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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A10-Q
(Amendment No. 1)
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x☒ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2018
2019
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¨☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to .
001-35542
(Commission File number)
(Exact name of registrant as specified in its charter)
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Pennsylvania | | 27-2290659 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
1015 Penn Avenue
Suite 103
WyomissingPA19610
(Address of principal executive offices)
(610) (610) 933-2000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | | Trading Symbols | | Name of Each Exchange on which Registered |
Voting Common Stock, par value $1.00 per share | | CUBI | | New York Stock Exchange |
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C, par value $1.00 per share | | CUBI/PC | | New York Stock Exchange |
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series D, par value $1.00 per share | | CUBI/PD | | New York Stock Exchange |
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series E, par value $1.00 per share | | CUBI/PE | | New York Stock Exchange |
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series F, par value $1.00 per share | | CUBI/PF | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | | x | | Accelerated filer | | ¨o |
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Non-accelerated filer | | o (Do not check if a smaller reporting company) | | Smaller Reporting Company | | ¨☐ |
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| | | | Emerging Growth Company | | ¨☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | | ¨o |
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 July 31, 2018, 31,669,839August 2, 2019, 31,228,622 shares of Voting Common Stock were outstanding.
EXPLANATORY NOTE
This Amendment No. 1 to Customers Bancorp, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018 (the "June 30, 2018 Form 10-Q/A") is being filed to amend and restate the following items presented in Customers Bancorp, Inc.'s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018, which was initially filed with the Securities and Exchange Commission on August 9, 2018 (the "Original June 30, 2018 Form 10-Q"):
The Consolidated Balance Sheet (unaudited) included in Part I, Item 1 "Customers Bancorp, Inc. Consolidated Financial Statements as of June 30, 2018 and for the three month and six month periods ended June 30, 2018 and 2017 (unaudited)" are being amended and restated as of June 30, 2018 as set forth in the Consolidated Balance Sheets (unaudited) and described in NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION.
The Consolidated Statements of Cash Flows (unaudited) included in Part I, Item 1 are being amended and restated for the six months ended June 30, 2018 and 2017 as set forth in the Consolidated Statements of Cash Flows (unaudited) and described in NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION.
NOTE 7 - LOANS HELD FOR SALE, NOTE 8 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES, AND NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS included in Part I, Item 1 are being amended and restated as set forth in the notes accompanying the unaudited consolidated financial statements and described in NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION.
Part I, Item 4 "Controls and Procedures" is being amended to address management's re-evaluation of disclosure controls and procedures and reflect the identification of a material weakness in internal control over financial reporting in conjunction with the restatement.
Part II, Item 1A "Risk Factors" is being amended to address risks related to the identification of a material weakness in internal control over financial reporting in conjunction with the restatement.
Part II, Item 6 "Exhibits" also has been amended to include currently dated certifications from Customers Bancorp, Inc's Principal Executive Officer and Principal Financial Officer as required by sections 302 and 906 of the Sarbanes Oxley Act of 2002. The certifications are attached to this June 30, 2018 Form 10-Q/A as Exhibits 31.1, 31.2, 32.1 and 32.2. The Interactive Data Files have also been amended in conjunction with the restatement and are attached to this June 30, 2018 Form 10-Q/A as Exhibit 101.
This June 30, 2018 Form 10-Q/A also restates previously reported amounts included in Part I, Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" to present the corrected classification of Customers Bancorp Inc.'s commercial mortgage warehouse lending activities.
As previously reported on its Current Report on Form 8-K, which was filed with the SEC on November 13, 2018, Customers Bancorp, Inc. is restating its previously issued audited consolidated financial statements for 2017, 2016 and 2015 and its interim unaudited consolidated financial statements as of and for the three months ended March 31, 2018 and 2017 and the three and six months ended June 30, 2018 and 2017, because of misclassifications of cash flow activities associated with its commercial mortgage warehouse lending activities between operating and investing activities on the consolidated statements of cash flows because the related loan balances were incorrectly classified as held for sale rather than held for investment on the consolidated balance sheets. Accordingly, management has concluded that the control deficiency that resulted in these incorrect classifications constituted a material weakness in internal control over financial reporting. Solely as a result of this material weakness, management revised its earlier assessment and has now concluded that its disclosure controls and procedures were not effective at June 30, 2018.
These misclassifications had no effect on total cash balances, total loans, the allowance for loan losses, total assets, total capital, regulatory capital ratios, net interest income, net interest margin, net income to shareholders, basic or diluted earnings per share, return on average assets, return on average equity, the efficiency ratio, asset quality ratios or any other key performance metric, including non-GAAP performance metrics, that Customers routinely discusses with analysts and investors. This June 30, 2018 Form 10-Q/A has not been updated for other events or information subsequent to the date of the filing of the Original June 30, 2018 Form 10-Q, except as noted above, and should be read in conjunction with the Original June 30, 2018 Form 10-Q and our other filings with the SEC.
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
Table of Contents
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Item 1. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 1A.1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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Ex-31.1 | | |
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Ex-31.2 | | |
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Ex-32.1 | | |
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Ex-32.2 | | |
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Ex-101 | | |
GLOSSARY OF ABBREVIATIONS AND ACRONYMS
The following list of abbreviations and acronyms may be used throughout this Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Unaudited Consolidated Financial Statements and the Notes to the Unaudited Consolidated Financial Statements.
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ASC | Accountings Standards Codification |
ALLL | Allowance for loan and lease losses |
AOCI | Accumulated other comprehensive income |
Bancorp | Customers Bancorp, Inc. |
Bank | Customers Bank |
BOLI | Bank-owned life insurance |
CCF | Customers Commercial Finance, LLC |
CECL | Current expected credit loss |
CPI | Consumer Price Index |
CUBI | Symbol for Customers Bancorp, Inc. common stock traded on the NYSE |
Customers | Customers Bancorp, Inc. and Customers Bank, collectively |
Customers Bancorp | Customers Bancorp, Inc. |
Department | Pennsylvania Department of Banking and Securities |
DOE | United States Department of Education |
EGRRCPA | The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 |
EPS | Earnings per share |
EVE | Economic value of equity |
FASB | Financial Accounting Standards Board |
Federal Reserve Board | Board of Governors of the Federal Reserve System |
FHA | Federal Housing Administration |
FHLB | Federal Home Loan Bank |
FMV | Fair Market Value |
FPRD | Final Program Review Determination |
FRB | Federal Reserve Bank of Philadelphia |
GNMA | Government National Mortgage Association |
GLBA | Gramm-Leach-Bliley Act of 1999 |
HECM | Home Equity Conversion Mortgage |
IRS | Internal Revenue Service |
LIHTC | Low-Income Housing Tax Credit |
LPO | Limited Purpose Office |
MMDA | Money market deposit accounts |
NIM | Net interest margin, tax equivalent |
NM | Not meaningful |
Non-QM | Non-qualified mortgage |
NPA | Non-performing asset |
NPL | Non-performing loan |
OCI | Other comprehensive income |
OREO | Other real estate owned |
OTTI | Other-than-temporary impairment |
PCI | Purchased Credit-Impaired |
ROU | Right-of-use |
SBA | Small Business Administration |
SBA loans | Loans originated pursuant to the rules and regulations of the SBA |
SEC | U.S. Securities and Exchange Commission |
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TDR | Troubled debt restructuring |
TRAC | Terminal Rental Adjustment Clause |
UDAAP | Unfair, Deceptive or Abusive Acts and Practices |
U.S. GAAP | Accounting principles generally accepted in the United States of America |
VA | United States Department of Veterans Affairs |
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET — UNAUDITED
(amounts in thousands, except share and per share data)
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| June 30, 2018 | | December 31, 2017 |
| (As Restated) | | (As Restated) |
ASSETS | | | |
Cash and due from banks | $ | 22,969 |
| | $ | 20,388 |
|
Interest-earning deposits | 228,757 |
| | 125,935 |
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Cash and cash equivalents | 251,726 |
| | 146,323 |
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Investment securities, at fair value | 1,161,000 |
| | 471,371 |
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Loans held for sale (includes $1,043 and $1,886, respectively, at fair value) | 1,043 |
| | 146,077 |
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Loans receivable, mortgage warehouse, at fair value | 1,930,738 |
| | 1,793,408 |
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Loans receivable | 7,181,726 |
| | 6,768,258 |
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Allowance for loan losses | (38,288 | ) | | (38,015 | ) |
Total loans receivable, net of allowance for loan losses | 9,074,176 |
| | 8,523,651 |
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FHLB, Federal Reserve Bank, and other restricted stock | 136,066 |
| | 105,918 |
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Accrued interest receivable | 33,956 |
| | 27,021 |
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Bank premises and equipment, net | 11,224 |
| | 11,955 |
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Bank-owned life insurance | 261,121 |
| | 257,720 |
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Other real estate owned | 1,705 |
| | 1,726 |
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Goodwill and other intangibles | 17,150 |
| | 16,295 |
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Other assets | 143,679 |
| | 131,498 |
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Total assets | $ | 11,092,846 |
| | $ | 9,839,555 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Liabilities: | | | |
Deposits: | | | |
Demand, non-interest bearing | $ | 1,090,744 |
| | $ | 1,052,115 |
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Interest-bearing | 6,205,210 |
| | 5,748,027 |
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Total deposits | 7,295,954 |
| | 6,800,142 |
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Federal funds purchased | 105,000 |
| | 155,000 |
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FHLB advances | 2,389,797 |
| | 1,611,860 |
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Other borrowings | 186,888 |
| | 186,497 |
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Subordinated debt | 108,929 |
| | 108,880 |
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Accrued interest payable and other liabilities | 70,051 |
| | 56,212 |
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Total liabilities | 10,156,619 |
| | 8,918,591 |
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Shareholders’ equity: | | | |
Preferred stock, par value $1.00 per share; liquidation preference $25.00 per share; 100,000,000 shares authorized, 9,000,000 shares issued and outstanding as of June 30, 2018 and December 31, 2017 | 217,471 |
| | 217,471 |
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Common stock, par value $1.00 per share; 200,000,000 shares authorized; 32,199,903 and 31,912,763 shares issued as of June 30, 2018 and December 31, 2017; 31,669,643 and 31,382,503 shares outstanding as of June 30, 2018 and December 31, 2017 | 32,200 |
| | 31,913 |
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Additional paid in capital | 428,796 |
| | 422,096 |
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Retained earnings | 299,990 |
| | 258,076 |
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Accumulated other comprehensive loss, net | (33,997 | ) | | (359 | ) |
Treasury stock, at cost (530,260 shares as of June 30, 2018 and December 31, 2017) | (8,233 | ) | | (8,233 | ) |
Total shareholders’ equity | 936,227 |
| | 920,964 |
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Total liabilities and shareholders’ equity | $ | 11,092,846 |
| | $ | 9,839,555 |
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| June 30, 2019 | | December 31, 2018 |
ASSETS | | | |
Cash and due from banks | $ | 24,757 |
| | $ | 17,696 |
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Interest-earning deposits | 71,038 |
| | 44,439 |
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Cash and cash equivalents | 95,795 |
| | 62,135 |
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Investment securities, at fair value | 708,359 |
| | 665,012 |
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Loans held for sale (includes $4,372 and $1,507, respectively, at fair value) | 5,697 |
| | 1,507 |
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Loans receivable, mortgage warehouse, at fair value | 2,001,540 |
| | 1,405,420 |
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Loans and leases receivable | 7,714,106 |
| | 7,138,074 |
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Allowance for loan and lease losses | (48,388 | ) | | (39,972 | ) |
Total loans and leases receivable, net of allowance for loan and lease losses | 9,667,258 |
| | 8,503,522 |
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FHLB, Federal Reserve Bank, and other restricted stock | 101,947 |
| | 89,685 |
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Accrued interest receivable | 38,506 |
| | 32,955 |
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Bank premises and equipment, net | 10,095 |
| | 11,063 |
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Bank-owned life insurance | 268,682 |
| | 264,559 |
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Other real estate owned | 1,076 |
| | 816 |
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Goodwill and other intangibles | 15,847 |
| | 16,499 |
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Other assets | 269,165 |
| | 185,672 |
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Total assets | $ | 11,182,427 |
| | $ | 9,833,425 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Liabilities: | | | |
Deposits: | | | |
Demand, non-interest bearing | $ | 1,380,698 |
| | $ | 1,122,171 |
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Interest-bearing | 6,805,079 |
| | 6,020,065 |
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Total deposits | 8,185,777 |
| | 7,142,236 |
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Federal funds purchased | 406,000 |
| | 187,000 |
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FHLB advances | 1,262,100 |
| | 1,248,070 |
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Other borrowings | 99,055 |
| | 123,871 |
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Subordinated debt | 109,026 |
| | 108,977 |
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Accrued interest payable and other liabilities | 129,064 |
| | 66,455 |
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Total liabilities | 10,191,022 |
| | 8,876,609 |
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Commitments and contingencies (NOTE 13) |
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Shareholders’ equity: | | | |
Preferred stock, par value $1.00 per share; liquidation preference $25.00 per share; 100,000,000 shares authorized, 9,000,000 shares issued and outstanding as of June 30, 2019 and December 31, 2018 | 217,471 |
| | 217,471 |
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Common stock, par value $1.00 per share; 200,000,000 shares authorized; 32,482,642 and 32,252,488 shares issued as of June 30, 2019 and December 31, 2018; 31,202,023 and 31,003,028 shares outstanding as of June 30, 2019 and December 31, 2018 | 32,483 |
| | 32,252 |
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Additional paid in capital | 439,067 |
| | 434,314 |
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Retained earnings | 334,157 |
| | 316,651 |
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Accumulated other comprehensive loss, net | (9,993 | ) | | (22,663 | ) |
Treasury stock, at cost (1,280,619 and 1,249,460 shares as of June 30, 2019 and December 31, 2018) | (21,780 | ) | | (21,209 | ) |
Total shareholders’ equity | 991,405 |
| | 956,816 |
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Total liabilities and shareholders’ equity | $ | 11,182,427 |
| | $ | 9,833,425 |
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See accompanying notes to the unaudited consolidated financial statements.
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME — UNAUDITED
(amounts in thousands, except per share data)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 | 2019 | | 2018 | | 2019 | | 2018 |
Interest income: | | | | | | | | | | | | | | |
Loans | $ | 95,240 |
| | $ | 84,560 |
| | $ | 181,171 |
| | $ | 159,967 |
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Loans and leases | | $ | 103,567 |
| | $ | 95,240 |
| | $ | 196,683 |
| | $ | 181,171 |
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Investment securities | 9,765 |
| | 7,823 |
| | 18,437 |
| | 13,710 |
| 6,481 |
| | 9,765 |
| | 12,722 |
| | 18,437 |
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Other | 2,634 |
| | 1,469 |
| | 4,996 |
| | 3,269 |
| 1,902 |
| | 2,634 |
| | 3,620 |
| | 4,996 |
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Total interest income | 107,639 |
| | 93,852 |
| | 204,604 |
| | 176,946 |
| 111,950 |
| | 107,639 |
| | 213,025 |
| | 204,604 |
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Interest expense: | | | | | | | | | | | | | | |
Deposits | 24,182 |
| | 16,228 |
| | 43,975 |
| | 30,551 |
| 35,980 |
| | 24,182 |
| | 67,204 |
| | 43,975 |
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Other borrowings | 3,275 |
| | 1,993 |
| | 6,651 |
| | 3,600 |
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FHLB advances | 11,176 |
| | 5,340 |
| | 18,256 |
| | 8,401 |
| 7,607 |
| | 11,176 |
| | 12,900 |
| | 18,256 |
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Subordinated debt | 1,684 |
| | 1,685 |
| | 3,369 |
| | 3,370 |
| 1,684 |
| | 1,684 |
| | 3,369 |
| | 3,369 |
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Other borrowings | | 2,000 |
| | 3,275 |
| | 5,569 |
| | 6,651 |
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Total interest expense | 40,317 |
| | 25,246 |
| | 72,251 |
| | 45,922 |
| 47,271 |
| | 40,317 |
| | 89,042 |
| | 72,251 |
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Net interest income | 67,322 |
| | 68,606 |
| | 132,353 |
| | 131,024 |
| 64,679 |
| | 67,322 |
| | 123,983 |
| | 132,353 |
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Provision for loan losses | (784 | ) | | 535 |
| | 1,333 |
| | 3,585 |
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Net interest income after provision for loan losses | 68,106 |
| | 68,071 |
| | 131,020 |
| | 127,439 |
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Provision for loan and lease losses | | 5,346 |
| | (784 | ) | | 10,113 |
| | 1,333 |
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Net interest income after provision for loan and lease losses | | 59,333 |
| | 68,106 |
| | 113,870 |
| | 131,020 |
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Non-interest income: | | | | | | | | | | | | | | |
Interchange and card revenue | 6,382 |
| | 8,648 |
| | 16,043 |
| | 22,158 |
| 6,760 |
| | 6,382 |
| | 15,565 |
| | 16,043 |
|
Deposit fees | | 3,348 |
| | 1,632 |
| | 5,557 |
| | 3,724 |
|
Commercial lease income | | 2,730 |
| | 1,091 |
| | 5,131 |
| | 1,953 |
|
Bank-owned life insurance | | 1,836 |
| | 1,869 |
| | 3,653 |
| | 3,900 |
|
Mortgage warehouse transactional fees | 1,967 |
| | 2,523 |
| | 3,854 |
| | 4,743 |
| 1,681 |
| | 1,967 |
| | 2,995 |
| | 3,854 |
|
Bank-owned life insurance | 1,869 |
| | 2,258 |
| | 3,900 |
| | 3,624 |
| |
Deposit fees | 1,632 |
| | 2,133 |
| | 3,724 |
| | 5,260 |
| |
Gain on sale of SBA and other loans | 947 |
| | 573 |
| | 2,308 |
| | 1,901 |
| — |
| | 947 |
| | — |
| | 2,308 |
|
Mortgage banking income | 205 |
| | 291 |
| | 325 |
| | 446 |
| 250 |
| | 205 |
| | 417 |
| | 325 |
|
Gain on sale of investment securities | — |
| | 3,183 |
| | — |
| | 3,183 |
| |
Impairment loss on investment securities | — |
| | (2,882 | ) | | — |
| | (4,585 | ) | |
Loss upon acquisition of interest-only GNMA securities | | (7,476 | ) | | — |
| | (7,476 | ) | | — |
|
Other | 3,125 |
| | 1,664 |
| | 6,883 |
| | 4,414 |
| 2,907 |
| | 2,034 |
| | 5,912 |
| | 4,930 |
|
Total non-interest income | 16,127 |
| | 18,391 |
| | 37,037 |
| | 41,144 |
| 12,036 |
| | 16,127 |
| | 31,754 |
| | 37,037 |
|
Non-interest expense: | | | | | | | | | | | | | | |
Salaries and employee benefits | 27,748 |
| | 23,651 |
| | 52,673 |
| | 44,763 |
| 26,920 |
| | 27,748 |
| | 52,743 |
| | 52,673 |
|
Technology, communication and bank operations | 11,322 |
| | 8,910 |
| | 21,266 |
| | 18,827 |
| |
Technology, communication, and bank operations | | 12,402 |
| | 11,322 |
| | 24,355 |
| | 21,266 |
|
Professional services | 3,811 |
| | 6,227 |
| | 9,820 |
| | 13,739 |
| 5,718 |
| | 3,811 |
| | 10,291 |
| | 9,820 |
|
Occupancy | 3,141 |
| | 2,657 |
| | 5,975 |
| | 5,371 |
| 3,064 |
| | 3,141 |
| | 5,967 |
| | 5,975 |
|
Commercial lease depreciation | | 2,252 |
| | 920 |
| | 4,174 |
| | 1,735 |
|
FDIC assessments, non-income taxes, and regulatory fees | 2,135 |
| | 2,416 |
| | 4,335 |
| | 4,141 |
| 2,157 |
| | 2,135 |
| | 4,145 |
| | 4,335 |
|
Provision for operating losses | 1,233 |
| | 1,746 |
| | 2,759 |
| | 3,392 |
| 2,446 |
| | 1,233 |
| | 4,225 |
| | 2,759 |
|
Advertising and promotion | | 1,360 |
| | 319 |
| | 2,169 |
| | 709 |
|
Merger and acquisition related expenses | 869 |
| | — |
| | 975 |
| | — |
| — |
| | 869 |
| | — |
| | 975 |
|
Loan workout | 648 |
| | 408 |
| | 1,307 |
| | 929 |
| 643 |
| | 648 |
| | 963 |
| | 1,307 |
|
Advertising and promotion | 319 |
| | 378 |
| | 709 |
| | 704 |
| |
Other real estate owned expenses | 58 |
| | 160 |
| | 98 |
| | 105 |
| |
Other real estate owned expenses (income) | | (14 | ) | | 58 |
| | 43 |
| | 98 |
|
Other | 2,466 |
| | 3,860 |
| | 6,114 |
| | 7,807 |
| 2,634 |
| | 1,546 |
| | 4,491 |
| | 4,379 |
|
Total non-interest expense | 53,750 |
| | 50,413 |
| | 106,031 |
| | 99,778 |
| 59,582 |
| | 53,750 |
| | 113,566 |
| | 106,031 |
|
Income before income tax expense | 30,483 |
| | 36,049 |
| | 62,026 |
| | 68,805 |
| 11,787 |
| | 30,483 |
| | 32,058 |
| | 62,026 |
|
Income tax expense | 6,820 |
| | 12,327 |
| | 14,222 |
| | 19,336 |
| 2,491 |
| | 6,820 |
| | 7,323 |
| | 14,222 |
|
Net income | 23,663 |
| | 23,722 |
| | 47,804 |
| | 49,469 |
| 9,296 |
| | 23,663 |
| | 24,735 |
| | 47,804 |
|
Preferred stock dividends | 3,615 |
| | 3,615 |
| | 7,229 |
| | 7,229 |
| 3,615 |
| | 3,615 |
| | 7,229 |
| | 7,229 |
|
Net income available to common shareholders | $ | 20,048 |
| | $ | 20,107 |
| | $ | 40,575 |
| | $ | 42,240 |
| $ | 5,681 |
| | $ | 20,048 |
| | $ | 17,506 |
| | $ | 40,575 |
|
Basic earnings per common share | $ | 0.64 |
| | $ | 0.66 |
| | $ | 1.29 |
| | $ | 1.38 |
| $ | 0.18 |
| | $ | 0.64 |
| | $ | 0.56 |
| | $ | 1.29 |
|
Diluted earnings per common share | $ | 0.62 |
| | $ | 0.62 |
| | $ | 1.26 |
| | $ | 1.29 |
| $ | 0.18 |
| | $ | 0.62 |
| | $ | 0.55 |
| | $ | 1.26 |
|
See accompanying notes to the unaudited consolidated financial statements.
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) — UNAUDITED
(amounts in thousands)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net income | $ | 9,296 |
| | $ | 23,663 |
| | $ | 24,735 |
| | $ | 47,804 |
|
Unrealized gains (losses) on available-for-sale debt securities: | | | | | | | |
Unrealized gains (losses) arising during the period | 20,755 |
| | (12,190 | ) | | 38,572 |
| | (46,288 | ) |
Income tax effect | (5,397 | ) | | 3,170 |
| | (10,029 | ) | | 12,035 |
|
Net unrealized gains (losses) on available-for-sale debt securities | 15,358 |
| | (9,020 | ) | | 28,543 |
| | (34,253 | ) |
Unrealized gains (losses) on cash flow hedges: | | | | | | | |
Unrealized gains (losses) arising during the period | (14,102 | ) | | 1,895 |
| | (21,041 | ) | | 2,768 |
|
Income tax effect | 3,667 |
| | (492 | ) | | 5,471 |
| | (719 | ) |
Reclassification adjustment for (gains) losses included in net income | 4 |
| | (259 | ) | | (409 | ) | | (128 | ) |
Income tax effect | (1 | ) | | 67 |
| | 106 |
| | 33 |
|
Net unrealized gains (losses) on cash flow hedges | (10,432 | ) | | 1,211 |
| | (15,873 | ) | | 1,954 |
|
Other comprehensive income (loss), net of income tax effect | 4,926 |
| | (7,809 | ) | | 12,670 |
| | (32,299 | ) |
Comprehensive income (loss) | $ | 14,222 |
| | $ | 15,854 |
| | $ | 37,405 |
| | $ | 15,505 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net income | $ | 23,663 |
| | $ | 23,722 |
| | $ | 47,804 |
| | $ | 49,469 |
|
Unrealized (losses) gains on available-for-sale debt securities: | | | | | | | |
Unrealized (losses) gains arising during the period | (12,190 | ) | | 19,885 |
| | (46,288 | ) | | 18,762 |
|
Income tax effect | 3,170 |
| | (7,755 | ) | | 12,035 |
| | (7,317 | ) |
Reclassification adjustments for gains on securities included in net income | — |
| | (3,183 | ) | | — |
| | (3,183 | ) |
Income tax effect | — |
| | 1,241 |
| | — |
| | 1,241 |
|
Net unrealized (losses) gains on available-for-sale debt securities | (9,020 | ) | | 10,188 |
| | (34,253 | ) | | 9,503 |
|
Unrealized gains on cash flow hedges: | | | | | | | |
Unrealized gains (losses) arising during the period | 1,895 |
| | (689 | ) | | 2,768 |
| | (360 | ) |
Income tax effect | (492 | ) | | 269 |
| | (719 | ) | | 141 |
|
Reclassification adjustment for (gains) losses included in net income | (259 | ) | | 767 |
| | (128 | ) | | 1,594 |
|
Income tax effect | 67 |
| | (299 | ) | | 33 |
| | (622 | ) |
Net unrealized gains on cash flow hedges | 1,211 |
| | 48 |
| | 1,954 |
| | 753 |
|
Other comprehensive (loss) income, net of income tax effect | (7,809 | ) | | 10,236 |
| | (32,299 | ) | | 10,256 |
|
Comprehensive income | $ | 15,854 |
| | $ | 33,958 |
| | $ | 15,505 |
| | $ | 59,725 |
|
See accompanying notes to the unaudited consolidated financial statements.
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY — UNAUDITED
(amounts in thousands, except shares outstanding data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 |
| Preferred Stock | | Common Stock | | | | | | | | | | |
| Shares of Preferred Stock Outstanding | | Preferred Stock | | Shares of Common Stock Outstanding | | Common Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total |
Balance, March 31, 2019 | 9,000,000 |
| | $ | 217,471 |
| | 31,131,247 |
| | $ | 32,412 |
| | $ | 436,713 |
| | $ | 328,476 |
| | $ | (14,919 | ) | | $ | (21,780 | ) | | $ | 978,373 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 9,296 |
| | — |
| | — |
| | 9,296 |
|
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,926 |
| | — |
| | 4,926 |
|
Preferred stock dividends | — |
| | — |
| | — |
| | — |
| | — |
| | (3,615 | ) | | — |
| | — |
| | (3,615 | ) |
Share-based compensation expense | — |
| | — |
| | — |
| | — |
| | 2,315 |
| | — |
| | — |
| | — |
| | 2,315 |
|
Issuance of common stock under share-based compensation arrangements | — |
| | — |
| | 70,776 |
| | 71 |
| | 39 |
| | — |
| | — |
| | — |
| | 110 |
|
Balance, June 30, 2019 | 9,000,000 |
| | $ | 217,471 |
| | 31,202,023 |
| | $ | 32,483 |
| | $ | 439,067 |
| | $ | 334,157 |
| | $ | (9,993 | ) | | $ | (21,780 | ) | | $ | 991,405 |
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2018 |
| Preferred Stock | | Common Stock | | | | | | | | | | |
| Shares of Preferred Stock Outstanding | | Preferred Stock | | Shares of Common Stock Outstanding | | Common Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total |
Balance, March 31, 2018 | 9,000,000 |
| | $ | 217,471 |
| | 31,466,271 |
| | $ | 31,997 |
| | $ | 424,099 |
| | $ | 279,942 |
| | $ | (26,188 | ) | | $ | (8,233 | ) | | $ | 919,088 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 23,663 |
| | — |
| | — |
| | 23,663 |
|
Other comprehensive income (loss) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7,809 | ) | | — |
| | (7,809 | ) |
Preferred stock dividends | — |
| | — |
| | — |
| | — |
| | — |
| | (3,615 | ) | | — |
| | — |
| | (3,615 | ) |
Share-based compensation expense | — |
| | — |
| | — |
| | — |
| | 1,875 |
| | — |
| | — |
| | — |
| | 1,875 |
|
Issuance of common stock under share-based compensation arrangements | — |
| | — |
| | 203,372 |
| | 203 |
| | 2,822 |
| | — |
| | — |
| | — |
| | 3,025 |
|
Balance, June 30, 2018 | 9,000,000 |
| | $ | 217,471 |
| | 31,669,643 |
| | $ | 32,200 |
| | $ | 428,796 |
| | $ | 299,990 |
| | $ | (33,997 | ) | | $ | (8,233 | ) | | $ | 936,227 |
|
See accompanying notes to the unaudited consolidated financial statements.
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY — UNAUDITED (CONTINUED)
(amounts in thousands, except shares outstanding data)
| | | | Six Months Ended June 30, 2019 |
| | Preferred Stock | | Common Stock | | | | | | | | | | |
| | Shares of Preferred Stock Outstanding | | Preferred Stock | | Shares of Common Stock Outstanding | | Common Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total |
Balance, December 31, 2018 | | 9,000,000 |
| | $ | 217,471 |
| | 31,003,028 |
| | $ | 32,252 |
| | $ | 434,314 |
| | $ | 316,651 |
| | $ | (22,663 | ) | | $ | (21,209 | ) | | $ | 956,816 |
|
Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 24,735 |
| | — |
| | — |
| | 24,735 |
|
Other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 12,670 |
| | — |
| | 12,670 |
|
Preferred stock dividends | | — |
| | — |
| | — |
| | — |
| | — |
| | (7,229 | ) | | — |
| | — |
| | (7,229 | ) |
Share-based compensation expense | | — |
| | — |
| | — |
| | — |
| | 4,425 |
| | — |
| | — |
| | — |
| | 4,425 |
|
Issuance of common stock under share-based compensation arrangements | | — |
| | — |
| | 230,154 |
| | 231 |
| | 328 |
| | — |
| | — |
| | — |
| | 559 |
|
Repurchase of common shares | | — |
| | — |
| | (31,159 | ) | | — |
| | — |
| | — |
| | — |
| | (571 | ) | | (571 | ) |
Balance, June 30, 2019 | | 9,000,000 |
| | $ | 217,471 |
| | 31,202,023 |
| | $ | 32,483 |
| | $ | 439,067 |
| | $ | 334,157 |
| | $ | (9,993 | ) | | $ | (21,780 | ) | | $ | 991,405 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2018 | Six Months Ended June 30, 2018 |
| Preferred Stock | | Common Stock | | | | | | | | | | | Preferred Stock | | Common Stock | | | | | | | | | | |
| Shares of Preferred Stock Outstanding | | Preferred Stock | | Shares of Common Stock Outstanding | | Common Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total | Shares of Preferred Stock Outstanding | | Preferred Stock | | Shares of Common Stock Outstanding | | Common Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total |
Balance, December 31, 2017 | 9,000,000 |
| | $ | 217,471 |
| | 31,382,503 |
| | $ | 31,913 |
| | $ | 422,096 |
| | $ | 258,076 |
| | $ | (359 | ) | | $ | (8,233 | ) | | $ | 920,964 |
| 9,000,000 |
| | $ | 217,471 |
| | 31,382,503 |
| | $ | 31,913 |
| | $ | 422,096 |
| | $ | 258,076 |
| | $ | (359 | ) | | $ | (8,233 | ) | | $ | 920,964 |
|
Reclassification of the income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | 298 |
| | (298 | ) | | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | 298 |
| | (298 | ) | | — |
| | — |
|
Reclassification of net unrealized gains on equity securities from accumulated other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | 1,041 |
| | (1,041 | ) | | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | 1,041 |
| | (1,041 | ) | | — |
| | — |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 47,804 |
| | — |
| | — |
| | 47,804 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 47,804 |
| | — |
| | — |
| | 47,804 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (32,299 | ) | | — |
| | (32,299 | ) | |
Other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (32,299 | ) | | — |
| | (32,299 | ) |
Preferred stock dividends | — |
| | — |
| | — |
| | — |
| | — |
| | (7,229 | ) | | — |
| | — |
| | (7,229 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | (7,229 | ) | | — |
| | | | (7,229 | ) |
Share-based compensation expense | — |
| | — |
| | — |
| | — |
| | 3,661 |
| | — |
| | — |
| | — |
| | 3,661 |
| — |
| | — |
| | — |
| | — |
| | 3,661 |
| | — |
| | — |
| | — |
| | 3,661 |
|
Exercise of warrants | — |
| | — |
| | 5,242 |
| | 5 |
| | 107 |
| | — |
| | — |
| | — |
| | 112 |
| — |
| | — |
| | 5,242 |
| | 5 |
| | 107 |
| | — |
| | — |
| | — |
| | 112 |
|
Issuance of common stock under share-based compensation arrangements | — |
| | — |
| | 281,898 |
| | 282 |
| | 2,932 |
| | — |
| | — |
| | — |
| | 3,214 |
| — |
| | — |
| | 281,898 |
| | 282 |
| | 2,932 |
| | — |
| | — |
| | — |
| | 3,214 |
|
Balance, June 30, 2018 | 9,000,000 |
| | $ | 217,471 |
| | 31,669,643 |
| | $ | 32,200 |
| | $ | 428,796 |
| | $ | 299,990 |
| | $ | (33,997 | ) | | $ | (8,233 | ) | | $ | 936,227 |
| 9,000,000 |
| | $ | 217,471 |
| | 31,669,643 |
| | $ | 32,200 |
| | $ | 428,796 |
| | $ | 299,990 |
| | $ | (33,997 | ) | | $ | (8,233 | ) | | $ | 936,227 |
|
| | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2017 | |
| Preferred Stock | | Common Stock | | | | | | | | | | | |
| Shares of Preferred Stock Outstanding | | Preferred Stock | | Shares of Common Stock Outstanding | | Common Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income/(Loss) | | Treasury Stock | | Total | |
Balance, December 31, 2016 | 9,000,000 |
| | $ | 217,471 |
| | 30,289,917 |
| | $ | 30,820 |
| | $ | 427,008 |
| | $ | 193,698 |
| | $ | (4,892 | ) | | $ | (8,233 | ) | | $ | 855,872 |
| |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 49,469 |
| | — |
| | — |
| | 49,469 |
| |
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 10,256 |
| | — |
| | 10,256 |
| |
Preferred stock dividends | — |
| | — |
| | — |
| | — |
| | — |
| | (7,229 | ) | | — |
| | | | (7,229 | ) | |
Share-based compensation expense | — |
| | — |
| | — |
| | — |
| | 2,934 |
| | — |
| | — |
| | — |
| | 2,934 |
| |
Exercise of warrants | — |
| | — |
| | 43,974 |
| | 44 |
| | 376 |
| | — |
| | — |
| | — |
| | 420 |
| |
Issuance of common stock under share-based compensation arrangements | — |
| | — |
| | 396,893 |
| | 397 |
| | (1,830 | ) | | — |
| | — |
| | — |
| | (1,433 | ) | |
Balance, June 30, 2017 | 9,000,000 |
| | $ | 217,471 |
| | 30,730,784 |
| | $ | 31,261 |
| | $ | 428,488 |
| | $ | 235,938 |
| | $ | 5,364 |
| | $ | (8,233 | ) | | $ | 910,289 |
| |
See accompanying notes to the unaudited consolidated financial statements.
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(amounts in thousands)
| | | Six Months Ended June 30, | | | | | |
| 2018 | | 2017 | Six Months Ended June 30, |
| (As Restated) | | (As Restated) | 2019 | | 2018 |
Cash Flows from Operating Activities | | | | | | |
Net income | $ | 47,804 |
| | $ | 49,469 |
| $ | 24,735 |
| | $ | 47,804 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Provision for loan losses | 1,333 |
| | 3,585 |
| |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | |
Provision for loan and lease losses | | 10,113 |
| | 1,333 |
|
Depreciation and amortization | 6,716 |
| | 2,393 |
| 8,884 |
| | 6,716 |
|
Share-based compensation expense | 4,384 |
| | 3,562 |
| 4,900 |
| | 4,384 |
|
Deferred taxes | 4,172 |
| | (2,588 | ) | (681 | ) | | 4,172 |
|
Net amortization of investment securities premiums and discounts | 813 |
| | 232 |
| 421 |
| | 813 |
|
Unrealized loss recognized on equity securities | 296 |
| | — |
| |
Gain on sale of investment securities | — |
| | (3,183 | ) | |
Impairment loss on investment securities | — |
| | 4,585 |
| |
Gain on sale of SBA and other loans | (2,572 | ) | | (2,183 | ) | |
Unrealized (gain) loss on equity securities | | 345 |
| | 296 |
|
Loss upon acquisition of interest-only GNMA securities | | 7,476 |
| | — |
|
(Gain) loss on sale of SBA and other loans | | (304 | ) | | (2,572 | ) |
Origination of loans held for sale | (11,554 | ) | | (20,442 | ) | (22,152 | ) | | (11,554 | ) |
Proceeds from the sale of loans held for sale | 12,640 |
| | 18,721 |
| 19,591 |
| | 12,640 |
|
Amortization of fair value discounts and premiums | 85 |
| | 98 |
| 232 |
| | 85 |
|
Net gain on sales of other real estate owned | (28 | ) | | (163 | ) | |
Net (gain) loss on sales of other real estate owned | | — |
| | (28 | ) |
Valuation and other adjustments to other real estate owned | 78 |
| | 231 |
| 31 |
| | 78 |
|
Earnings on investment in bank-owned life insurance | (3,900 | ) | | (3,624 | ) | (3,653 | ) | | (3,900 | ) |
Increase in accrued interest receivable and other assets | (7,857 | ) | | (9,003 | ) | |
(Increase) decrease in accrued interest receivable and other assets | | (63,311 | ) | | (7,857 | ) |
Increase (decrease) in accrued interest payable and other liabilities | 13,061 |
| | (29,357 | ) | 16,502 |
| | 13,061 |
|
Net Cash Provided By Operating Activities | 65,471 |
| | 12,333 |
| |
Net Cash Provided By (Used In) Operating Activities | | 3,129 |
| | 65,471 |
|
Cash Flows from Investing Activities | | | | | | |
Proceeds from maturities, calls and principal repayments of securities available for sale | 26,216 |
| | 22,843 |
| 11,616 |
| | 26,216 |
|
Proceeds from sales of investment securities available for sale | — |
| | 115,982 |
| |
Purchases of investment securities available for sale | (763,242 | ) | | (644,011 | ) | — |
| | (763,242 | ) |
Origination of mortgage warehouse loans | (14,260,621 | ) | | (14,693,838 | ) | (12,246,471 | ) | | (14,260,621 | ) |
Proceeds from repayments of mortgage warehouse loans | 14,123,291 |
| | 14,709,013 |
| 11,624,062 |
| | 14,123,291 |
|
Net increase in loans | (18,680 | ) | | (572,253 | ) | |
Net (increase) decrease in loans and leases, excluding mortgage warehouse loans | | (22,665 | ) | | (18,680 | ) |
Proceeds from sales of loans | 29,038 |
| | 112,927 |
| — |
| | 29,038 |
|
Purchase of loans | (278,508 | ) | | (262,641 | ) | (555,587 | ) | | (278,508 | ) |
Purchases of bank-owned life insurance | — |
| | (50,000 | ) | |
Proceeds from bank-owned life insurance | 529 |
| | 1,418 |
| — |
| | 529 |
|
Net purchases of FHLB, Federal Reserve Bank, and other restricted stock | (30,148 | ) | | (61,281 | ) | (12,262 | ) | | (30,148 | ) |
Purchases of bank premises and equipment | (608 | ) | | (1,732 | ) | (345 | ) | | (608 | ) |
Proceeds from sales of other real estate owned | 28 |
| | 682 |
| — |
| | 28 |
|
Purchase of leased assets under operating leases | (6,486 | ) | | — |
| |
Net Cash Used In Investing Activities | (1,179,191 | ) | | (1,322,891 | ) | |
Purchases of leased assets under lessor operating leases | | (11,672 | ) | | (6,486 | ) |
Net Cash Provided By (Used In) Investing Activities | | (1,213,324 | ) | | (1,179,191 | ) |
Cash Flows from Financing Activities | | | | | | |
Net increase in deposits | 495,812 |
| | 171,587 |
| 1,043,541 |
| | 495,812 |
|
Net increase in short-term borrowed funds from the FHLB | 777,937 |
| | 1,130,800 |
| |
Net (decrease) increase in federal funds purchased | (50,000 | ) | | 67,000 |
| |
Net proceeds from issuance of long-term debt | — |
| | 98,574 |
| |
Net increase (decrease) in short-term borrowed funds from the FHLB | | (335,970 | ) | | 777,937 |
|
Net increase (decrease) in federal funds purchased | | 219,000 |
| | (50,000 | ) |
Proceeds from long-term borrowed funds from the FHLB | | 350,000 |
| | — |
|
Repayments of other borrowings | | (25,000 | ) | | — |
|
Preferred stock dividends paid | (7,229 | ) | | (7,229 | ) | (7,229 | ) | | (7,229 | ) |
Exercise of warrants | 112 |
| | 420 |
| — |
| | 112 |
|
Purchase of treasury stock | | (571 | ) | | — |
|
Payments of employee taxes withheld from share-based awards | (700 | ) | | (3,961 | ) | (1,210 | ) | | (700 | ) |
Proceeds from issuance of common stock | 3,191 |
| | 1,900 |
| 1,294 |
| | 3,191 |
|
Net Cash Provided By Financing Activities | 1,219,123 |
| | 1,459,091 |
| |
Net Increase in Cash and Cash Equivalents | 105,403 |
| | 148,533 |
| |
Net Cash Provided By (Used In) Financing Activities | | 1,243,855 |
| | 1,219,123 |
|
Net Increase (Decrease) in Cash and Cash Equivalents | | 33,660 |
| | 105,403 |
|
Cash and Cash Equivalents – Beginning | 146,323 |
| | 264,709 |
| 62,135 |
| | 146,323 |
|
Cash and Cash Equivalents – Ending | $ | 251,726 |
| | $ | 413,242 |
| $ | 95,795 |
| | $ | 251,726 |
|
| | | | |
| | | | |
| | | | |
| | | | | | |
| | | | | | |
| (continued) |
| | | (continued) |
| | |
| | | | | | |
Supplementary Cash Flows Information: | | | | | | |
Interest paid | $ | 73,162 |
| | $ | 44,983 |
| $ | 85,560 |
| | $ | 73,162 |
|
Income taxes paid | 4,174 |
| | 21,715 |
| 3,005 |
| | 4,174 |
|
Non-cash items: | | | | | | |
Transfer of loans to other real estate owned | $ | 57 |
| | $ | — |
| $ | 291 |
| | $ | 57 |
|
Transfer of loans held for investment to held for sale | — |
| | 150,758 |
| |
Transfer of loans held for sale to held for investment | 129,691 |
| | — |
| — |
| | 129,691 |
|
Acquisition of interest-only GNMA securities securing a mortgage warehouse loan | | 17,157 |
| | — |
|
Acquisition of residential reverse mortgage loans securing a mortgage warehouse loan | | 1,325 |
| | — |
|
University relationship intangible purchased not settled | 1,502 |
| | — |
| — |
| | 1,502 |
|
See accompanying notes to the unaudited consolidated financial statements.
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
NOTE 1 — DESCRIPTION OF THE BUSINESS
Customers Bancorp, Inc. (the “Bancorp” or “Customers Bancorp”) is a bank holding company engaged in banking activities through its wholly owned subsidiary, Customers Bank (the “Bank”), collectively referred to as “Customers” herein. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”)GAAP and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).SEC.
Customers Bancorp, Inc. and its wholly owned subsidiaries, Customers Bank, and non-bank subsidiaries, serve residents and businesses in Southeastern Pennsylvania (Bucks, Berks, Chester, Philadelphia and Delaware Counties); Rye Brook, New York (Westchester County); Hamilton, New Jersey (Mercer County); Boston, Massachusetts; Providence, Rhode Island; Portsmouth, New Hampshire (Rockingham County); Manhattan and Melville, New York; Washington, D.C.; Chicago, Illinois; and nationally for certain loan and deposit products. The Bank has 13 full-service branches and provides commercial banking products, primarily loans and deposits. In addition, Customers Bank also administratively supports loan, equipment leases and other financial products to customers through its limited-purpose offices in Boston, Massachusetts, Providence, Rhode Island, Portsmouth, New Hampshire, Manhattan and Melville, New York, Philadelphia, Pennsylvania, Washington, D.C., and Chicago, Illinois. The Bank also provides liquidity to residential mortgage originators nationwide through commercial loans to mortgage companies.
Through BankMobile, a division of Customers Bank, Customers offers state of the art high tech digital banking services to consumers, students, and the "under banked" nationwide. In October 2017, Customers announced its intent to spin-off its BankMobile business directly to Customers’ shareholders, to be followed bynationwide, along with "Banking as a merger of BankMobile into Flagship Community Bank ("Flagship"), as the most favorable option for disposition of BankMobile to Customers' shareholders rather than selling the business directly to a third party. Until execution of the spin-off and merger transaction, the assets and liabilities of BankMobile will be reported as held and used for all periods presented. Previously, Customers had stated its intention to sell BankMobile and, accordingly, all BankMobile operating results for the three and six months ended June 30, 2017 and cash flows for the six months ended June 30, 2017 were presented as discontinued operations. All prior period amounts have been reclassified to conformService" offerings with the current period consolidated financial statement presentation. See NOTE 2 SPIN-OFF AND MERGER for more information regarding the spin-off and merger transaction.white label partners.
Customers is subject to regulation of the Pennsylvania Department of Banking and Securities and the Federal Reserve Bank and is periodically examined by those regulatory authorities. Customers Bancorp has made certain equity investments through its wholly owned subsidiaries CB Green Ventures Pte Ltd. and CUBI India Ventures Pte Ltd.
NOTE 2 – SPIN-OFF AND MERGER
In third quarter 2017, Customers decided that the best strategy for its shareholders to realize the value of the BankMobile business was to divest BankMobile through a spin-off of BankMobile to Customers’ shareholders to be followed by a merger with Flagship Community Bank ("Flagship"). An Amended and Restated Purchase and Assumption Agreement and Plan of Merger (the "Amended Agreement") with Flagship to effect the spin-off and merger and Flagship's related purchase of BankMobile deposits from Customers was executed on November 17, 2017. Per the provisions of the Amended Agreement, the spin-off will be followed by a merger of the BankMobile spin-off subsidiary into Flagship, with Customers' shareholders first receiving shares of the BankMobile spin-off subsidiary as a dividend in the spin-off and then receiving shares of Flagship common stock in the merger of the BankMobile spin-off subsidiary into Flagship in exchange for shares of the BankMobile spin-off subsidiary common stock they receive in the spin-off. Separately, Flagship will assume the deposits and purchase certain associated assets of BankMobile for $10 million. Following completion of the spin-off and merger and other transactions contemplated in the Amended Agreement between Customers and Flagship, the BankMobile spin-off subsidiary shareholders would receive collectively more than 50% of Flagship common stock. The common stock of the merged entities, expected to be called BankMobile, is expected to be listed on a national securities exchange after completion of the transactions. In connection with the signing of the Amended Agreement on November 17, 2017, Customers deposited $1.0 million in an escrow account with a third party to be reserved for payment to Flagship in the event the Amended Agreement is terminated for reasons described in the Amended Agreement. This $1.0 million is considered restricted cash and is presented in cash and cash equivalents in the accompanying June 30, 2018 consolidated balance sheet. The Amended Agreement provides that completion of the transactions will be subject to the receipt of all necessary closing conditions. Although the possibility still exits that the spin-off and merger could close by September 30, 2018, at this time, no assurance can be given that the spin-off and merger will occur by or shortly after September 30, 2018.
As of June 30, 2017, BankMobile met the criteria to be classified as held for sale and, accordingly, the operating results of BankMobile for the three and six month periods ended June 30, 2017, along with the associated cash flows of BankMobile for the six months ended June 30, 2017, were presented as "Discontinued operations." However, generally accepted accounting principles require that assets, liabilities, operating results, and cash flows associated with a business to be disposed of through a spin-off/merger transaction should not be reported as held for sale or discontinued operations until execution of the spin-off/merger transaction. As a result, beginning in third quarter 2017, the period in which Customers decided to spin-off BankMobile rather than selling directly to a third party, BankMobile's operating results and cash flows were no longer reported as held for sale or discontinued operations but instead were reported as held and used. At September 30, 2017, Customers measured the business at the lower of its (i) carrying amount before it was classified as held for sale, adjusted for depreciation and amortization expense that would have been recognized had the business been continuously classified as held and used, or (ii) fair value at the date the decision not to sell was made.
Amounts previously reported as discontinued operations for the three and six month periods ended June 30, 2017 have been reclassified to conform with the current period presentation within the accompanying consolidated financial statements as summarized below. Customers will continue reporting the Community Business Banking and BankMobile segment results. See NOTE 12 - BUSINESS SEGMENTS.
The following tables summarize the effect of the reclassification of BankMobile from held for sale to held and used on the previously reported consolidated statements of income for the three and six months ended June 30, 2017:
|
| | | | | | | | | | | |
| Three Months Ended June 30, 2017 |
(amounts in thousands) | As Previously Reported | | Effect of Reclassification From Held For Sale to Held and Used | | After Reclassification |
Interest income | $ | 93,852 |
| | $ | — |
| | $ | 93,852 |
|
Interest expense | 25,236 |
| | 10 |
| | 25,246 |
|
Net interest income | 68,616 |
| | (10 | ) | | 68,606 |
|
Provision for loan losses | 535 |
| | — |
| | 535 |
|
Non-interest income | 6,971 |
| | 11,420 |
| | 18,391 |
|
Non-interest expense | 30,567 |
| | 19,846 |
| | 50,413 |
|
Income from continuing operations before income taxes | 44,485 |
| | (8,436 | ) | | 36,049 |
|
Provision for income taxes | 15,533 |
| | (3,206 | ) | | 12,327 |
|
Net income from continuing operations | 28,952 |
| | (5,230 | ) | | 23,722 |
|
Loss from discontinued operations before income taxes | (8,436 | ) | | 8,436 |
| | — |
|
Income tax benefit from discontinued operations | (3,206 | ) | | 3,206 |
| | — |
|
Net loss from discontinued operations | (5,230 | ) |
| 5,230 |
|
| — |
|
Net income | 23,722 |
|
| — |
|
| 23,722 |
|
Preferred stock dividends | 3,615 |
| | — |
| | 3,615 |
|
Net income available to common shareholders | $ | 20,107 |
| | $ | — |
| | $ | 20,107 |
|
| | | | | |
|
| | | | | | | | | | | |
| Six Months Ended June 30, 2017 |
(amounts in thousands) | As Previously Reported | | Effect of Reclassification From Held For Sale to Held and Used | | After Reclassification |
Interest income | $ | 176,946 |
| | $ | — |
| | $ | 176,946 |
|
Interest expense | 45,906 |
| | 16 |
| | 45,922 |
|
Net interest income | 131,040 |
| | (16 | ) | | 131,024 |
|
Provision for loan losses | 3,585 |
| | — |
| | 3,585 |
|
Non-interest income | 12,398 |
| | 28,746 |
| | 41,144 |
|
Non-interest expense | 60,714 |
| | 39,064 |
| | 99,778 |
|
Income from continuing operations before income taxes | 79,139 |
| | (10,334 | ) | | 68,805 |
|
Provision for income taxes | 23,263 |
| | (3,927 | ) | | 19,336 |
|
Net income from continuing operations | 55,876 |
| | (6,407 | ) | | 49,469 |
|
Loss from discontinued operations before income taxes | (10,334 | ) | | 10,334 |
| | — |
|
Income tax benefit from discontinued operations | (3,927 | ) | | 3,927 |
| | — |
|
Net loss from discontinued operations | (6,407 | ) | | 6,407 |
| | — |
|
Net income | 49,469 |
| | — |
| | 49,469 |
|
Preferred stock dividends | 7,229 |
| | — |
| | 7,229 |
|
Net income available to common shareholders | $ | 42,240 |
| | $ | — |
| | $ | 42,240 |
|
| | | | | |
NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION - As Restated
Basis of Presentation
The interim unaudited consolidated financial statements of Customers Bancorp and subsidiaries have been prepared in conformity with U.S. GAAP and pursuant to the rules and regulations of the SEC. These interim unaudited consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the financial position and the results of operations and cash flows of Customers Bancorp and subsidiaries for the interim periods presented. Certain information and footnote disclosures normally included in the annual consolidated financial statements have been omitted from these interim unaudited consolidated financial statements as permitted by SEC rules and regulations. On November 13, 2018, Customers Bancorp filed with the SEC a report on Form 8-K advising that its 2017, 2016, and 2015 audited consolidated financial statements and its interim unaudited consolidated financial statements as of and for the three months ended March 31, 2018 and 2017 and the three and six months ended June 30, 2018 and 2017, respectively, should no longer be relied upon because of incorrect classifications of the cash flows used in and provided by its commercial mortgage warehouse lending activities between operating and investing activities on the consolidated statements of cash flows because the related loan balances were incorrectly classified as held for sale instead of held for investment (i.e., loans receivable) on its consolidated balance sheets. These misclassifications have no impact on total cash balances, total loans, total assets, the allowance for loan losses, total capital, regulatory capital ratios, net interest income, net interest margin, net income to shareholders, basic or diluted earnings per share, return on average assets, return on average equity, the efficiency ratio, asset quality ratios or other key performance metrics, including non-GAAP performance metrics, that Customers routinely discusses with analysts and investors. The December 31, 20172018 consolidated balance sheet presented in this report has been derived from Customers'Customers Bancorp’s audited 20172018 consolidated financial statements included in its Annual Report on Form 10-K/A filed with the SEC on November 30, 2018 (the "2017 Form 10-K/A"). Because of a fair value option election that Customers made on July 1, 2012 that continues today, these loans are, and will continue to be, reported at their fair value and accordingly do not have an allowance for loan losses.statements. Management believes that the disclosures are adequate to present fairly the consolidated financial statements as of the dates and for the periods presented. These interim unaudited consolidated financial statements should be read in conjunction with the 20172018 consolidated financial statements of Customers Bancorp and subsidiaries included in Customers' Annual Report on Form 10-K for the 2017year ended December 31, 2018 filed with the SEC on March 1, 2019 (the "2018 Form 10-K/A.10-K"). The 20172018 Form 10-K/A10-K describes Customers Bancorp’s significant accounting policies, which include its policies on Principles of Consolidation; Cash and Cash Equivalents and Statements of Cash Flows; Restrictions on Cash and Amounts due from Banks; Business Combinations; Investment Securities; Loan Accounting Framework; Loans Held for Sale and Loans at Fair Value; Loans Receivable - Mortgage Warehouse, at Fair Value; Loans Receivable; Purchased Loans; Allowance for Loan Losses;ALLL; Goodwill and Other Intangible Assets; Investments in FHLB, Federal Reserve Bank, and Other Restricted Stock; Other Real Estate Owned; Bank-Owned Life Insurance;OREO; BOLI; Bank Premises and Equipment; Lessor Operating Leases; Treasury Stock; Income Taxes; Share-Based Compensation; Transfer of Financial Assets; Business Segments;Segment Information; Derivative Instruments and Hedging; Comprehensive Income (Loss); Earnings per Share;EPS; Loss Contingencies; and Loss Contingencies.Collaborative Arrangements. There have been no material changes to Customers Bancorp's significant accounting policies noted above for the three and six months ended June 30, 2019, with the exception of the adoption of ASU 2016-02, Leases as described below in accounting standards adopted in 2019 and the election of the fair value option, upon acquisition on June 28, 2019, for certain interest-only classes of Ginnie Mae guaranteed home equity conversion mortgage-backed securities ("interest-only GNMA securities") that served as the primary collateral for loans made to one commercial mortgage warehouse customer, as further described in NOTE 5 - INVESTMENT SECURITIES. As the interest-only GNMA securities are carried at their current fair value, changes in fair value are reported in non-interest income. Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year or any other period.
Restatement of Previously Issued Financial Statements
In November 2018, Customers determined that the cash flow activities associated with its commercial mortgage warehouse lending activities should have been reported as investing activities in its consolidated statements of cash flows because the related loan balances should have been classified as held for investment (i.e., loans receivable). Customers changed its accounting policies such that commercial mortgage warehouse loans are classified as held for investment and presented as "Loans receivable, mortgage warehouse, at fair value" on its consolidated balance sheets. The cash flow activities associated with these commercial mortgage warehouse lending activities are reported as investing activities in the consolidated statements of cash flows. Accordingly, Customers has restated the consolidated balance sheet as of June 30, 2018 and statements of cash flows for the six months ended June 30, 2018 and 2017 herein.
The following tables set forth the effects of the correction on the consolidated balance sheet as of June 30, 2018 and the consolidated statements of cash flows for the six months ended June 30, 2018 and 2017.
|
| | | | | | | | | | | |
| June 30, 2018 |
Consolidated Balance Sheet | As Previously Reported | | Adjustments | | As Restated |
(amounts in thousands) | | | | | |
Loans held for sale | $ | 1,931,781 |
| | $ | (1,930,738 | ) | | $ | 1,043 |
|
Loans receivable, mortgage warehouse, at fair value | — |
| | 1,930,738 |
| | 1,930,738 |
|
Total loans receivable, net of allowance for loan losses | $ | 7,143,438 |
| | $ | 1,930,738 |
| | $ | 9,074,176 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 |
Consolidated Statements of Cash Flows | As Previously Reported | | Adjustments | | As Restated | | As Previously Reported | | Adjustments | | As Restated |
(amounts in thousands) | | | | | | | | | | | |
Origination of loans held for sale | $ | (14,272,175 | ) | | $ | 14,260,621 |
| | $ | (11,554 | ) | | $ | (14,714,280 | ) | | $ | 14,693,838 |
| | $ | (20,442 | ) |
Proceeds from the sale of loans held for sale | 14,135,931 |
| | (14,123,291 | ) | | 12,640 |
| | 14,727,734 |
| | (14,709,013 | ) | | 18,721 |
|
Net Cash Provided by (Used in) Operating Activities | (71,859 | ) | | 137,330 |
| | 65,471 |
| | 27,508 |
| | (15,175 | ) | | 12,333 |
|
Origination of mortgage warehouse loans | — |
| | (14,260,621 | ) | | (14,260,621 | ) | | — |
| | (14,693,838 | ) | | (14,693,838 | ) |
Proceeds from repayments of mortgage warehouse loans | — |
| | 14,123,291 |
| | 14,123,291 |
| | — |
| | 14,709,013 |
| | 14,709,013 |
|
Net Cash Used In Investing Activities | $ | (1,041,861 | ) | | $ | (137,330 | ) | | $ | (1,179,191 | ) | | $ | (1,338,066 | ) | | $ | 15,175 |
| | $ | (1,322,891 | ) |
In addition to the restatement of Customers' consolidated balance sheet and statements of cash flows summarized above, the following notes to the consolidated financial statements have been restated to reflect the corrected classification of Customers' commercial warehouse lending activities:
NOTE 7 - LOANS HELD FOR SALE;
NOTE 8 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES; and
NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS.
In addition, the comparative balances reported throughout Management's Discussion and Analysis of Financial Condition and Results of Operations included in Item 2 in this Quarterly Report on Form 10-Q/A, have been restated to present the corrected classification of Customers' commercial mortgage warehouse lending activities.
Reclassifications
As described in NOTE 2 - SPIN-OFF AND MERGER, beginning in third quarter 2017, Customers reclassified BankMobile, a segment previously classified as held for sale, to held and used as it no longer met the held-for-sale criteria. Certain prior period amounts and note disclosures (including NOTE 4, NOTE 8 and NOTE 10) have been reclassified to conform with the current period presentation. Except for these reclassifications, there have been no material changes to Customers' significant accounting policies as disclosed in Customers' 2017 Form 10-K/A.year.
Presented below are recently issued accounting standards that Customers has adopted as well as those that the Financial Accounting Standards Board (“FASB”)FASB has issued but are not yet effective or that Customers has not yet adopted.effective.
Recently Issued Accounting Standards
Accounting Standards Adopted in 20182019
|
| | | | |
Standard | | Summary of guidance | | Effects on Financial Statements |
| | | | |
ASU 2018-03,2016-02, Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10)Leases
Issued February 20182016
| | Ÿ Clarifies certain aspects Supersedes the lease accounting guidance for both lessees and lessors under ASC 840, Leases. Ÿ From the lessee's perspective, the new standard establishes a ROU model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Ÿ Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for lessees. Ÿ This ASU requires lessors to account for leases using an approach that is substantially similar to the existing guidance for sales-type, direct financing leases and operating leases. Ÿ Effective January 1, 2019. Ÿ In July 2018, the FASB issued in ASU 2016-01 including:2018-11 “Leases (Topic 842): Targeted Improvements,” which provides lessees the abilityoption to irrevocably electapply the new leasing standard to change the measurement approach for equity securities measured using the practical expedient (at cost plus or minus observable transactions less impairment) to a fair value method in accordance with ASC 820, Fair Value Measurement. Ÿ Provides clarification that if an observable transaction occurs for such securities, the adjustment isall open leases as of the observable transactionadoption date. Prior to this ASU issuance, a modified retrospective transition approach was required.
Ÿ Effective July 1, In December 2018, onthe FASB issued ASU 2018-20 "Leases (Topic 842): Narrow-Scope Improvements for Lessors," which provides lessors a prospective basis with early adoption permitted.policy election to not evaluate whether certain sales taxes and other similar taxes are lessor costs or lessee costs. Additionally, the update requires certain lessors to exclude from variable payments lessor costs paid by lessees directly to third parties. Ÿ In March 2019, the FASB issued ASU 2019-01 "Codification Improvements," which clarifies that lessors who are not manufacturers or dealers should use the original cost of the underlying asset in a lease as its fair value. Additionally, the update states that lessors who are depository or lending institutions within the scope of ASC 942 should present all principal payments received under leases under investing activities in their Statement of Cash Flows and that interim disclosures under ASC 250-10-50-3 are not required in the interim reports of issuers adopting ASC 842. | | Ÿ Customers adopted on JulyJanuary 1, 2018 on a prospective basis.2019. Ÿ The adoption did not materially change Customers' recognition of operating lease expense in its consolidated statements of income. Ÿ Customers adopted certain practical expedients available under the new guidance, which did not require it to (1) reassess whether any expired or existing contracts contain leases, (2) reassess the lease classification for any expired or existing leases, (3) reassess initial direct costs for any existing leases, (4) separate non-lease components from the associated lease components, (5) evaluate whether certain sales taxes and other similar taxes are lessor costs, and (6) capitalize short-term leases. Additionally, Customers elected to apply the new lease guidance at the adoption date, rather than at the beginning of the earliest period presented and will continue to present comparative periods prior to January 1, 2019 under Topic 840. Customers did not adopt the hindsight practical expedient. Ÿ The adoption of the ASU for Customers' lessor equipment finance business did not have a significant impact as Customers currently does not have any significant equity securities without readily determinable fair values.on Customers' financial condition, results of operations, and consolidated financial statements. Ÿ See NOTE 7 - LEASES.
|
| | | | |
ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated2017-08, Receivables-Nonrefundable Fees and Other Comprehensive Income/(Loss) ("AOCI")
Costs: Premium Amortization on Purchased Callable Debt Securities
Issued February 2018March 2017
| | Ÿ Allows Requires that premiums for reclassification from AOCIcertain callable debt securities held be amortized to retained earnings for stranded tax effects resulting from the 2017 Tax Cut and Jobs Act. their earliest call date. Ÿ Requires an entity to disclose whether it has elected to reclassify stranded tax effects from AOCI to retained earnings and its policy for releasing income tax effects from AOCI. Ÿ Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted.on January 1, 2019. Ÿ Adoption of this new guidance must be applied on a modified retrospective approach.
| | Ÿ Customers early adopted on January 1, 2018.2019. Ÿ The adoption resulted in the reclassification of $0.3 million in stranded tax effects in Customers' AOCI related to net unrealized losses on its available-for-sale debt securities and cash flow hedges. Ÿ The adoption did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements.
|
| | | | |
ASU 2017-12,
Targeted Improvements to Accounting for Hedging Activities
Issued August 2017
| | Ÿ Aligns the entity's risk management activities and financial reporting for hedging relationships.
Ÿ Amends the existing hedge accounting model and expands an entity's ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest-rate risk.
Ÿ Eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line item as the hedge item.
Ÿ Changes certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness.
Ÿ Effective for fiscal years beginning after December 15, 2018. Early adoption is permitted.
| | Ÿ Customers early adopted on January 1, 2018.
Ÿ With the early adoption, Customers is able to pursue additional hedging strategies including the ability to apply fair value hedge accounting to a specified pool of assets by excluding the portion of the hedged items related to prepayments, defaults and other events.
Ÿ These additional hedging strategies will allow Customers to better align the accounting and financial reporting of its hedging activities with the economic objectives thereby reducing the earnings volatility resulting from these hedging activities.
Ÿ The adoption did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements. Customers has updated its disclosures in NOTE 11 - DERIVATIVES INSTRUMENTS AND HEDGING ACTIVITIES as a result of early adopting this ASU.
|
| | | | |
ASU 2017-09,
Compensation - Stock Compensation: Scope of Modification Accounting
Issued May 2017
| | Ÿ Clarifies when to account for a change to the terms or conditions of a share-based-payment award as a modification in ASC 718.
Ÿ Provides that modification accounting is only required if the fair value, vesting conditions, or the classification of the award as equity or a liability changes as a result of the change in terms or conditions.
Ÿ Effective January 1, 2018 on a prospective basis for awards modified on or after the adoption date.
| | Ÿ Customers adopted on January 1, 2018.
Ÿ The adoption did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements.
|
| | | | |
ASU 2017-05,
Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
Issued February 2017
| | Ÿ Clarifies the scope and application of the accounting guidance on the sale of nonfinancial assets to non-customers, including partial sales.
Ÿ Clarifies that if substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in substance nonfinancial assets within the scope of Subtopic 610-20.
Ÿ Effective January 1, 2018 on a prospective basis.
| | Ÿ Customers adopted on January 1, 2018.
Ÿ The adoption did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements.
|
| | | | |
Accounting Standards Adopted in 20182019 (continued)
|
| | | | |
Standard | | Summary of guidance | | Effects on Financial Statements |
ASU 2017-01,
Clarifying the Definition of a Business
Issued January 2017
| | Ÿ Narrows the definition of a business and clarifies that to be considered a business, the fair value of gross assets acquired (or disposed of) should not be concentrated in a single identifiable asset or a group of similar identifiable assets.
Ÿ Also clarifies that in order to be considered a business, an acquisition would have to include an input and a substantive process that together will significantly contribute to the ability to create an output.
Ÿ Effective January 1, 2018 on a prospective basis.
| | Ÿ Customers adopted on January 1, 2018.
Ÿ The adoption did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements.
|
| | | | |
ASU 2016-18,
Statement of Cash Flows: Restricted Cash
Issued November 2016
| | Ÿ Requires inclusion of restricted cash in cash and cash equivalents when reconciling the beginning-of-period total amounts shown on the statement of cash flows.
Ÿ Effective January 1, 2018 and requires retrospective application to all periods presented.
| | Ÿ Customers adopted on January 1, 2018.
Ÿ The adoption did not result in any significant impact on Customers' consolidated financial statements, including its consolidated statement of cash flows, and therefore did not result in a retrospective application.
|
| | | | |
ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
Issued October 2016
| | Ÿ Requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.
Ÿ Eliminates the current exception for all intra-entity transfers of an asset other than inventory that requires deferral of the tax effects until the asset is sold to a third party or otherwise recovered through use.
Ÿ Effective January 1, 2018 on a modified retrospective basis.
| | Ÿ Customers adopted on January 1, 2018.
Ÿ The adoption of the ASU did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements.
|
| | | | |
ASU 2016-15,
Statement of Cash Flow: Classification of Certain Cash Receipts and Cash Payments
Issued August 2016
| | Ÿ Aims to reduce the existing diversity in practice with regards to the classification of the following specific items in the statement of cash flows:
1.
Cash payments for debt prepayment or extinguishment costs will be classified as an operating activity, while the portion of the payment attributable to principal will be classified as a financing activity.2.
Cash paid by an acquirer soon after a business combination for the settlement of a contingent consideration liability recognized at the acquisition date will be classified in investing activities.3.
Cash proceeds received from the settlement of insurance claims will be classified on the basis of the related insurance coverage (i.e., the nature of the loss).4.
Cash proceeds received from the settlement of bank-owned life insurance policies will be classified as cash inflows from investing activities.5.
A transferor's beneficial interest obtained in a securitization of financial assets will be disclosed as a non-cash activity, and cash received from beneficial interests will be classified in investing activities.
Ÿ Effective January 1, 2018 and requires retrospective application to all periods presented.
| | Ÿ Customers adopted on January 1, 2018.
Ÿ The adoption did not result in any significant impact on Customers' consolidated financial statements, including its consolidated statement of cash flows, and therefore it did not result in a retrospective application.
|
| | | | |
ASU 2016-04,
Liabilities - Extinguishment of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products
Issued March 2016
| | Ÿ Requires issuers of prepaid stored-value products (such as gift cards, telecommunication cards, and traveler's checks), to derecognize the financial liability related to those products for breakage. Breakage is the value of prepaid stored-value products that is not redeemed by consumers for goods, services or cash.
Ÿ The amendments in this ASU provide a narrow scope exception to the guidance in Subtopic 405-20 to require that breakage be accounted for consistent with the breakage guidance in Topic 606.
ŸEffective January 1, 2018 on a modified retrospective basis.
| | Ÿ Customers adopted on January 1, 2018.
Ÿ The adoption of this ASU did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements.
|
| | | | |
Accounting Standards Adopted in 2018 (continued)
|
| | | | |
Standard | | Summary of guidance | | Effects on Financial Statements |
ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
Issued January 2016
| | Ÿ Requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income.
Ÿ Simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment.
Ÿ Eliminates the requirement for public entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.
Ÿ Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
Ÿ Requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.
Ÿ Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements.
Ÿ Clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities.
ŸEffective January 1, 2018 on a modified retrospective basis.
| | Ÿ Customers adopted on January 1, 2018 using a modified retrospective approach.
Ÿ The adoption of this ASU resulted in a cumulative-effect adjustment that resulted in a $1.0 million reduction in AOCI and a corresponding increase in retained earnings for the same amount.
Ÿ The $1.0 million represented the net unrealized gain on Customers' investment in Religare equity securities at December 31, 2017, as disclosed in NOTE 6 - INVESTMENT SECURITIES.
Ÿ Customers also refined its calculation to determine the fair value of its held-for- investment loan portfolio for disclosure purposes using an exit price notion as part of adopting this ASU. The refined calculation did not have a significant impact on Customers' fair value disclosures.
|
| | | | |
ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
Issued May 2014
| | Ÿ Supersedes the revenue recognition requirements in ASC 605.
Ÿ Requires an entity to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Ÿ The amendment includes a five-step process to assist an entity in achieving the main principle(s) of revenue recognition under ASC 605.
Ÿ Reframed the structure of the indicators of when an entity is acting as an agent and focused on evidence that an entity is acting as the principal or agent in a revenue transaction.
Ÿ Requires additional qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
Ÿ Effective January 1 , 2018 and can be either applied retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption (modified retrospective approach).
| | Ÿ Customers adopted on January 1, 2018 on a modified retrospective basis.
Ÿ Because the ASU does not apply to revenue associated with leases and financial instruments (including loans and securities), Customers concluded that the new guidance did not have a material impact on the elements of its consolidated statements of operations most closely associated with leases and financial instruments (such as interest income, interest expense and securities gain).
Ÿ Customers has identified its deposit-related fees, service charges, debit and prepaid card interchange income and university fees to be within the scope of the standard.
Ÿ Customers has also completed its review of the related contracts and its evaluation of certain costs related to these revenue streams and determined that its debit and prepaid card interchange income, previously reported on a gross basis for periods prior to adoption, will need to be presented on a net basis under this ASU, as Customers is the agent.
Ÿ The adoption of this ASU, did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements. Additional discussion related to the adoption and the required quantitative and qualitative disclosures are included in NOTE 13 - NON-INTEREST REVENUES.
|
| | | | |
Accounting Standards Issued But Not Yet Adopted
|
| | | | |
Standard | | Summary of guidance | | Effects on Financial Statements |
ASU 2018-07,
Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting
Issued June 2018
| | Ÿ Expands the scope of Topic 718, Compensation - Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services.
Ÿ Applies to all share-based payment transactions in which a grantor acquires goods or services from non-employees to be used or consumed in a grantor's own operations by issuing share-based payment awards.
ŸWith the amended guidance from ASU 2018-07, non-employees share-based payments are measured with an estimate of the fair value of the equity the business is obligated to issue at the grant date (the date that the business and the stock award recipient agree to the terms of the award).
Ÿ Compensation would be recognized in the same period and in the same manner as if the entity had paid cash for goods or services instead of stock.
Ÿ Effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.
| | Ÿ Customers currently does not grant share-based payment awards to non-employees and, accordingly, does not expect the adoption of this ASU to have a significant impact on its financial condition, results of operations and consolidated financial statements; however, Customers will continue to evaluate the potential impact of this ASU through the adoption date.
|
| | | | |
ASU 2017-11, Accounting for Certain Financial Instruments with Down Round Features
Issued July 2017
| | Ÿ Changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. Ÿ When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity's own stock. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) would no longer be accounted for as a derivative liability at fair value as a result of the existence of a down round feature.
Ÿ For freestanding equity-classified financial instruments, the amendments require entities to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of net income available to common shareholders in basic earnings per share ("EPS").
EPS. Ÿ Effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.January 1, 2019. | | Ÿ Customers currently doesadopted on January 1, 2019. Ÿ The adoption did not have any equity-linked financial instruments (or embedded features) with down round features and, accordingly, does not expect the adoption of this ASU to have a significant impact on itsCustomers' financial condition, results of operations and consolidated financial statements; however, Customers will continue to evaluate the potential impact of this ASU through the adoption date.statements. |
| | | | |
ASU 2017-08,
Receivables-Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities
2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting
Issued March 2017June 2018
| | Ÿ Requires Expands the scope of Topic 718, Compensation - Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services. Ÿ Applies to all share-based payment transactions in which a grantor acquires goods or services from non-employees to be used or consumed in a grantor's own operations by issuing share-based payment awards. Ÿ With the amended guidance from ASU 2018-07, non-employees share-based payments are measured with an estimate of the fair value of the equity the business is obligated to issue at the grant date (the date that premiumsthe business and the stock award recipient agree to the terms of the award). Ÿ Compensation would be recognized in the same period and in the same manner as if the entity had paid cash for certain callable debt securities held be amortized to their earliest call date. goods or services instead of stock. Ÿ Effective for Customers beginning after December 15, 2018, with early adoption permitted.
Ÿ Adoption of this new guidance must be applied on a modified retrospective approach.January 1, 2019. | | Ÿ Customers currently has an immaterial amount of callable debt securities purchased at a premium and, accordingly, doesadopted on January 1, 2019. Ÿ The adoption did not expect the adoption of this ASU to have a significant impact on itsCustomers' financial condition, results of operations and consolidated financial statements; however, Customers will continue to evaluate the potential impact through the adoption date.statements. |
| | | | |
Accounting Standards Issued But Not Yet Adopted (continued)
|
| | | | |
Standard | | Summary of guidance | | Effects on Financial Statements |
| | | | |
ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments
Issued April 2019 | | Ÿ Clarifies the scope of the credit losses standard and addresses issues related to accrued interest receivable balances, recoveries, variable interest rates, and prepayments. Ÿ Addresses partial-term fair value hedges, fair value hedge basis adjustments and certain transition requirements. Ÿ Addresses recognizing and measuring financial instruments, specifically the requirement for remeasurement under ASC 820 when using the measurement alternative, certain disclosure requirements and which equity securities have to be remeasured at historical exchange rates. Ÿ Topic 326 Amendments - Effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption permitted. Topic 815 Amendments - Effective for first annual period beginning after the issuance date of this ASU (i.e., fiscal year 2020). Entities that have already adopted the amendments in ASU 2017-12 may elect either to retrospectively apply all the amendments or to prospectively apply all amendments as of the date of adoption. Topic 825 Amendments - Effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. | | Ÿ Customers is currently evaluating the expected impact of this ASU on its financial condition, results of operations and consolidated financial statements.
|
| | | | |
ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606
Issued November 2018
| | Ÿ Clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all the guidance in Topic 606 should be applied, including recognition, measurement, presentation, and disclosure requirements. Ÿ Adds unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within scope of Topic 606. Ÿ Requires that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer. Ÿ Effective for fiscal year beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption permitted.
| | Ÿ Customers is currently evaluating the expected impact of this ASU on its financial condition, results of operations and consolidated financial statements.
|
| | | | |
Accounting Standards Issued But Not Yet Adopted (continued) |
| | | | |
Standard | | Summary of guidance | | Effects on Financial Statements |
| | | | |
ASU 2018-15, Internal-Use Software (Subtopic 350-40): Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract
Issued August 2018
| | Ÿ Clarifies that service contracts with hosting arrangements must follow internal-use software guidance Subtopic 350-40 when determining which implementation costs to capitalize as an asset related to the service contract and which costs to expense. Ÿ Also clarifies that capitalized implementation costs of a hosting arrangement that is a service contract are to be amortized over the term of the hosting arrangement, which includes the noncancelable period of the arrangement plus options to extend the arrangement if reasonably certain to exercise. Ÿ Clarifies that existing impairment guidance in Subtopic 350-40 must be applied to the capitalized implementation costs as if they were long-lived assets. Ÿ Applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Ÿ Effective for fiscal year beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption permitted. | | Ÿ Customers intends to adopt this guidance on its effective date and does not expect the adoption of this guidance to materially impact its financial condition, results of operations and consolidated financial statements.
|
| | | | |
ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
Issued June 2016
| | Ÿ Requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL")CECL model to estimate lifetime expected credit loss and record an allowance that, when deducted from the amortized cost basis of the financial asset (including HTMheld-to-maturity debt securities), presents the net amount expected to be collected on the financial asset. Ÿ Replaces today's "incurred loss" approach and is expected to result in earlier recognition of credit losses. Ÿ For available-for-sale debt securities, entities will be required to record allowances for credit losses rather than reduce the carrying amount, as they do today under the OTTI model, and will be allowed to reverse previously established allowances in the event the credit of the issuer improves. Ÿ Simplifies the accounting model for purchased credit-impairedPCI debt securities and loans. Ÿ In May 2019, the FASB issued ASU 2019-05 "Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief," which provides entities that have certain instruments within the scope of Topic 326 with an option to irrevocably elect the fair value option in Subtopic 825, Financial Instruments. This relief is to be applied on an instrument-by-instrument basis for eligible instruments upon adoption of Topic 326. Ÿ Effective beginning after December 15, 2019 with early adoption permitted. Ÿ Adoption can be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. | | Ÿ Customers is currentlyhas established a company-wide, cross-discipline governance structure, which provides implementation oversight and continues evaluating the impact of this ASU continuing its implementation efforts across the company and reviewing the loss modeling requirements consistent with lifetime expected loss estimates. Ÿ Customers expects thathas selected a third-party vendor to assist in the implementation process of its new model, which will include different assumptions used in calculating credit losses, such as estimating losses over the estimated life of a financial assetcontractual term adjusted for prepayments and will consider expected future changes in macroeconomic conditions.
Ÿ Customers began to run the new model parallel to its current ALLL model during second quarter 2019 and continues to evaluate the results and assumptions. Ÿ The adoption of this ASU maywill result in an increase to Customers' allowance for loan lossesALLL which will depend upon the nature and characteristics of Customers' loan and lease portfolio at the adoption date, as well as the macroeconomic conditions and forecasts at that date. Ÿ Customers currently does not intend to early adopt this new guidance.
|
| | | | |
ASU 2016-02,
Leases
Issued February 2016
| | Ÿ Supersedes the current lease accounting guidance for both lessees and lessors under ASC 840, Leases.
Ÿ From the lessee's perspective, the new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.
Ÿ Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for lessees.
Ÿ This ASU will require lessors to account for leases using an approach that is substantially similar to the existing guidance for sales-type, direct financing leases and operating leases.
Ÿ Effective beginning after December 15, 2018 with early adoption permitted.
Ÿ A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.
Ÿ In July 2018, the FASB issued ASU 2018-11 “Leases (Topic 842): Targeted Improvements,” which provides lessees the option to apply the new leasing standard to all open leases as of the adoption date.
| | Ÿ Customers is currently evaluating the impact of this ASU on its financial condition and results of operations and expects to recognize right-of-use assets and lease liabilities for substantially all of its operating lease commitments based on the present value of unpaid lease payments as of the date of adoption.
Ÿ Customers expects to apply the new transition option under ASU 2018-11.
Ÿ Customers does not intend to early adopt this ASU.
|
| | | | |
NOTE 43 — EARNINGS PER SHARE
The following are the components and results of Customers' earnings per common share calculations for the periods presented.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(amounts in thousands, except share and per share data) | 2019 | | 2018 | | 2019 | | 2018 |
Net income available to common shareholders | $ | 5,681 |
| | $ | 20,048 |
| | $ | 17,506 |
| | $ | 40,575 |
|
| | | | | | | |
Weighted-average number of common shares outstanding - basic | 31,154,292 |
| | 31,564,893 |
| | 31,101,037 |
| | 31,495,082 |
|
Share-based compensation plans | 471,449 |
| | 807,258 |
| | 446,985 |
| | 823,245 |
|
Warrants | — |
| | 8,511 |
| | — |
| | 8,566 |
|
Weighted-average number of common shares - diluted | 31,625,741 |
| | 32,380,662 |
| | 31,548,022 |
| | 32,326,893 |
|
| | | | | | | |
Basic earnings per common share | $ | 0.18 |
| | $ | 0.64 |
| | $ | 0.56 |
| | $ | 1.29 |
|
Diluted earnings per common share | $ | 0.18 |
| | $ | 0.62 |
| | $ | 0.55 |
| | $ | 1.26 |
|
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
(amounts in thousands, except share and per share data) | | | | | | | |
Net income available to common shareholders | $ | 20,048 |
| | $ | 20,107 |
| | $ | 40,575 |
| | $ | 42,240 |
|
| | | | | | | |
Weighted-average number of common shares outstanding - basic | 31,564,893 |
| | 30,641,554 |
| | 31,495,082 |
| | 30,524,955 |
|
Share-based compensation plans | 807,258 |
| | 1,910,634 |
| | 823,245 |
| | 2,129,773 |
|
Warrants | 8,511 |
| | 17,464 |
| | 8,566 |
| | 27,318 |
|
Weighted-average number of common shares - diluted | 32,380,662 |
| | 32,569,652 |
| | 32,326,893 |
| | 32,682,046 |
|
| | | | | | | |
Basic earnings per common share | $ | 0.64 |
| | $ | 0.66 |
| | $ | 1.29 |
| | $ | 1.38 |
|
Diluted earnings per common share | $ | 0.62 |
| | $ | 0.62 |
| | $ | 1.26 |
| | $ | 1.29 |
|
The following is a summary of securities that could potentially dilute basic earnings per common share in future periods that were not included in the computation of diluted earnings per common share because either the performance conditions for certain of the share-based compensation awards have not been met or to do so would have been anti-dilutive for the periods presented.
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Share-based compensation awards | 2,246,181 |
| | 1,069,225 |
| | 2,301,663 |
| | 1,069,225 |
|
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Anti-dilutive securities: | | | | | | | |
Share-based compensation awards | 1,069,225 |
| | 288,325 |
| | 1,069,225 |
| | 282,725 |
|
Warrants | — |
| | 52,242 |
| | — |
| | 52,242 |
|
Total anti-dilutive securities | 1,069,225 |
| | 340,567 |
| | 1,069,225 |
| | 334,967 |
|
NOTE 54 — CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT
The following tables present the changes in accumulated other comprehensive income (loss) by component for the three and six months ended June 30, 20182019 and 2017.2018. All amounts are presented net of tax. Amounts in parentheses indicate reductions to accumulated other comprehensive income.AOCI.
| | | Three Months Ended June 30, 2018 | Three Months Ended June 30, 2019 |
| Available-for-sale debt securities | | | | | Available-for-Sale Debt Securities | | | | |
(amounts in thousands) | Unrealized Gains (Losses) | Foreign Currency Items | Total Unrealized Gains (Losses) | | Unrealized Gains (Losses) on Cash Flow Hedges | | Total | Unrealized Gains (Losses) | Foreign Currency Items | Total Unrealized Gains (Losses) | | Unrealized Gains (Losses) on Cash Flow Hedges | | Total |
Balance - March 31, 2018 | $ | (26,691 | ) | $ | — |
| $ | (26,691 | ) | | $ | 503 |
| | $ | (26,188 | ) | |
Balance - March 31, 2019 | | $ | (8,556 | ) | $ | — |
| $ | (8,556 | ) | | $ | (6,363 | ) | | $ | (14,919 | ) |
Other comprehensive income (loss) before reclassifications | (9,020 | ) | — |
| (9,020 | ) | | 1,403 |
| | (7,617 | ) | 15,358 |
| — |
| 15,358 |
| | (10,435 | ) | | 4,923 |
|
Amounts reclassified from accumulated other comprehensive income (loss) to net income (1) | — |
| — |
| — |
| | (192 | ) | | (192 | ) | — |
| — |
| — |
| | 3 |
| | 3 |
|
Net current-period other comprehensive income (loss) | (9,020 | ) | — |
| (9,020 | ) | | 1,211 |
| | (7,809 | ) | |
Balance - June 30, 2018 | $ | (35,711 | ) | $ | — |
| $ | (35,711 | ) | | $ | 1,714 |
| | $ | (33,997 | ) | |
Net current-period other comprehensive income | | 15,358 |
| — |
| 15,358 |
| | (10,432 | ) | | 4,926 |
|
Balance - June 30, 2019 | | $ | 6,802 |
| $ | — |
| $ | 6,802 |
| | $ | (16,795 | ) | | $ | (9,993 | ) |
|
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2019 |
| Available-for-Sale Debt Securities | | | | |
(amounts in thousands) | Unrealized Gains (Losses) | Foreign Currency Items | Total Unrealized Gains (Losses) | | Unrealized Gains (Losses) on Cash Flow Hedges | | Total |
Balance - December 31, 2018 | $ | (21,741 | ) | $ | — |
| $ | (21,741 | ) | | $ | (922 | ) | | $ | (22,663 | ) |
Other comprehensive income (loss) before reclassifications | 28,543 |
| — |
| 28,543 |
| | (15,570 | ) | | 12,973 |
|
Amounts reclassified from accumulated other comprehensive income (loss) to net income (1) | — |
| — |
| — |
| | (303 | ) | | (303 | ) |
Net current-period other comprehensive income (loss) | 28,543 |
| — |
| 28,543 |
| | (15,873 | ) | | 12,670 |
|
Balance - June 30, 2019 | $ | 6,802 |
| $ | — |
| $ | 6,802 |
| | $ | (16,795 | ) | | $ | (9,993 | ) |
| | | | | | | |
| |
(1) | Reclassification amounts for available-for-sale debt securities are reported as gain or loss on sale of investment securities on the consolidated statements of income. During the three and six months ended June 30, 2019 there were no sales of investment securities. Reclassification amounts for cash flow hedges are reported as interest expense for the applicable hedged items on the consolidated statements of income. During the three and six months ended June 30, 2019, reclassification amounts of $4 thousand ($3 thousand net of taxes) and $409 thousand ($303 thousand net of taxes) were reported as an increase and as a reduction, respectively, to interest expense for the applicable hedged items on the consolidated statements of income. |
| | | Six Months Ended June 30, 2018 | Three Months Ended June 30, 2018 |
| Available-for-sale securities | | | | | Available-for-Sale Debt Securities | | | | |
(amounts in thousands) | Unrealized Gains (Losses) | Foreign Currency Items | Total Unrealized Gains (Losses) | | Unrealized Gains (Losses) on Cash Flow Hedges | | Total | Unrealized Gains (Losses) | Foreign Currency Items | Unrealized Gains (Losses) on Available-For-Sale Securities | | Unrealized Gains (Losses) on Cash Flow Hedges | | Total |
Balance - December 31, 2017 | $ | (249 | ) | $ | 88 |
| $ | (161 | ) | | $ | (198 | ) | | $ | (359 | ) | |
Reclassification of the income tax effects of the Tax Cuts and Jobs Act (2) | (256 | ) | — |
| (256 | ) | | (42 | ) | | (298 | ) | |
Reclassification of net unrealized gains on equity securities (2) | (953 | ) | (88 | ) | (1,041 | ) | | — |
| | (1,041 | ) | |
Balance after reclassification adjustments on January 1, 2018 | (1,458 | ) | — |
| (1,458 | ) | | (240 | ) | | (1,698 | ) | |
Balance - March 31, 2018 | | $ | (26,691 | ) | $ | — |
| $ | (26,691 | ) | | $ | 503 |
| | $ | (26,188 | ) |
Other comprehensive income (loss) before reclassifications | (34,253 | ) | — |
| (34,253 | ) | | 2,049 |
| | (32,204 | ) | (9,020 | ) | — |
| (9,020 | ) | | 1,403 |
| | (7,617 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) to net income (1) | — |
| — |
| — |
| | (95 | ) | | (95 | ) | — |
| — |
| — |
| | (192 | ) | | (192 | ) |
Net current-period other comprehensive income (loss) | (34,253 | ) | — |
| (34,253 | ) | | 1,954 |
| | (32,299 | ) | (9,020 | ) | — |
| (9,020 | ) | | 1,211 |
| | (7,809 | ) |
Balance - June 30, 2018 | $ | (35,711 | ) | $ | — |
| $ | (35,711 | ) | | $ | 1,714 |
| | $ | (33,997 | ) | $ | (35,711 | ) | $ | — |
| $ | (35,711 | ) | | $ | 1,714 |
| | $ | (33,997 | ) |
| | | | | | |
(1) Reclassification amounts for cash flow hedges are reported as interest expense on FHLB advances on the consolidated statements of income.
(2) Amounts reclassified from accumulated other comprehensive income (loss) on January 1, 2018 as a result of the adoption of ASU 2018-02 and ASU 2016-01 resulted in a decrease in accumulated other comprehensive income of $1.3 million and a corresponding increase in retained earnings for the same amount. See NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION for more information.
| | | | | | | | | | Six Months Ended June 30, 2018 |
| Three Months Ended June 30, 2017 | Available-for-Sale Debt Securities | | | | |
(amounts in thousands) | Unrealized Gains (Losses) on Available-For-Sale Debt Securities | | Unrealized Gains (Losses) on Cash Flow Hedges | | Total | Unrealized Gains (Losses) | Foreign Currency Items | Unrealized Gains (Losses) on Available-For-Sale Securities | | Unrealized Gains (Losses) on Cash Flow Hedges | | Total |
Balance - March 31, 2017 | $ | (3,366 | ) | | $ | (1,506 | ) | | $ | (4,872 | ) | |
Balance - December 31, 2017 | | $ | (249 | ) | $ | 88 |
| $ | (161 | ) | | $ | (198 | ) | | $ | (359 | ) |
Reclassification of the income tax effects of the Tax Cuts and Jobs Act (2) | | (256 | ) | — |
| (256 | ) | | (42 | ) | | (298 | ) |
Reclassification of net unrealized gains on equity securities (2) | | (953 | ) | (88 | ) | (1,041 | ) | | — |
| | (1,041 | ) |
Balance after reclassifications on January 1, 2018 | | (1,458 | ) | — |
| (1,458 | ) | | (240 | ) | | (1,698 | ) |
Other comprehensive income (loss) before reclassifications | 12,130 |
| | (420 | ) | | 11,710 |
| (34,253 | ) | — |
| (34,253 | ) | | 2,049 |
| | (32,204 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) to net income (1) | (1,942 | ) | | 468 |
| | (1,474 | ) | — |
| — |
| — |
| | (95 | ) | | (95 | ) |
Net current-period other comprehensive income | 10,188 |
| | 48 |
| | 10,236 |
| (34,253 | ) | — |
| (34,253 | ) | | 1,954 |
| | (32,299 | ) |
Balance - June 30, 2017 | $ | 6,822 |
| | $ | (1,458 | ) | | $ | 5,364 |
| |
Balance - June 30, 2018 | | $ | (35,711 | ) | $ | — |
| $ | (35,711 | ) | | $ | 1,714 |
| | $ | (33,997 | ) |
| | | | | | |
|
| | | | | | | | | | | |
| Six Months Ended June 30, 2017 |
(amounts in thousands) | Unrealized Gains (Losses) on Available-For-Sale Debt Securities | | Unrealized Gains (Losses) on Cash Flow Hedges | | Total |
Balance - December 31, 2016 | $ | (2,681 | ) | | $ | (2,211 | ) | | $ | (4,892 | ) |
Other comprehensive income (loss) before reclassifications | 11,445 |
| | (219 | ) | | 11,226 |
|
Amounts reclassified from accumulated other comprehensive income (loss) to net income (1) | (1,942 | ) | | 972 |
| | (970 | ) |
Net current-period other comprehensive income | 9,503 |
| | 753 |
| | 10,256 |
|
Balance - June 30, 2017 | $ | 6,822 |
| | $ | (1,458 | ) | | $ | 5,364 |
|
| | | | | |
(1) Reclassification amounts for available-for-sale debt securities are reported as gain on sale of investment securities on the consolidated statements of income. Reclassification amounts for cash flow hedges are reported as interest expense on FHLB advances on the consolidated statements of income.
| |
(1) | Reclassification amounts for available-for-sale debt securities are reported as gain or loss on sale of investment securities on the consolidated statements of income. During the three and six months ended June 30, 2018, there were no sales of investment securities. Reclassification amounts for cash flow hedges are reported as interest expense for the applicable hedged items on the consolidated statements of income. During the three and six months ended June 30, 2018, reclassification amounts of $259 thousand ($192 thousand net of taxes) and $128 thousand ($95 thousand net of taxes) were reported as reductions to interest expense for the applicable hedged items on the consolidated statements of income. |
| |
(2) | Amounts reclassified from accumulated other comprehensive income (loss) on January 1, 2018 as a result of the adoption of ASU 2018-02 and ASU 2016-01 resulted in a decrease in AOCI of $1.3 million and a corresponding increase in retained earnings for the same amount. |
NOTE 65 — INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities as of June 30, 20182019 and December 31, 20172018 are summarized in the tables below:
|
| | | | | | | | | | | | | | | |
| June 30, 2018 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
(amounts in thousands) | | | | | | | |
Available-for-Sale Debt Securities: | | | | | | | |
Agency-guaranteed residential mortgage-backed securities | $ | 490,425 |
| | $ | — |
| | $ | (13,862 | ) | | $ | 476,563 |
|
Agency-guaranteed commercial real estate mortgage-backed securities | 334,232 |
| | — |
| | (13,859 | ) | | 320,373 |
|
Corporate notes | 381,545 |
| | 798 |
| | (21,335 | ) | | 361,008 |
|
Available-for-Sale Debt Securities | $ | 1,206,202 |
| | $ | 798 |
| | $ | (49,056 | ) | | 1,157,944 |
|
Equity Securities (1) | | | | | | | 3,056 |
|
Total Investment Securities, at Fair Value | | | | | | | $ | 1,161,000 |
|
(1) Includes equity securities issued by a foreign entity that are being measured at fair value with changes in fair value recognized directly in earnings effective January 1, 2018 as a result of adopting ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (see NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION for additional information related to the adoption of this new standard).
|
| | | | | | | | | | | | | | | |
| June 30, 2019 |
(amounts in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Available-for-sale debt securities: | | | | | | | |
Agency-guaranteed residential mortgage-backed securities | $ | 299,370 |
| | $ | 2,023 |
| | $ | (2 | ) | | $ | 301,391 |
|
Corporate notes (1) | 381,267 |
| | 8,574 |
| | (1,403 | ) | | 388,438 |
|
Available-for-sale debt securities | $ | 680,637 |
| | $ | 10,597 |
| | $ | (1,405 | ) | | 689,829 |
|
Interest-only classes of agency-guaranteed home equity conversion mortgage-backed securities (2) | | | | | | | 17,157 |
|
Equity securities (3) | | | | | | | 1,373 |
|
Total investment securities, at fair value |
|
| |
|
| |
|
| | $ | 708,359 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2017 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
(amounts in thousands) | | | | | | | |
Available-for-Sale Securities: | | | | | | | |
Agency-guaranteed residential mortgage-backed securities | $ | 186,221 |
| | $ | 36 |
| | $ | (2,799 | ) | | $ | 183,458 |
|
Agency-guaranteed commercial real estate mortgage-backed securities | 238,809 |
| | 432 |
| | (769 | ) | | 238,472 |
|
Corporate notes (1) | 44,959 |
| | 1,130 |
| | — |
| | 46,089 |
|
Equity securities (2) | 2,311 |
| | 1,041 |
| | — |
| | 3,352 |
|
Total Available-for-Sale Securities, at Fair Value | $ | 472,300 |
| | $ | 2,639 |
| | $ | (3,568 | ) | | $ | 471,371 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2018 |
(amounts in thousands) | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value |
Available-for-sale debt securities: | | | | | | | |
Agency-guaranteed residential mortgage-backed securities | $ | 311,267 |
| | $ | — |
| | $ | (5,893 | ) | | $ | 305,374 |
|
Corporate notes (1) | 381,407 |
| | 920 |
| | (24,407 | ) | | 357,920 |
|
Available-for-sale debt securities | $ | 692,674 |
| | $ | 920 |
| | $ | (30,300 | ) | | 663,294 |
|
Equity securities (3) | | | | | | | 1,718 |
|
Total investment securities, at fair value |
|
| |
|
| |
|
| | $ | 665,012 |
|
| |
(1) | Includes subordinated debtcorporate securities issued by other domestic and foreign bank holding companies. |
| |
(2) | Reported at fair value with fair value changes recorded in non-interest income based on a fair value option election. |
| |
(3) | Includes equity securities issued by a foreign entity. |
The following table presents proceeds from
On June 28, 2019, Customers obtained ownership of certain interest-only classes of Ginnie Mae guaranteed home equity conversion mortgage-backed securities ("interest-only GNMA securities") that served as the primary collateral for loans made to one commercial mortgage warehouse customer through a Uniform Commercial Code private sale transaction. In connection with the acquisition of investmentthe interest-only GNMA securities, and gross gains and gross losses realized on those salesCustomers recognized a pre-tax loss of $7.5 million for the three and six month periodsmonths ended June 30, 20182019 for the shortfall in the fair value of the interest-only GNMA securities compared to its credit exposure to this commercial mortgage warehouse customer. On June 28, 2019, Customers elected the fair value option for these interest-only GNMA securities acquired on such date. The fair value of these securities at June 30, 2019 was $17.2 million.
There were no sales of available-for-sale debt securities or equity securities for the three and 2017:six months ended June 30, 2019 and 2018.
|
| | | | | | | | | | | | | | | |
| | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
(amounts in thousands) | | | | | | | |
Proceeds from sale of available-for-sale securities | $ | — |
| | $ | 115,982 |
| | $ | — |
| | $ | 115,982 |
|
Gross gains | $ | — |
| | $ | 3,183 |
| | $ | — |
| | $ | 3,183 |
|
Gross losses | — |
| | — |
| | — |
| | — |
|
Net gains (losses) | $ | — |
| | $ | 3,183 |
| | $ | — |
| | $ | 3,183 |
|
These gains were determined using the specific identification method and were reported as gains on sale of investment securities included in non-interest income on the consolidated statements of income.
The following table shows debt investment securities by stated maturity. InvestmentDebt securities backed by mortgages and interest-only GNMA securities have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay and, therefore, these debt securities are classified separately with no specific maturity date:
|
| | | | | | | |
| June 30, 2019 |
(amounts in thousands) | Amortized Cost | | Fair Value |
Due in one year or less | $ | — |
| | $ | — |
|
Due after one year through five years | — |
| | — |
|
Due after five years through ten years | 379,267 |
| | 386,316 |
|
Due after ten years | 2,000 |
| | 2,122 |
|
Agency-guaranteed residential mortgage-backed securities | 299,370 |
| | 301,391 |
|
Interest-only classes of agency-guaranteed home equity conversion mortgage-backed securities | — |
| | 17,157 |
|
Total debt securities | $ | 680,637 |
| | $ | 706,986 |
|
|
| | | | | | | |
| June 30, 2018 |
| Amortized Cost | | Fair Value |
(amounts in thousands) | | | |
Due in one year or less | $ | — |
| | $ | — |
|
Due after one year through five years | — |
| | — |
|
Due after five years through ten years | 179,413 |
| | 171,214 |
|
Due after ten years | 202,132 |
| | 189,794 |
|
Agency-guaranteed residential mortgage-backed securities | 490,425 |
| | 476,563 |
|
Agency-guaranteed commercial real estate mortgage-backed securities | 334,232 |
| | 320,373 |
|
Total debt securities | $ | 1,206,202 |
| | $ | 1,157,944 |
|
Gross unrealized losses and fair value of Customers' available for saleavailable-for-sale debt investment securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 20182019 and December 31, 20172018 were as follows: | | | June 30, 2018 | | | | | | | | | | | | | |
| Less Than 12 Months | | 12 Months or More | | Total | June 30, 2019 |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | Less Than 12 Months | | 12 Months or More | | Total |
(amounts in thousands) | | | | | | | | | | | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Available-for-Sale Debt Securities: | | | | | | | | | | | | |
Available-for-sale debt securities: | | | | | | | | | | | | |
Agency-guaranteed residential mortgage-backed securities | $ | 416,002 |
| | $ | (10,256 | ) | | $ | 60,561 |
| | $ | (3,606 | ) | | $ | 476,563 |
| | $ | (13,862 | ) | $ | — |
| | $ | — |
| | $ | 64,296 |
| | $ | (2 | ) | | $ | 64,296 |
| | $ | (2 | ) |
Agency-guaranteed commercial real estate mortgage-backed securities | 314,525 |
| | (13,532 | ) | | 5,848 |
| | (327 | ) | | 320,373 |
| | (13,859 | ) | |
Corporate notes | 315,249 |
| | (21,335 | ) | | — |
| | — |
| | 315,249 |
| | (21,335 | ) | — |
| | — |
| | 74,492 |
| | (1,403 | ) | | 74,492 |
| | (1,403 | ) |
Total | $ | 1,045,776 |
| | $ | (45,123 | ) | | $ | 66,409 |
| | $ | (3,933 | ) | | $ | 1,112,185 |
| | $ | (49,056 | ) | $ | — |
| | $ | — |
| | $ | 138,788 |
| | $ | (1,405 | ) | | $ | 138,788 |
| | $ | (1,405 | ) |
| | | December 31, 2017 | | | | | | | | | | | | | |
| Less Than 12 Months | | 12 Months or More | | Total | December 31, 2018 |
| Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | Less Than 12 Months | | 12 Months or More | | Total |
(amounts in thousands) | | | | | | | | | | | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
Available-for-Sale Debt Securities: | | | | | | | | | | | | |
Available-for-sale debt securities: | | | | | | | | | | | | |
Agency-guaranteed residential mortgage-backed securities | $ | 104,861 |
| | $ | (656 | ) | | $ | 66,579 |
| | $ | (2,143 | ) | | $ | 171,440 |
| | $ | (2,799 | ) | $ | 305,374 |
| | $ | (5,893 | ) | | $ | — |
| | $ | — |
| | $ | 305,374 |
| | $ | (5,893 | ) |
Agency-guaranteed commercial real estate mortgage-backed securities | 115,970 |
| | (740 | ) | | 6,151 |
| | (29 | ) | | 122,121 |
| | (769 | ) | |
Corporate notes | | 310,036 |
| | (24,407 | ) | | — |
| | — |
| | 310,036 |
| | (24,407 | ) |
Total | $ | 220,831 |
| | $ | (1,396 | ) | | $ | 72,730 |
| | $ | (2,172 | ) | | $ | 293,561 |
| | $ | (3,568 | ) | $ | 615,410 |
| | $ | (30,300 | ) | | $ | — |
| | $ | — |
| | $ | 615,410 |
| | $ | (30,300 | ) |
At June 30, 2018,2019, there were sixty-fourno available-for-sale debt investment securities with unrealized losses in the less-than-twelve-month category and sixteenseven available-for-sale debt investment securities with unrealized losses in the twelve-month-or-more category. The unrealized losses on the mortgage-backed securities are guaranteed by government-sponsored entities and primarily relate to changes in market interest rates. The unrealized losses on the corporate notes relate to securities with no company specific concentration. The unrealized losses were principally due to an upward shift in interest rates since the time of purchase that resulted in a negative impact on the respective notes pricing.security's fair value. All amounts related to the mortgage-backed securities and the corporate notes are expected to be recovered when market prices recover or at maturity. Customers does not intend to sell these securities and it is not more likely than not that Customers will be required to sell the securities before recovery of the amortized cost basis.
During the three and six month periods ended June 30, 2017, Customers recorded other-than-temporary impairment losses of $2.9 million and $4.6 million, respectively, related to its equity holdings in Religare Enterprises Ltd. ("Religare") for the full amount of the decline in fair value from the cost basis established at December 31, 2016 through June 30, 2017 because Customers no longer had the intent to hold these securities until a recovery in fair value. At December 31, 2017, the fair value of the Religare equity securities was $3.4 million which resulted in an unrealized gain of $1.0 million being recognized in accumulated other comprehensive income with no adjustment for deferred taxes as Customers currently does not have a tax strategy in place capable of generating sufficient capital gains to utilize any capital losses resulting from the Religare investment.
As described in NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION, the adoption of ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities,on January 1, 2018 resulted in a cumulative effect adjustment to Customers' consolidated balance sheet with a $1.0 million reduction in accumulated other comprehensive income and a corresponding increase in retained earnings related to the December 31, 2017 unrealized gain on the Religare equity securities. In accordance with the new accounting guidance, changes in the fair value of the Religare equity securities since adoption were recorded directly in earnings, which resulted in an unrealized loss of $0.3 million being recognized in other non-interest income in the accompanying consolidated statements of income for the three and six months ended June 30, 2018, respectively.
At June 30, 20182019 and December 31, 2017,2018, Customers Bank had pledged investment securities aggregating $685.0$22.6 million and $16.9$23.0 million in fair value, respectively, as collateral against its borrowings primarily with the FHLB and an unused line of credit with another financial institution. These counterparties do not have the ability to sell or repledge these securities.
NOTE 7 – LOANS HELD FOR SALE - As Restated
The composition of loans held for sale as ofAt June 30, 20182019 and December 31, 2017 was as follows:
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
(amounts in thousands) | (As Restated) | | (As Restated) |
Commercial loans: | | | |
Multi-family loans at lower of cost or fair value | $ | — |
| | $ | 144,191 |
|
Total commercial loans held for sale | — |
| | 144,191 |
|
Consumer loans: | | | |
Residential mortgage loans, at fair value | 1,043 |
| | 1,886 |
|
Loans held for sale | $ | 1,043 |
| | $ | 146,077 |
|
2018, no securities holding of any one issuer, other than the U.S. Government and its agencies, amounted to greater than 10% of shareholders' equity.
Effective March 31, 2018, Customers Bank transferred $129.7 million of multi-family loans from loans held for sale to loan receivable (held for investment) because the Bank no longer has the intent to sell these loans. Customers Bank transferred these loans at their carrying value, which approximated their fair value at the time of transfer.
On June 30, 2017, Customers Bank transferred $150.6 million of multi-family loans from held for investment to loans held for sale. Customers Bank transferred these loans at their carrying value, which was lower than the estimated fair value at the time of transfer. At December 31, 2017, the carrying value of these loans approximated their fair value. Accordingly, a lower of cost or fair value adjustment was not recorded as of December 31, 2017. See NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION for more information on the reclassification of loans previously reported as held for sale.
NOTE 86 — LOANS AND LEASES RECEIVABLE AND ALLOWANCE FOR LOAN AND LEASE LOSSES - As Restated
The following table presents loans and leases receivable as of June 30, 20182019 and December 31, 2017.2018.
|
| | | | | | | |
(amounts in thousands) | June 30, 2019 | | December 31, 2018 |
Loans receivable, mortgage warehouse, at fair value | $ | 2,001,540 |
| | $ | 1,405,420 |
|
Loans receivable: | | | |
Commercial: | | | |
Multi-family | 3,017,531 |
| | 3,285,297 |
|
Commercial and industrial (including owner occupied commercial real estate) (1) | 2,184,556 |
| | 1,951,277 |
|
Commercial real estate non-owner occupied | 1,176,575 |
| | 1,125,106 |
|
Construction | 59,811 |
| | 56,491 |
|
Total commercial loans and leases receivable | 6,438,473 |
| | 6,418,171 |
|
Consumer: | | | |
Residential real estate | 648,860 |
| | 566,561 |
|
Manufactured housing | 75,597 |
| | 79,731 |
|
Other consumer | 552,839 |
| | 74,035 |
|
Total consumer loans receivable | 1,277,296 |
| | 720,327 |
|
Loans and leases receivable | 7,715,769 |
| | 7,138,498 |
|
Deferred (fees) costs and unamortized (discounts) premiums, net | (1,663 | ) | | (424 | ) |
Allowance for loan and lease losses | (48,388 | ) | | (39,972 | ) |
Total loans and leases receivable, net of allowance for loan and lease losses | $ | 9,667,258 |
| | $ | 8,503,522 |
|
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
(amounts in thousands) | (As Restated) | | (As Restated) |
Loans receivable, mortgage warehouse, at fair value | $ | 1,930,738 |
| | $ | 1,793,408 |
|
Loans receivable: | | | |
Commercial: | | | |
Multi-family | 3,542,770 |
| | 3,502,381 |
|
Commercial and industrial (including owner occupied commercial real estate) | 1,811,751 |
| | 1,633,818 |
|
Commercial real estate non-owner occupied | 1,155,998 |
| | 1,218,719 |
|
Construction | 88,141 |
| | 85,393 |
|
Total commercial loans receivable | 6,598,660 |
| | 6,440,311 |
|
Consumer: | | | |
Residential real estate | 493,222 |
| | 234,090 |
|
Manufactured housing | 85,328 |
| | 90,227 |
|
Other | 3,874 |
| | 3,547 |
|
Total consumer loans receivable | 582,424 |
| | 327,864 |
|
Loans receivable | 7,181,084 |
| | 6,768,175 |
|
Deferred costs and unamortized premiums, net | 642 |
| | 83 |
|
Allowance for loan losses | (38,288 | ) | | (38,015 | ) |
Total loans receivable, net of allowance for loan losses | $ | 9,074,176 |
| | $ | 8,523,651 |
|
| |
(1) | Includes direct finance equipment leases of $64.5 million and $54.5 million at June 30, 2019 and December 31, 2018, respectively. |
Customers' total loans and leases receivable portfolio includes loans receivable which are reported at fair value based on an election made to account for these loans at fair value and loans and leases receivable which are predominately reported at their outstanding unpaid principal balance, net of charge-offs and deferred costs and fees and unamortized premiums and discounts and are evaluated for impairment.
Loans receivable, mortgage warehouse, at fair value:
Mortgage warehouse loans consist of commercial loans to mortgage companies. These mortgage warehouse lending transactions are subject to master repurchase agreements. As a result of the contractual provisions, for accounting purposes control of the underlying mortgage loan has not transferred and the rewards and risks of the mortgage loans are not assumed by Customers. The commercial mortgage warehouse loans receivable are designated as loans held for investment and reported at fair value based on an election made to account for the loans at fair value. Pursuant to the agreements, Customers funds the pipelines for these mortgage lenders by sending payments directly to the closing agents for funded mortgage loans and receives proceeds directly from third party investors when the underlying mortgage loans are sold into the secondary market. The fair value of the mortgage warehouse loans is estimated as the amount of cash initially advanced to fund the mortgage, plus accrued interest and fees, as specified in the respective agreements. The interest rates on these loans are variable, and the lending transactions are short-term, with an average life of 20under 30 days from purchase to sale. The primary goal of these lending transactions is to provide liquidity to mortgage companies.
At June 30, 20182019 and December 31, 2017,2018, all of Customers' commercial mortgage warehouse loans were current in terms of payment. BecauseAs these loans are reported at their fair value, they do not have an allowance for loan and lease loss and are therefore excluded from allowance for loan losses relatedALLL-related disclosures.
Loans and leases receivable:
The following tables summarize loans receivable by loan type and performance status as of June 30, 20182019 and December 31, 2017:2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2019 |
(amounts in thousands) | 30-89 Days past due (1) | | 90 Days or more past due (1) | | Total past due (1) | | Non-accrual | | Current (2) | | Purchased-credit-impaired loans (3) | | Total loans and leases (4) |
Multi-family | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,015,935 |
| | $ | 1,596 |
| | $ | 3,017,531 |
|
Commercial and industrial | 626 |
| | — |
| | 626 |
| | 5,400 |
| | 1,592,049 |
| | 395 |
| | 1,598,470 |
|
Commercial real estate owner occupied | 801 |
| | — |
| | 801 |
| | 927 |
| | 576,692 |
| | 7,666 |
| | 586,086 |
|
Commercial real estate non-owner occupied | 252 |
| | — |
| | 252 |
| | 94 |
| | 1,172,421 |
| | 3,808 |
| | 1,176,575 |
|
Construction | — |
| | — |
| | — |
| | — |
| | 59,811 |
| | — |
| | 59,811 |
|
Residential real estate | 2,611 |
| | — |
| | 2,611 |
| | 5,083 |
| | 637,309 |
| | 3,857 |
| | 648,860 |
|
Manufactured housing (5) | 3,829 |
| | 2,006 |
| | 5,835 |
| | 1,570 |
| | 66,470 |
| | 1,722 |
| | 75,597 |
|
Other consumer | 1,480 |
| | — |
| | 1,480 |
| | 359 |
| | 550,794 |
| | 206 |
| | 552,839 |
|
Total | $ | 9,599 |
| | $ | 2,006 |
| | $ | 11,605 |
| | $ | 13,433 |
| | $ | 7,671,481 |
| | $ | 19,250 |
| | $ | 7,715,769 |
|
| | | | | | | | | | | | | |
| December 31, 2018 |
(amounts in thousands) | 30-89 Days past due (1) | | 90 Days or more past due (1) | | Total past due (1) | | Non-accrual | | Current (2) | | Purchased-credit-impaired loans (3) | | Total loans and leases (4) |
Multi-family | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,155 |
| | $ | 3,282,452 |
| | $ | 1,690 |
| | $ | 3,285,297 |
|
Commercial and industrial | 1,914 |
| | — |
| | 1,914 |
| | 17,764 |
| | 1,353,586 |
| | 536 |
| | 1,373,800 |
|
Commercial real estate owner occupied | 193 |
| | — |
| | 193 |
| | 1,037 |
| | 567,809 |
| | 8,438 |
| | 577,477 |
|
Commercial real estate non-owner occupied | 1,190 |
| | — |
| | 1,190 |
| | 129 |
| | 1,119,443 |
| | 4,344 |
| | 1,125,106 |
|
Construction | — |
| | — |
| | — |
| | — |
| | 56,491 |
| | — |
| | 56,491 |
|
Residential real estate | 5,940 |
| | — |
| | 5,940 |
| | 5,605 |
| | 550,679 |
| | 4,337 |
| | 566,561 |
|
Manufactured housing (5) | 3,926 |
| | 2,188 |
| | 6,114 |
| | 1,693 |
| | 69,916 |
| | 2,008 |
| | 79,731 |
|
Other consumer | 200 |
| | — |
| | 200 |
| | 111 |
| | 73,503 |
| | 221 |
| | 74,035 |
|
Total | $ | 13,363 |
| | $ | 2,188 |
| | $ | 15,551 |
| | $ | 27,494 |
| | $ | 7,073,879 |
| | $ | 21,574 |
| | $ | 7,138,498 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2018 |
| 30-89 Days Past Due (1) | | 90 Days Or More Past Due(1) | | Total Past Due (1) | | Non- Accrual | | Current (2) | | Purchased- Credit- Impaired Loans (3) | | Total Loans (4) |
(amounts in thousands) | | | | | | | | | | | | | |
Multi-family | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,343 |
| | $ | 3,539,640 |
| | $ | 1,787 |
| | $ | 3,542,770 |
|
Commercial and industrial | 1,087 |
| | — |
| | 1,087 |
| | 13,683 |
| | 1,251,148 |
| | 602 |
| | 1,266,520 |
|
Commercial real estate - owner occupied | — |
| | — |
| | — |
| | 718 |
| | 534,923 |
| | 9,590 |
| | 545,231 |
|
Commercial real estate - non-owner occupied | — |
| | — |
| | — |
| | 2,536 |
| | 1,148,581 |
| | 4,881 |
| | 1,155,998 |
|
Construction | — |
| | — |
| | — |
| | — |
| | 88,141 |
| | — |
| | 88,141 |
|
Residential real estate | 2,174 |
| | — |
| | 2,174 |
| | 5,606 |
| | 480,381 |
| | 5,061 |
| | 493,222 |
|
Manufactured housing (5) | 2,977 |
| | 2,661 |
| | 5,638 |
| | 2,015 |
| | 75,250 |
| | 2,425 |
| | 85,328 |
|
Other consumer | 56 |
| | — |
| | 56 |
| | 94 |
| | 3,496 |
| | 228 |
| | 3,874 |
|
Total | $ | 6,294 |
| | $ | 2,661 |
| | $ | 8,955 |
| | $ | 25,995 |
| | $ | 7,121,560 |
| | $ | 24,574 |
| | $ | 7,181,084 |
|
| December 31, 2017 |
| 30-89 Days Past Due (1) | | 90 Days Or More Past Due(1) | | Total Past Due (1) | | Non- Accrual | | Current (2) | | Purchased- Credit- Impaired Loans (3) | | Total Loans (4) |
(amounts in thousands) | | | | | | | | | | | | | |
Multi-family | $ | 4,900 |
| | $ | — |
| | $ | 4,900 |
| | $ | — |
| | $ | 3,495,600 |
| | $ | 1,881 |
| | $ | 3,502,381 |
|
Commercial and industrial | 103 |
| | — |
| | 103 |
| | 17,392 |
| | 1,130,831 |
| | 764 |
| | 1,149,090 |
|
Commercial real estate - owner occupied | 202 |
| | — |
| | 202 |
| | 1,453 |
| | 472,501 |
| | 10,572 |
| | 484,728 |
|
Commercial real estate - non-owner occupied | 93 |
| | — |
| | 93 |
| | 160 |
| | 1,213,216 |
| | 5,250 |
| | 1,218,719 |
|
Construction | — |
| | — |
| | — |
| | — |
| | 85,393 |
| | — |
| | 85,393 |
|
Residential real estate | 7,628 |
| | — |
| | 7,628 |
| | 5,420 |
| | 215,361 |
| | 5,681 |
| | 234,090 |
|
Manufactured housing (5) | 4,028 |
| | 2,743 |
| | 6,771 |
| | 1,959 |
| | 78,946 |
| | 2,551 |
| | 90,227 |
|
Other consumer | 116 |
| | — |
| | 116 |
| | 31 |
| | 3,184 |
| | 216 |
| | 3,547 |
|
Total | $ | 17,070 |
| | $ | 2,743 |
| | $ | 19,813 |
| | $ | 26,415 |
| | $ | 6,695,032 |
| | $ | 26,915 |
| | $ | 6,768,175 |
|
| |
(1) | Includes past due loans and leases that are accruing interest because collection is considered probable. |
| |
(2) | Loans and leases where next payment due is less than 30 days from the report date. |
| |
(3) | Purchased-credit-impaired loans aggregated into a pool are accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, and the past due status of the pools, or that of the individual loans within the pools, is not meaningful. Because ofDue to the credit impaired nature of the loans, the loans are recorded at a discount reflecting estimated future cash flows and the Bank recognizes interest income on each pool of loans reflecting the estimated yield and passage of time. Such loans are considered to be performing. Purchased-credit-impaired loans that are not in pools accrete interest when the timing and amount of their expected cash flows are reasonably estimable, and are reported as performing loans. |
| |
(4) | Amounts exclude deferred costs and fees, unamortized premiums and discounts, and the allowance for loan losses.ALLL. |
| |
(5) | ManufacturedCertain manufactured housing loans purchased in 2010 are supported by cash reserves held at the Bank thatof $0.4 million and $0.5 million at June 30, 2019 and December 31, 2018, respectively, which are used to fund past-due payments when the loan becomes 90 days or more delinquent. Subsequent purchasesEach quarter, these funds are subjectevaluated to varying provisions indetermine if they would be sufficient to absorb the event of borrowers’ delinquencies.probable incurred losses within the manufactured housing portfolio. |
As of June 30, 20182019 and December 31, 2017,2018, the Bank had $0.3$0.5 million and $0.2 million, respectively, of residential real estate held in other real estate owned.OREO. As of June 30, 20182019 and December 31, 2017,2018, the Bank had initiated foreclosure proceedings on $2.2$0.7 million and $1.6$2.1 million, respectively, in loans secured by residential real estate.
Allowance for loan and lease losses
The changes in the allowance for loan lossesALLL for the three and six months ended June 30, 20182019 and 2017,2018, and the loans and allowance for loan lossesleases and ALLL by loan classand lease type based on impairment-evaluation method as of June 30, 20182019 and December 31, 20172018 are presented in the tables below.
| | Three Months Ended June 30, 2018 | Multi-family | | Commercial and Industrial | | Commercial Real Estate Owner Occupied | | Commercial Real Estate Non-Owner Occupied | | Construction | | Residential Real Estate | | Manufactured Housing | | Other Consumer | | Total | |
Three Months Ended June 30, 2019 | | Multi-family | | Commercial and industrial | | Commercial real estate owner occupied | | Commercial real estate non-owner occupied | | Construction | | Residential real estate | | Manufactured housing | | Other consumer | | Total |
(amounts in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ending Balance, March 31, 2018 | $ | 12,545 |
| | $ | 11,737 |
| | $ | 3,525 |
| | $ | 7,233 |
| | $ | 921 |
| | $ | 3,179 |
| | $ | 176 |
| | $ | 183 |
| | $ | 39,499 |
| |
Ending Balance, March 31, 2019 | | $ | 10,630 |
| | $ | 12,647 |
| | $ | 3,425 |
| | $ | 6,015 |
| | $ | 584 |
| | $ | 6,572 |
| | $ | 117 |
| | $ | 3,689 |
| | $ | 43,679 |
|
Charge-offs | — |
| | (174 | ) | | (483 | ) | | — |
| | — |
| | (42 | ) | | — |
| | (462 | ) | | (1,161 | ) | — |
| | (183 | ) | | (66 | ) | | — |
| | — |
| | (69 | ) | | — |
| | (932 | ) | | (1,250 | ) |
Recoveries | — |
| | 140 |
| | 326 |
| | — |
| | 209 |
| | 56 |
| | — |
| | 3 |
| | 734 |
| 7 |
| | 338 |
| | 97 |
| | — |
| | 114 |
| | 8 |
| | — |
| | 49 |
| | 613 |
|
Provision for loan losses | (476 | ) | | 555 |
| | (380 | ) | | (535 | ) | | (138 | ) | | (285 | ) | | (27 | ) | | 502 |
| | (784 | ) | |
Ending Balance, June 30, 2018 | $ | 12,069 |
| | $ | 12,258 |
| | $ | 2,988 |
| | $ | 6,698 |
| | $ | 992 |
| | $ | 2,908 |
| | $ | 149 |
| | $ | 226 |
| | $ | 38,288 |
| |
Six Months Ended June 30, 2018 | | | | | | | | | | | | | | | | | | |
Ending Balance, December 31, 2017 | $ | 12,168 |
| | $ | 10,918 |
| | $ | 3,232 |
| | $ | 7,437 |
| | $ | 979 |
| | $ | 2,929 |
| | $ | 180 |
| | $ | 172 |
| | $ | 38,015 |
| |
Provision for loan and lease losses | | (711 | ) | | 934 |
| | (96 | ) | | 144 |
| | (49 | ) | | (2,343 | ) | | 6 |
| | 7,461 |
| | 5,346 |
|
Ending Balance, June 30, 2019 | | $ | 9,926 |
| | $ | 13,736 |
| | $ | 3,360 |
| | $ | 6,159 |
| | $ | 649 |
| | $ | 4,168 |
| | $ | 123 |
| | $ | 10,267 |
| | $ | 48,388 |
|
Six Months Ended June 30, 2019 | | | | | | | | | | | | | | | | | | |
Ending Balance, December 31, 2018 | | $ | 11,462 |
| | $ | 12,145 |
| | $ | 3,320 |
| | $ | 6,093 |
| | $ | 624 |
| | $ | 3,654 |
| | $ | 145 |
| | $ | 2,529 |
| | $ | 39,972 |
|
Charge-offs | — |
| | (224 | ) | | (501 | ) | | — |
| | — |
| | (407 | ) | | — |
| | (718 | ) | | (1,850 | ) | (541 | ) | | (183 | ) | | (74 | ) | | — |
| | — |
| | (109 | ) | | — |
| | (1,687 | ) | | (2,594 | ) |
Recoveries | — |
| | 175 |
| | 326 |
| | — |
| | 220 |
| | 63 |
| | — |
| | 6 |
| | 790 |
| 7 |
| | 457 |
| | 225 |
| | — |
| | 120 |
| | 15 |
| | — |
| | 73 |
| | 897 |
|
Provision for loan losses | (99 | ) | | 1,389 |
| | (69 | ) | | (739 | ) | | (207 | ) | | 323 |
| | (31 | ) | | 766 |
| | 1,333 |
| |
Ending Balance, June 30, 2018 | $ | 12,069 |
| | $ | 12,258 |
| | $ | 2,988 |
| | $ | 6,698 |
| | $ | 992 |
| | $ | 2,908 |
| | $ | 149 |
| | $ | 226 |
| | $ | 38,288 |
| |
Provision for loan and lease losses | | (1,002 | ) | | 1,317 |
| | (111 | ) | | 66 |
| | (95 | ) | | 608 |
| | (22 | ) | | 9,352 |
| | 10,113 |
|
Ending Balance, June 30, 2019 | | $ | 9,926 |
| | $ | 13,736 |
| | $ | 3,360 |
| | $ | 6,159 |
| | $ | 649 |
| | $ | 4,168 |
| | $ | 123 |
| | $ | 10,267 |
| | $ | 48,388 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of June 30, 2018 | | | | | | | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | | | | | | |
As of June 30, 2019 | | | | | | | | | | | | | | | | | | |
(amounts in thousands) | | | | | | | | | | | | | | | | | | |
Loans and leases receivable: | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 1,343 |
| | $ | 13,750 |
| | $ | 759 |
| | $ | 2,536 |
| | $ | — |
| | $ | 8,775 |
| | $ | 10,372 |
| | $ | 94 |
| | $ | 37,629 |
| $ | — |
| | $ | 10,605 |
| | $ | 950 |
| | $ | 94 |
| | $ | — |
| | $ | 8,107 |
| | $ | 10,126 |
| | $ | 359 |
| | $ | 30,241 |
|
Collectively evaluated for impairment | 3,539,640 |
| | 1,252,168 |
| | 534,882 |
| | 1,148,581 |
| | 88,141 |
| | 479,386 |
| | 72,531 |
| | 3,552 |
| | 7,118,881 |
| 3,015,935 |
| | 1,587,470 |
| | 577,470 |
| | 1,172,673 |
| | 59,811 |
| | 636,896 |
| | 63,749 |
| | 552,274 |
| | 7,666,278 |
|
Loans acquired with credit deterioration | 1,787 |
| | 602 |
| | 9,590 |
| | 4,881 |
| | — |
| | 5,061 |
| | 2,425 |
| | 228 |
| | 24,574 |
| 1,596 |
| | 395 |
| | 7,666 |
| | 3,808 |
| | — |
| | 3,857 |
| | 1,722 |
| | 206 |
| | 19,250 |
|
| $ | 3,542,770 |
| | $ | 1,266,520 |
| | $ | 545,231 |
| | $ | 1,155,998 |
| | $ | 88,141 |
| | $ | 493,222 |
| | $ | 85,328 |
| | $ | 3,874 |
| | $ | 7,181,084 |
| |
Allowance for loan losses: | | | | | | | | | | | | | | | | | | |
Total loans and leases receivable | | $ | 3,017,531 |
| | $ | 1,598,470 |
| | $ | 586,086 |
| | $ | 1,176,575 |
| | $ | 59,811 |
| | $ | 648,860 |
| | $ | 75,597 |
| | $ | 552,839 |
| | $ | 7,715,769 |
|
Allowance for loan and lease losses: | | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | — |
| | $ | 1,062 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 313 |
| | $ | 5 |
| | $ | — |
| | $ | 1,381 |
| $ | — |
| | $ | 225 |
| | $ | 31 |
| | $ | — |
| | $ | — |
| | $ | 39 |
| | $ | 3 |
| | $ | 5 |
| | $ | 303 |
|
Collectively evaluated for impairment | 12,069 |
| | 10,749 |
| | 2,987 |
| | 4,334 |
| | 992 |
| | 2,106 |
| | 81 |
| | 154 |
| | 33,472 |
| 9,926 |
| | 13,250 |
| | 3,321 |
| | 4,249 |
| | 649 |
| | 3,789 |
| | 91 |
| | 10,108 |
| | 45,383 |
|
Loans acquired with credit deterioration | — |
| | 447 |
| | — |
| | 2,364 |
| | — |
| | 489 |
| | 63 |
| | 72 |
| | 3,435 |
| — |
| | 261 |
| | 8 |
| | 1,910 |
| | — |
| | 340 |
| | 29 |
| | 154 |
| | 2,702 |
|
| $ | 12,069 |
| | $ | 12,258 |
| | $ | 2,988 |
| | $ | 6,698 |
| | $ | 992 |
| | $ | 2,908 |
| | $ | 149 |
| | $ | 226 |
| | $ | 38,288 |
| |
Total allowance for loan and lease losses | | $ | 9,926 |
| | $ | 13,736 |
| | $ | 3,360 |
| | $ | 6,159 |
| | $ | 649 |
| | $ | 4,168 |
| | $ | 123 |
| | $ | 10,267 |
| | $ | 48,388 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2018 | Multi-family | | Commercial and industrial | | Commercial real estate owner occupied | | Commercial real estate non-owner occupied | | Construction | | Residential real estate | | Manufactured housing | | Other consumer | | Total |
(amounts in thousands) | | | | | | | | | | | | | | | | | |
Ending Balance, March 31, 2018 | $ | 12,545 |
| | $ | 11,737 |
| | $ | 3,525 |
| | $ | 7,233 |
| | $ | 921 |
| | $ | 3,179 |
| | $ | 176 |
| | $ | 183 |
| | $ | 39,499 |
|
Charge-offs | — |
| | (174 | ) | | (483 | ) | | — |
| | — |
| | (42 | ) | | — |
| | (462 | ) | | (1,161 | ) |
Recoveries | — |
| | 140 |
| | 326 |
| | — |
| | 209 |
| | 56 |
| | — |
| | 3 |
| | 734 |
|
Provision for loan and lease losses | (476 | ) | | 555 |
| | (380 | ) | | (535 | ) | | (138 | ) | | (285 | ) | | (27 | ) | | 502 |
| | (784 | ) |
Ending Balance, June 30, 2018 | $ | 12,069 |
| | $ | 12,258 |
| | $ | 2,988 |
| | $ | 6,698 |
| | $ | 992 |
| | $ | 2,908 |
| | $ | 149 |
| | $ | 226 |
| | $ | 38,288 |
|
Six Months Ended June 30, 2018 | | | | | | | | | | | | | | | | | |
Ending Balance, December 31, 2017 | $ | 12,168 |
| | $ | 10,918 |
| | $ | 3,232 |
| | $ | 7,437 |
| | $ | 979 |
| | $ | 2,929 |
| | $ | 180 |
| | $ | 172 |
| | $ | 38,015 |
|
Charge-offs | — |
| | (224 | ) | | (501 | ) | | — |
| | — |
| | (407 | ) | | — |
| | (718 | ) | | (1,850 | ) |
Recoveries | — |
| | 175 |
| | 326 |
| | — |
| | 220 |
| | 63 |
| | — |
| | 6 |
| | 790 |
|
Provision for loan and lease losses | (99 | ) | | 1,389 |
| | (69 | ) | | (739 | ) | | (207 | ) | | 323 |
| | (31 | ) | | 766 |
| | 1,333 |
|
Ending Balance, June 30, 2018 | $ | 12,069 |
| | $ | 12,258 |
| | $ | 2,988 |
| | $ | 6,698 |
| | $ | 992 |
| | $ | 2,908 |
| | $ | 149 |
| | $ | 226 |
| | $ | 38,288 |
|
| | | | | | | | | | | | | | | | | |
As of December 31, 2018 | | | | | | | | | | | | | | | | | |
(amounts in thousands) | | | | | | | | | | | | | | | | | |
Loans and leases receivable: | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 1,155 |
| | $ | 17,828 |
| | $ | 1,069 |
| | $ | 129 |
| | $ | — |
| | $ | 8,631 |
| | $ | 10,195 |
| | $ | 111 |
| | $ | 39,118 |
|
Collectively evaluated for impairment | 3,282,452 |
| | 1,355,436 |
| | 567,970 |
| | 1,120,633 |
| | 56,491 |
| | 553,593 |
| | 67,528 |
| | 73,703 |
| | 7,077,806 |
|
Loans acquired with credit deterioration | 1,690 |
| | 536 |
| | 8,438 |
| | 4,344 |
| | — |
| | 4,337 |
| | 2,008 |
| | 221 |
| | 21,574 |
|
Total loans and leases receivable | $ | 3,285,297 |
| | $ | 1,373,800 |
| | $ | 577,477 |
| | $ | 1,125,106 |
| | $ | 56,491 |
| | $ | 566,561 |
| | $ | 79,731 |
| | $ | 74,035 |
| | $ | 7,138,498 |
|
Allowance for loan and lease losses: | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | 539 |
| | $ | 261 |
| | $ | 1 |
| | $ | — |
| | $ | — |
| | $ | 41 |
| | $ | 3 |
| | $ | — |
| | $ | 845 |
|
Collectively evaluated for impairment | 10,923 |
| | 11,516 |
| | 3,319 |
| | 4,161 |
| | 624 |
| | 3,227 |
| | 89 |
| | 2,390 |
| | 36,249 |
|
Loans acquired with credit deterioration | — |
| | 368 |
| | — |
| | 1,932 |
| | — |
| | 386 |
| | 53 |
| | 139 |
| | 2,878 |
|
Total allowance for loan and lease losses | $ | 11,462 |
| | $ | 12,145 |
| | $ | 3,320 |
| | $ | 6,093 |
| | $ | 624 |
| | $ | 3,654 |
| | $ | 145 |
| | $ | 2,529 |
| | $ | 39,972 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2017 | Multi-family | | Commercial and Industrial | | Commercial Real Estate Owner Occupied | | Commercial Real Estate Non-Owner Occupied | | Construction | | Residential Real Estate | | Manufactured Housing | | Other Consumer | | Total |
(amounts in thousands) | | | | | | | | | | | | | | | | | |
Ending Balance, March 31, 2017 | $ | 12,283 |
| | $ | 13,009 |
| | $ | 2,394 |
| | $ | 7,847 |
| | $ | 885 |
| | $ | 3,080 |
| | $ | 284 |
| | $ | 101 |
| | $ | 39,883 |
|
Charge-offs | — |
| | (1,849 | ) | | — |
| | (4 | ) | | — |
| | (69 | ) | | — |
| | (226 | ) | | (2,148 | ) |
Recoveries | — |
| | 68 |
| | 9 |
| | — |
| | 49 |
| | 6 |
| | — |
| | 56 |
| | 188 |
|
Provision for loan losses | (255 | ) | | 357 |
| | 573 |
| | (57 | ) | | (218 | ) | | (22 | ) | | (16 | ) | | 173 |
| | 535 |
|
Ending Balance, June 30, 2017 | $ | 12,028 |
| | $ | 11,585 |
| | $ | 2,976 |
| | $ | 7,786 |
| | $ | 716 |
| | $ | 2,995 |
| | $ | 268 |
| | $ | 104 |
| | $ | 38,458 |
|
Six Months Ended June 30, 2017 | | | | | | | | | | | | | | | | | |
Ending Balance, December 31, 2016 | $ | 11,602 |
| | $ | 11,050 |
| | $ | 2,183 |
| | $ | 7,894 |
| | $ | 840 |
| | $ | 3,342 |
| | $ | 286 |
| | $ | 118 |
| | $ | 37,315 |
|
Charge-offs | — |
| | (2,047 | ) | | — |
| | (408 | ) | | — |
| | (290 | ) | | — |
| | (246 | ) | | (2,991 | ) |
Recoveries | — |
| | 283 |
| | 9 |
| | — |
| | 130 |
| | 27 |
| | — |
| | 100 |
| | 549 |
|
Provision for loan losses | 426 |
| | 2,299 |
| | 784 |
| | 300 |
| | (254 | ) | | (84 | ) | | (18 | ) | | 132 |
| | 3,585 |
|
Ending Balance, June 30, 2017 | $ | 12,028 |
| | $ | 11,585 |
| | $ | 2,976 |
| | $ | 7,786 |
| | $ | 716 |
| | $ | 2,995 |
| | $ | 268 |
| | $ | 104 |
| | $ | 38,458 |
|
As of December 31, 2017 | | | | | | | | | | | | | | | | | |
Loans: | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | — |
| | $ | 17,461 |
| | $ | 1,448 |
| | $ | 160 |
| | $ | — |
| | $ | 9,247 |
| | $ | 10,089 |
| | $ | 30 |
| | $ | 38,435 |
|
Collectively evaluated for impairment | 3,500,500 |
| | 1,130,865 |
| | 472,708 |
| | 1,213,309 |
| | 85,393 |
| | 219,162 |
| | 77,587 |
| | 3,301 |
| | 6,702,825 |
|
Loans acquired with credit deterioration | 1,881 |
| | 764 |
| | 10,572 |
| | 5,250 |
| | — |
| | 5,681 |
| | 2,551 |
| | 216 |
| | 26,915 |
|
| $ | 3,502,381 |
| | $ | 1,149,090 |
| | $ | 484,728 |
| | $ | 1,218,719 |
| | $ | 85,393 |
| | $ | 234,090 |
| | $ | 90,227 |
| | $ | 3,547 |
| | $ | 6,768,175 |
|
Allowance for loan losses: | | | | | | | | | | | | | | | | | |
Individually evaluated for impairment | $ | — |
| | $ | 650 |
| | $ | 642 |
| | $ | — |
| | $ | — |
| | $ | 155 |
| | $ | 4 |
| | $ | — |
| | $ | 1,451 |
|
Collectively evaluated for impairment | 12,168 |
| | 9,804 |
| | 2,580 |
| | 4,630 |
| | 979 |
| | 2,177 |
| | 82 |
| | 117 |
| | 32,537 |
|
Loans acquired with credit deterioration | — |
| | 464 |
| | 10 |
| | 2,807 |
| | — |
| | 597 |
| | 94 |
| | 55 |
| | 4,027 |
|
| $ | 12,168 |
| | $ | 10,918 |
| | $ | 3,232 |
| | $ | 7,437 |
| | $ | 979 |
| | $ | 2,929 |
| | $ | 180 |
| | $ | 172 |
| | $ | 38,015 |
|
Certain manufactured housing loans were purchased in August 2010. A portion of the purchase price may be used to reimburse the Bank under the specified terms in the purchase agreement for defaults of the underlying borrower and other specified items. At June 30, 2018 and December 31, 2017, funds available for reimbursement, if necessary, were $0.5 million and $0.6 million, respectively. Each quarter, these funds are evaluated to determine if they would be sufficient to absorb the probable incurred losses within the manufactured housing portfolio.
Impaired Loans - Individually Evaluated for Impairment
The following tables present the recorded investment (net of charge-offs), unpaid principal balance, and related allowance by loan type for impaired loans that were individually evaluated for impairment as of June 30, 20182019 and December 31, 20172018 and the average recorded investment and interest income recognized for the three and six months ended June 30, 2019 and 2018. Customers had no impaired lease receivables as of June 30, 2019 and December 31, 2018, and 2017.respectively. Purchased-credit-impaired loans are considered to be performing and are not included in the tables below.
| | | June 30, 2018 | | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 | | | | | | | | | | | | | | | |
| Recorded Investment Net of Charge offs | | Unpaid Principal Balance | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized | June 30, 2019 | | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
(amounts in thousands) | | | | | | | | | | | | | | Recorded investment net of charge-offs | | Unpaid principal balance | | Related allowance | | Average recorded investment | | Interest income recognized | | Average recorded investment | | Interest income recognized |
With no recorded allowance: | | | | | | | | | | | | | | |
With no related allowance recorded: | | | | | | | | | | | | | | |
Multi-family | $ | 1,343 |
| | $ | 1,343 |
| | $ | — |
| | $ | 672 |
| | $ | 8 |
| | $ | 448 |
| | $ | 8 |
| $ | — |
| | $ | 534 |
| | $ | — |
| | $ | 998 |
| | $ | — |
| | $ | 665 |
| | $ | — |
|
Commercial and industrial | 5,642 |
| | 5,889 |
| | — |
| | 5,736 |
| | 2 |
| | 6,870 |
| | 2 |
| 4,663 |
| | 6,144 |
| | — |
| | 7,923 |
| | 16 |
| | 9,836 |
| | 18 |
|
Commercial real estate owner occupied | 718 |
| | 1,201 |
| | — |
| | 664 |
| | — |
| | 713 |
| | — |
| 784 |
| | 1,555 |
| | — |
| | 669 |
| | — |
| | 792 |
| | 21 |
|
Commercial real estate non-owner occupied | 2,536 |
| | 2,648 |
| | — |
| | 1,390 |
| | 8 |
| | 980 |
| | 8 |
| 94 |
| | 206 |
| | — |
| | 98 |
| | — |
| | 108 |
| | — |
|
Other consumer | 94 |
| | 94 |
| | — |
| | 96 |
| | — |
| | 74 |
| | — |
| |
Residential real estate | 4,301 |
| | 4,546 |
| | — |
| | 3,959 |
| | 2 |
| | 3,849 |
| | 2 |
| 4,365 |
| | 4,684 |
| | — |
| | 4,544 |
| | 61 |
| | 4,643 |
| | 61 |
|
Manufactured housing | 10,144 |
| | 10,144 |
| | — |
| | 10,015 |
| | 146 |
| | 9,963 |
| | 277 |
| 9,961 |
| | 9,961 |
| | — |
| | 10,051 |
| | 123 |
| | 10,043 |
| | 238 |
|
Other consumer | | 132 |
| | 132 |
| | — |
| | 120 |
| | 8 |
| | 117 |
| | 8 |
|
With an allowance recorded: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Multi-family | | — |
| | — |
| | — |
| | — |
| | — |
| | 385 |
| | — |
|
Commercial and industrial | 8,108 |
| | 8,292 |
| | 1,062 |
| | 8,283 |
| | 11 |
| | 8,296 |
| | 12 |
| 5,942 |
| | 6,048 |
| | 225 |
| | 6,084 |
| | 58 |
| | 5,445 |
| | 97 |
|
Commercial real estate owner occupied | 41 |
| | 41 |
| | 1 |
| | 455 |
| | 1 |
| | 517 |
| | 2 |
| 166 |
| | 166 |
| | 31 |
| | 239 |
| | — |
| | 170 |
| | 1 |
|
Commercial real estate non-owner occupied | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Residential real estate | 4,474 |
| | 4,479 |
| | 313 |
| | 4,550 |
| | 38 |
| | 4,906 |
| | 63 |
| 3,742 |
| | 3,742 |
| | 39 |
| | 3,794 |
| | 28 |
| | 3,792 |
| | 54 |
|
Manufactured housing | 228 |
| | 228 |
| | 5 |
| | 225 |
| | 6 |
| | 225 |
| | 6 |
| 165 |
| | 165 |
| | 3 |
| | 166 |
| | 2 |
| | 167 |
| | 4 |
|
Other consumer | | 227 |
| | 227 |
| | 5 |
| | 114 |
| | — |
| | 76 |
| | — |
|
Total | $ | 37,629 |
| | $ | 38,905 |
| | $ | 1,381 |
| | $ | 36,045 |
| | $ | 222 |
| | $ | 36,841 |
| | $ | 380 |
| $ | 30,241 |
| | $ | 33,564 |
| | $ | 303 |
| | $ | 34,800 |
| | $ | 296 |
| | $ | 36,239 |
| | $ | 502 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2018 | | Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
(amounts in thousands) | Recorded investment net of charge-offs | | Unpaid principal balance | | Related allowance | | Average recorded investment | | Interest income recognized | | Average recorded investment | | Interest income recognized |
With no related allowance recorded: | | | | | | | | | | | | | |
Multi-family | $ | — |
| | $ | — |
| | $ | — |
| | $ | 672 |
| | $ | 8 |
| | $ | 448 |
| | $ | 8 |
|
Commercial and industrial | 13,660 |
| | 15,263 |
| | — |
| | 5,736 |
| | 2 |
| | 6,870 |
| | 2 |
|
Commercial real estate owner occupied | 1,037 |
| | 1,766 |
| | — |
| | 664 |
| | — |
| | 713 |
| | — |
|
Commercial real estate non-owner occupied | 129 |
| | 241 |
| | — |
| | 1,390 |
| | 8 |
| | 980 |
| | 8 |
|
Residential real estate | 4,842 |
| | 5,128 |
| | — |
| | 3,959 |
| | 2 |
| | 3,849 |
| | 2 |
|
Manufactured housing | 10,027 |
| | 10,027 |
| | — |
| | 10,015 |
| | 146 |
| | 9,963 |
| | 277 |
|
Other consumer | 111 |
| | 111 |
| | — |
| | 96 |
| | — |
| | 74 |
| | — |
|
With an allowance recorded: | | | | | | | | | | | | | |
Multi-family | 1,155 |
| | 1,155 |
| | 539 |
| | — |
| | — |
| | — |
| | — |
|
Commercial and industrial | 4,168 |
| | 4,351 |
| | 261 |
| | 8,283 |
| | 11 |
| | 8,296 |
| | 12 |
|
Commercial real estate owner occupied | 32 |
| | 32 |
| | 1 |
| | 455 |
| | 1 |
| | 517 |
| | 2 |
|
Residential real estate | 3,789 |
| | 3,789 |
| | 41 |
| | 4,550 |
| | 38 |
| | 4,906 |
| | 63 |
|
Manufactured housing | 168 |
| | 168 |
| | 3 |
| | 225 |
| | 6 |
| | 225 |
| | 6 |
|
Total | $ | 39,118 |
| | $ | 42,031 |
| | $ | 845 |
| | $ | 36,045 |
| | $ | 222 |
| | $ | 36,841 |
| | $ | 380 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | Three Months Ended June 30, 2017 | | Six Months Ended June 30, 2017 |
| Recorded Investment Net of Charge offs | | Unpaid Principal Balance | | Related Allowance | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
(amounts in thousands) | | | | | | | | | | | | | |
With no recorded allowance: | | | | | | | | | | | | | |
Commercial and industrial | $ | 9,138 |
| | $ | 9,287 |
| | $ | — |
| | $ | 6,678 |
| | $ | 46 |
| | $ | 5,251 |
| | $ | 96 |
|
Commercial real estate owner occupied | 806 |
| | 806 |
| | — |
| | 1,739 |
| | — |
| | 1,563 |
| | 3 |
|
Commercial real estate non-owner occupied | 160 |
| | 272 |
| | — |
| | 884 |
| | — |
| | 1,257 |
| | 2 |
|
Other consumer | 30 |
| | 30 |
| | — |
| | 56 |
| | — |
| | 56 |
| | — |
|
Residential real estate | 3,628 |
| | 3,801 |
| | — |
| | 2,660 |
| | — |
| | 4,001 |
| | 1 |
|
Manufactured housing | 9,865 |
| | 9,865 |
| | — |
| | 10,074 |
| | 152 |
| | 9,937 |
| | 293 |
|
With an allowance recorded: | | | | | | | | | | | | | |
Commercial and industrial | 8,323 |
| | 8,506 |
| | 650 |
| | 7,209 |
| | — |
| | 6,846 |
| | 22 |
|
Commercial real estate - owner occupied | 642 |
| | 642 |
| | 642 |
| | 839 |
| | 1 |
| | 839 |
| | 2 |
|
Commercial real estate non-owner occupied | — |
| | — |
| | — |
| | 114 |
| | — |
| | 126 |
| | — |
|
Residential real estate | 5,619 |
| | 5,656 |
| | 155 |
| | 4,953 |
| | 45 |
| | 3,399 |
| | 84 |
|
Manufactured housing | 224 |
| | 224 |
| | 4 |
| | 216 |
| | 5 |
| | 144 |
| | 8 |
|
Total | $ | 38,435 |
| | $ | 39,089 |
| | $ | 1,451 |
| | $ | 35,422 |
| | $ | 249 |
| | $ | 33,419 |
| | $ | 511 |
|
Troubled Debt Restructurings
At June 30, 20182019 and December 31, 2017,2018, there were $19.4$19.0 million and $20.4$19.2 million, respectively, in loans reported as troubled debt restructurings (“TDRs”).TDRs. TDRs are reported as impaired loans in the calendar year of their restructuring and are evaluated to determine whether they should be placed on non-accrual status. In subsequent years, a TDR may be returned to accrual status if it satisfies a minimum performance requirement of six months, however, it will remain classified as impaired. Generally, the Bank requires sustained performance for nine months before returning a TDR to accrual status. ModificationModifications of purchased-credit-impairedPCI loans that are accounted for within loan pools in accordance with the accounting standards for purchased-credit-impairedPCI loans do not result in the removal of these loans from the pool even if the modifications would otherwise be considered a TDR. Accordingly, as each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, modifications of loans within such pools are not considered TDRs. Customers had no lease receivables that had been restructured as a TDR as of June 30, 2019 and December 31, 2018, respectively.
The following table presents total TDRs based on loan type and accrual status at June 30, 20182019 and December 31, 2017.2018. Nonaccrual TDRs are included in the reported amount of total non-accrual loans.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
(amounts in thousands) | Accruing TDRs | | Nonaccrual TDRs | | Total | | Accruing TDRs | | Nonaccrual TDRs | | Total |
Commercial and industrial | $ | 5,205 |
| | $ | 35 |
| | $ | 5,240 |
| | $ | 64 |
| | $ | 5,273 |
| | $ | 5,337 |
|
Commercial real estate owner occupied | 23 |
| | — |
| | 23 |
| | 32 |
| | — |
| | 32 |
|
Residential real estate | 3,024 |
| | 646 |
| | 3,670 |
| | 3,026 |
| | 667 |
| | 3,693 |
|
Manufactured housing | 8,556 |
| | 1,498 |
| | 10,054 |
| | 8,502 |
| | 1,620 |
| | 10,122 |
|
Other consumer | — |
| | 11 |
| | 11 |
| | — |
| | 12 |
| | 12 |
|
Total TDRs | $ | 16,808 |
| | $ | 2,190 |
| | $ | 18,998 |
| | $ | 11,624 |
| | $ | 7,572 |
| | $ | 19,196 |
|
|
| | | | | | | | | | | | | | | | | | | |
| June 30, 2018 | | December 31, 2017 |
| Accruing TDRs | Nonaccrual TDRs | Total | | Accruing TDRs | Nonaccrual TDRs | Total |
(amounts in thousands) | | | | | | | |
Commercial and industrial | $ | 67 |
| $ | 5,415 |
| $ | 5,482 |
| | $ | 63 |
| $ | 5,939 |
| $ | 6,002 |
|
Commercial real estate owner occupied | 41 |
| — |
| 41 |
| | — |
| — |
| — |
|
Manufactured housing | 8,357 |
| 1,875 |
| 10,232 |
| | 8,130 |
| 1,766 |
| 9,896 |
|
Residential real estate | 3,169 |
| 485 |
| 3,654 |
| | 3,828 |
| 703 |
| 4,531 |
|
Other consumer | — |
| 13 |
| 13 |
| | — |
| — |
| — |
|
Total TDRs | $ | 11,634 |
| $ | 7,788 |
| $ | 19,422 |
| | $ | 12,021 |
| $ | 8,408 |
| $ | 20,429 |
|
The following table presents loans modified in a troubled debt restructuringTDR by type of concession for the three and six months ended June 30, 20182019 and 2017.2018. There were no modifications that involved forgiveness of debt.debt for the three and six months ended June 30, 2019 and 2018.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
(dollars in thousands) | Number of loans | | Recorded investment | | Number of loans | | Recorded investment | | Number of loans | | Recorded investment | | Number of loans | | Recorded investment |
Extensions of maturity | — |
| | $ | — |
| | 1 |
| | $ | 56 |
| | 2 |
| | $ | 514 |
| | 1 |
| | $ | 56 |
|
Interest-rate reductions | 2 |
| | 47 |
| | 15 |
| | 607 |
| | 12 |
| | 432 |
| | 24 |
| | 929 |
|
Total | 2 |
| | $ | 47 |
| | 16 |
| | $ | 663 |
| | 14 |
| | $ | 946 |
| | 25 |
| | $ | 985 |
|
|
| | | | | | | | | | | | | |
| Three Months Ended June 30, 2018 | | Three Months Ended June 30, 2017 |
| Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment |
(dollars in thousands) | | | | | | | |
Extensions of maturity | 1 |
| | $ | 56 |
| | 2 |
| | $ | 5,855 |
|
Interest-rate reductions | 15 |
| | 607 |
| | 9 |
| | 320 |
|
Total | 16 |
| | $ | 663 |
| | 11 |
| | $ | 6,175 |
|
|
| | | | | | | | | | | | | |
| Six Months Ended June 30, 2018 | | Six Months Ended June 30, 2017 |
| Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment |
(dollars in thousands) | | | | | | | |
Extensions of maturity | 1 |
| | $ | 56 |
| | 3 |
| | $ | 6,203 |
|
Interest-rate reductions | 24 |
| | 929 |
| | 29 |
| | 1,175 |
|
Total | 25 |
| | $ | 985 |
| | 32 |
| | $ | 7,378 |
|
The following table provides, by loan type, the number of loans modified in troubled debt restructurings,TDRs and the related recorded investment duringfor the three and six months ended June 30, 20182019 and 2017. |
| | | | | | | | | | | | | |
| Three Months Ended June 30, 2018 | | Three Months Ended June 30, 2017 |
| Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment |
(dollars in thousands) | | | | | | | |
Commercial and industrial | — |
| | $ | — |
| | 2 |
| | $ | 5,855 |
|
Manufactured housing | 14 |
| | 450 |
| | 9 |
| | 320 |
|
Residential real estate | 1 |
| | 200 |
|
| — |
|
| — |
|
Other consumer | 1 |
| | 13 |
|
| — |
|
| — |
|
Total loans | 16 |
| | $ | 663 |
| | 11 |
| | $ | 6,175 |
|
2018. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
(dollars in thousands) | Number of loans | | Recorded investment | | Number of loans | | Recorded investment | | Number of loans | | Recorded investment | | Number of loans | | Recorded investment |
Commercial and industrial | — |
| | $ | — |
| | — |
| | $ | — |
| | 1 |
| | $ | 431 |
| | — |
| | $ | — |
|
Manufactured housing | 2 |
| | 47 |
| | 14 |
| | 450 |
| | 12 |
| | 432 |
| | 23 |
| | 772 |
|
Residential real estate | — |
| | — |
| | 1 |
| | 200 |
| | 1 |
| | 83 |
| | 1 |
| | 200 |
|
Other consumer | — |
| | — |
| | 1 |
| | 13 |
| | — |
| | — |
| | 1 |
| | 13 |
|
Total loans | 2 |
| | $ | 47 |
| | 16 |
| | $ | 663 |
| | 14 |
| | $ | 946 |
| | 25 |
| | $ | 985 |
|
|
| | | | | | | | | | | | | |
| Six Months Ended June 30, 2018 | | Six Months Ended June 30, 2017 |
| Number of Loans | | Recorded Investment | | Number of Loans | | Recorded Investment |
(dollars in thousands) | | | | | | | |
Commercial and industrial | — |
| | $ | — |
| | 3 |
| | $ | 6,203 |
|
Manufactured housing | 23 |
| | 772 |
| | 29 |
| | 1,175 |
|
Residential real estate | 1 |
| | 200 |
| | — |
| | — |
|
Other consumer | 1 |
| | 13 |
| | — |
| | — |
|
Total loans | 25 |
| | $ | 985 |
| | 32 |
| | $ | 7,378 |
|
As of both June 30, 20182019 and December 31, 2017,2018, except for one commercial and industrial loan with an outstanding commitment of $1.6$1.5 million, and $2.1 million, respectively, there were no other commitments to lend additional funds to debtors whose loans have been modified in TDRs.
As
The following table presents, by loan type, the number of June 30, 2018, there were no loans modified in TDRs and the related recorded investment, for which there was a TDRpayment default within the past twelve months that defaulted on payments. As of June 30, 2017, six manufactured housing loans totaling $0.3 million, that were modified in TDRs withinfollowing the past twelve months, defaulted on payments.modification:
|
| | | | | | | | | | | | | | |
| June 30, 2019 | | June 30, 2018 |
(dollars in thousands) | Number of loans | | Recorded investment | | Number of loans | | Recorded investment |
Manufactured housing | 3 |
| | $ | 108 |
| | — |
| | $ | — |
|
Commercial and industrial | 1 |
| | — |
| | — |
| | — |
|
Total loans | $ | 4 |
| | $ | 108 |
| | — |
| | $ | — |
|
Loans modified in troubled debt restructuringsTDRs are evaluated for impairment. The nature and extent of impairment of TDRs, including those which have experienced a subsequent default, is considered in the determination of an appropriate level of allowance for loan losses.ALLL. There waswerenoallowanceallowances recorded as a result of TDR modifications during the three and six months ended June 30, 2019 and 2018. There was no allowance recorded as a result of TDR modifications during the three months ended June 30, 2017. For the six months ended June 30, 2017, there was one allowance recorded resulting from TDR modifications, totaling $1 thousand for one manufactured housing loan.
Purchased-Credit-Impaired Loans
The changes in accretable yield related to purchased-credit-impairedPCI loans for the three and six months ended June 30, 20182019 and 20172018 were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(amounts in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Accretable yield balance, beginning of period | $ | 6,194 |
| | $ | 7,663 |
| | $ | 6,178 |
| | $ | 7,825 |
|
Accretion to interest income | (378 | ) | | (516 | ) | | (655 | ) | | (854 | ) |
Reclassification from nonaccretable difference and disposals, net | (9 | ) | | 256 |
| | 284 |
| | 432 |
|
Accretable yield balance, end of period | $ | 5,807 |
| | $ | 7,403 |
| | $ | 5,807 |
| | $ | 7,403 |
|
|
| | | | | | | |
| Three Months Ended June 30, |
| 2018 | | 2017 |
(amounts in thousands) | | | |
Accretable yield balance as of March 31, | $ | 7,663 |
| | $ | 9,376 |
|
Accretion to interest income | (516 | ) | | (465 | ) |
Reclassification from nonaccretable difference and disposals, net | 256 |
| | 95 |
|
Accretable yield balance as of June 30, | $ | 7,403 |
| | $ | 9,006 |
|
|
| | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 |
(amounts in thousands) | | | |
Accretable yield balance as of December 31, | $ | 7,825 |
| | $ | 10,202 |
|
Accretion to interest income | (854 | ) | | (958 | ) |
Reclassification from nonaccretable difference and disposals, net | 432 |
| | (238 | ) |
Accretable yield balance as of June 30, | $ | 7,403 |
| | $ | 9,006 |
|
Credit Quality Indicators
The allowance for loan lossesALLL represents management's estimate of probable losses in Customers' loans and leases receivable portfolio, excluding commercial mortgage warehouse loans reported at fair value because ofpursuant to a fair value option election. Multi-family, commercial and industrial, owner occupied commercial real estate, non-owner occupied commercial real estate, and construction loans are rated based on an internally assigned risk rating system which is assigned at the time of loan origination and reviewed on a periodic, or on an “as needed” basis. Residential real estate loans, manufactured housing and other consumer loans are evaluated based on the payment activity of the loan.
To facilitate the monitoring of credit quality within the multi-family, commercial and industrial, owner occupied commercial real estate, non-owner occupied commercial real estate, and construction loan portfolios, and for purposes of analyzing historical loss rates used in the determination of the allowance for loan lossesALLL for the respective loan portfolios, the Bank utilizes the following categories of risk ratings: pass/satisfactory (includes risk rating 1 through 6), special mention, substandard, doubtful, and loss. The risk rating categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter. Pass/satisfactory ratings, which are assigned to those borrowers who do not have identified potential or well-defined weaknesses and for whom there is a high likelihood of orderly repayment, are updated periodically based on the size and credit characteristics of the borrower. All other categories are updated on a quarterly basis during the month preceding the end of the calendar quarter. While assigning risk ratings involves judgment, the risk-rating process allows management to identify riskier credits in a timely manner and allocate the appropriate resources to manage those loans.
loans and leases. The 2018 Form 10-K describes Customers Bancorp’s risk rating grades are defined as follows:
“1” – Pass/Excellent
Loans rated 1 represent a credit extension of the highest quality. The borrower’s historic (at least five years) cash flows manifest extremely large and stable margins of coverage. Balance sheets are conservative, well capitalized, and liquid. After considering debt service for proposed and existing debt, projected cash flows continue to be strong and provide ample coverage. The borrower typically reflects broad geographic and product diversification and has access to alternative financial markets.
“2” – Pass/Superior
Loans rated 2 are those for which the borrower has a strong financial condition, balance sheet, operations, cash flow, debt capacity and coverage with ratios better than industry norms. The borrowers of these loans exhibit a limited leverage position, are virtually immune to local economies, and are in stable growing industries. The management team is well respected and the company has ready access to public markets.
“3” – Pass/Strong
Loans rated 3 are those loans for which the borrowers have above average financial condition and flexibility; more than satisfactory debt service coverage; balance sheet and operating ratios are consistent with or better than industry peers; operate in industries with little risk; move in diversified markets; and are experienced and competent in their industry. These borrowers’ access to capital markets is limited mostly to private sources, often secured, but the borrower typically has access to a wide range of refinancing alternatives.grades.
“4” – Pass/Good
Loans rated 4 have a sound primary and secondary source of repayment. The borrower may have access to alternative sources of financing, but sources are not as widely available as they are to a higher grade borrower. These loans carry a normal level of risk, with very low loss exposure. The borrower has the ability to perform according to the terms of the credit facility. The margins of cash flow coverage are satisfactory but vulnerable to more rapid deterioration than the higher quality loans.
“5” – Satisfactory
Loans rated 5 are extended to borrowers who are considered to be a reasonable credit risk and demonstrate the ability to repay the debt from normal business operations. Risk factors may include reliability of margins and cash flows, liquidity, dependence on a single product or industry, cyclical trends, depth of management, or limited access to alternative financing sources. The borrower’s historical financial information may indicate erratic performance, but current trends are positive and the quality of financial information is adequate, but is not as detailed and sophisticated as information found on higher grade loans. If adverse circumstances arise, the impact on the borrower may be significant.
“6” – Satisfactory/Bankable with Care
Loans rated 6 are those for which the borrower has higher than normal credit risk; however, cash flow and asset values are generally intact. These borrowers may exhibit declining financial characteristics, with increasing leverage and decreasing liquidity and may have limited resources and access to financial alternatives. Signs of weakness in these borrowers may include delinquent taxes, trade slowness and eroding profit margins.
“7” – Special Mention
Loans rated 7 are credit facilities that may have potential developing weaknesses and deserve extra attention from the account manager and other management personnel. In the event potential weaknesses are not corrected or mitigated, deterioration in the ability of the borrower to repay the debt in the future may occur. This grade is not assigned to loans that bear certain peculiar risks normally associated with the type of financing involved, unless circumstances have caused the risk to increase to a level higher than would have been acceptable when the credit was originally approved. Loans where significant actual, not potential, weaknesses or problems are clearly evident are graded in the category below.
“8” – Substandard
Loans are rated 8 when the loans are inadequately protected by the current sound worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the company will sustain some loss if the weaknesses are not corrected.
“9” – Doubtful
The Bank assigns a doubtful rating to loans that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans.
“10” – Loss
The Bank assigns a loss rating to loans considered uncollectible and of such little value that their continuance as an active asset is not warranted. Amounts classified as loss are immediately charged off.
Risk ratings are not established for certain consumer loans, including residential real estate, other consumer loans, home equity, manufactured housing, and installment loans, mainly because these portfolios consist of a larger number of homogeneous loans with smaller balances. Instead, these portfolios are evaluated for risk mainly based upon aggregate payment history and through the monitoring of delinquency levels and trends and are classified as performing and non-performing.
The following tables present the credit ratings of loans and leases receivable as of June 30, 20182019 and December 31, 2017.2018.
| | | June 30, 2018 | | | | | | | | | | | | | | | | | | | |
| Multi-family | | Commercial and Industrial | | Commercial Real Estate Owner Occupied | | Commercial Real Estate Non-Owner Occupied | | Construction | | Residential Real Estate | | Manufactured Housing | | Other Consumer | | Total (3) | June 30, 2019 |
(amounts in thousands) | (amounts in thousands) | | | | | | | | | | | | | | | Multi-family | | Commercial and industrial | | Commercial real estate owner occupied | | Commercial real estate non-owner occupied | | Construction | | Residential real estate | | Manufactured housing | | Other consumer | | Total (3) |
Pass/Satisfactory | $ | 3,485,669 |
| | $ | 1,211,934 |
| | $ | 529,898 |
| | $ | 1,089,666 |
| | $ | 88,141 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 6,405,308 |
| $ | 2,969,263 |
| | $ | 1,545,879 |
| | $ | 568,720 |
| | $ | 1,108,632 |
| | $ | 59,811 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 6,252,305 |
|
Special Mention | 31,001 |
| | 16,979 |
| | 8,152 |
| | 60,943 |
| | — |
| | — |
| | — |
| | — |
| | 117,075 |
| 43,147 |
| | 29,473 |
| | 11,853 |
| | 30,051 |
| | — |
| | — |
| | — |
| | — |
| | 114,524 |
|
Substandard | 26,100 |
| | 37,607 |
| | 7,181 |
| | 5,389 |
| | — |
| | — |
| | — |
| | — |
| | 76,277 |
| 5,121 |
| | 23,118 |
| | 5,513 |
| | 37,892 |
| | — |
| | — |
| | — |
| | — |
| | 71,644 |
|
Performing (1) | — |
| | — |
| | — |
| | — |
| | — |
| | 485,442 |
| | 77,675 |
| | 3,724 |
| | 566,841 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 641,166 |
| | 68,192 |
| | 551,000 |
| | 1,260,358 |
|
Non-performing (2) | — |
| | — |
| | — |
| | — |
| | — |
| | 7,780 |
| | 7,653 |
| | 150 |
| | 15,583 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 7,694 |
| | 7,405 |
| | 1,839 |
| | 16,938 |
|
Total | $ | 3,542,770 |
| | $ | 1,266,520 |
| | $ | 545,231 |
| | $ | 1,155,998 |
| | $ | 88,141 |
| | $ | 493,222 |
| | $ | 85,328 |
| | $ | 3,874 |
| | $ | 7,181,084 |
| $ | 3,017,531 |
| | $ | 1,598,470 |
| | $ | 586,086 |
| | $ | 1,176,575 |
| | $ | 59,811 |
| | $ | 648,860 |
| | $ | 75,597 |
| | $ | 552,839 |
| | $ | 7,715,769 |
|
| | | December 31, 2017 | | | | | | | | | | | | | | | | | | | |
| Multi-family | | Commercial and Industrial | | Commercial Real Estate Owner Occupied | | Commercial Real Estate Non-Owner Occupied | | Construction | | Residential Real Estate | | Manufactured Housing | | Other Consumer | | Total (3) | December 31, 2018 |
(amounts in thousands) | (amounts in thousands) | | | | | | | | | | | | | | | Multi-family | | Commercial and industrial | | Commercial real estate owner occupied | | Commercial real estate non-owner occupied | | Construction | | Residential real estate | | Manufactured housing | | Other consumer | | Total (3) |
Pass/Satisfactory | $ | 3,438,554 |
| | $ | 1,118,889 |
| | $ | 471,826 |
| | $ | 1,185,933 |
| | $ | 85,393 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 6,300,595 |
| $ | 3,201,822 |
| | $ | 1,306,466 |
| | $ | 562,639 |
| | $ | 1,054,493 |
| | $ | 56,491 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 6,181,911 |
|
Special Mention | 53,873 |
| | 7,652 |
| | 5,987 |
| | 31,767 |
| | — |
| | — |
| | — |
| | — |
| | 99,279 |
| 55,696 |
| | 30,551 |
| | 9,730 |
| | 30,203 |
| | — |
| | — |
| | — |
| | — |
| | 126,180 |
|
Substandard | 9,954 |
| | 22,549 |
| | 6,915 |
| | 1,019 |
| | — |
| | — |
| | — |
| | — |
| | 40,437 |
| 27,779 |
| | 36,783 |
| | 5,108 |
| | 40,410 |
| | — |
| | — |
| | — |
| | — |
| | 110,080 |
|
Performing (1) | — |
| | — |
| | — |
| | — |
| | — |
| | 221,042 |
| | 81,497 |
| | 3,400 |
| | 305,939 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 555,016 |
| | 71,924 |
| | 73,724 |
| | 700,664 |
|
Non-performing (2) | — |
| | — |
| | — |
| | — |
| | — |
| | 13,048 |
| | 8,730 |
| | 147 |
| | 21,925 |
| — |
| | — |
| | — |
| | — |
| | — |
| | 11,545 |
| | 7,807 |
| | 311 |
| | 19,663 |
|
Total | $ | 3,502,381 |
| | $ | 1,149,090 |
| | $ | 484,728 |
| | $ | 1,218,719 |
| | $ | 85,393 |
| | $ | 234,090 |
| | $ | 90,227 |
| | $ | 3,547 |
| | $ | 6,768,175 |
| $ | 3,285,297 |
| | $ | 1,373,800 |
| | $ | 577,477 |
| | $ | 1,125,106 |
| | $ | 56,491 |
| | $ | 566,561 |
| | $ | 79,731 |
| | $ | 74,035 |
| | $ | 7,138,498 |
|
| |
(1) | Includes residential real estate, manufactured housing, and other consumer loans not subject to risk ratings. |
| |
(2) | Includes residential real estate, manufactured housing, and other consumer loans that are past due and still accruing interest or on nonaccrual status. |
| |
(3) | Excludes commercial mortgage warehouse loans reported at fair value. |
Loan Purchases and Sales
In second quarter 2018, Customers purchased $277.4 million of thirty-year fixed-rate residential mortgage loans from Third Federal Savings & Loan. The purchase price was 100.4%Purchases and sales of loans outstanding. During second quarter 2018, Customers sold $11.7 million of SBA loans resulting in a gain on sale of $0.9 million. In second quarter 2017, Customers purchased an additional $90.0 million of thirty-year fixed-rate residential mortgage loans from Everbank. The purchase price was 101.0% of loans outstanding. In second quarter 2017, Customers sold $7.0 million of SBA loans resulting in a gain on sale of $0.6 million.
Customers did not purchase any loans during first quarter 2018. During first quarter 2018, Customers sold $15.0 million of Small Business Administration (SBA) loans resulting in a gain on sale of $1.4 million. In first quarter 2017, Customers purchased $174.2 million of thirty-year fixed-rate residential mortgage loans from Florida-based Everbank. The purchase price was 98.5% of loans outstanding. In first quarter 2017, Customers sold $94.9 million of multi-family loanswere as follows for $95.4 million resulting in a gain on sale of $0.5 million and $8.7 million of SBA loans resulting in a gain on sale of $0.8 million.
None of the purchases and sales during the three and six months ended June 30, 20182019 and 2017 materially affected the credit profile of Customers’ loan portfolio.2018:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(amounts in thousands) | 2019 | | 2018 | | 2019 | | 2018 |
Purchases (1) | | | | | | | |
Residential real estate | $ | 39,474 |
| | $ | 277,374 |
| | $ | 105,858 |
| | $ | 277,374 |
|
Other consumer (2) | 384,116 |
| | — |
| | 450,252 |
| | — |
|
Total | $ | 423,590 |
| | $ | 277,374 |
| | $ | 556,110 |
| | $ | 277,374 |
|
Sales (3) | | | | | | | |
Commercial and industrial (4) | — |
| | (10,307 | ) | | — |
| | (17,149 | ) |
Commercial real estate owner occupied (4) | — |
| | (1,430 | ) | | — |
| | (9,581 | ) |
Total | $ | — |
| | $ | (11,737 | ) | | $ | — |
| | $ | (26,730 | ) |
| |
(1) | Amounts reported in the above table are the unpaid principal balance at time of purchase. The purchase price was 100.6% and 100.4% of loans outstanding for the three months ended June 30, 2019 and 2018, respectively. The purchase price was 99.9% and 100.4% of loans outstanding for the six months ended June 30, 2019 and 2018, respectively. |
| |
(2) | Other consumer loan purchases for the three and six months ended June 30, 2019 consist of third-party originated unsecured consumer loans. None of the loans are considered sub-prime. Customers considers sub-prime borrowers to be those with FICO scores below 660. |
| |
(3) | Amounts reported in the above table are the unpaid principal balance at time of sale. There were no loan sales for the three and six months ended June 30, 2019. For the three and six months ended June 30, 2018, loan sales resulted in gains of $0.9 million and $2.3 million, respectively. |
| |
(4) | Primarily sales of SBA loans. |
Loans Pledged as Collateral
Customers has pledged eligible real estate loans as collateral for potential borrowings from the Federal Home Loan Bank of Pittsburgh ("FHLB")FHLB and FRB in the amount of $5.6$5.3 billion and $5.4 billion at June 30, 20182019 and $5.5 billion at December 31, 2017.2018, respectively.
NOTE 7 — LEASES
Lessee
Customers has operating leases for its branches, LPOs, and administrative offices, with remaining lease terms ranging between 2 months and 8 years. These operating leases comprise substantially all of Customers' obligations in which Customers is the lessee. Most lease agreements consist of initial lease terms ranging between 1 and 5 years, with options to renew the leases or extend the term up to 15 years at Customers' sole discretion. Some operating leases include variable lease payments that are based on an index or rate, such as the CPI. Variable lease payments are not included in the liability or right of use asset and are recognized in the period in which the obligation for those payments are incurred. Customers' operating lease agreements do not contain any material residual value guarantees or material restrictive covenants. Pursuant to these agreements, Customers does not have any commitments that would meet the definition of a finance lease.
As most of Customers' operating leases do not provide an implicit rate, Customers utilized its incremental borrowing rate based on the information available at either the adoption of ASC 842 or the commencement date of the lease, whichever was later, when determining the present value of lease payments. Customers does not present ROU assets and corresponding liabilities for operating leases for fiscal years prior to the adoption of this standard.
A ROU asset of $23.8 million, net of $1.1 million in accrued rent, was recognized in exchange for lease liabilities of $24.9 million with the adoption of ASU 2016-02 on January 1, 2019.
The following table summarizes operating lease ROU assets and operating lease liabilities and their corresponding balance sheet location:
|
| | | | | |
(amounts in thousands) | Classification | | June 30, 2019 |
ASSETS | | | |
Operating lease ROU assets | Other assets | | $ | 22,069 |
|
LIABILITIES | | | |
Operating lease liabilities | Other liabilities | | $ | 23,256 |
|
The following table summarizes operating lease cost and its corresponding income statement location for the periods presented:
|
| | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, |
(amounts in thousands) | Classification | | 2019 | | 2019 |
Operating lease cost (1) | Occupancy expenses | | $ | 1,462 |
| | $ | 2,931 |
|
(1) There were no variable lease costs for the three and six months ended June 30, 2019, and sublease income for operating leases is immaterial.
Maturities of non-cancelable operating lease liabilities were as follows at June 30, 2019:
|
| | | |
(amounts in thousands) | June 30, 2019 |
2019 | $ | 2,840 |
|
2020 | 5,309 |
|
2021 | 4,678 |
|
2022 | 4,076 |
|
2023 | 3,106 |
|
Thereafter | 4,785 |
|
Total minimum payments | 24,794 |
|
Less: interest | 1,538 |
|
Present value of lease liabilities | $ | 23,256 |
|
Customers is not currently involved with the construction or design of an underlying asset. Customers has legally binding minimum lease payments of $1.8 million for leases signed by not yet commenced as of June 30, 2019. Cash paid under the operating lease liability was $1.4 million and $2.8 million for the three and six months ended June 30, 2019, respectively, and is reported as cash flows from operating activities in the statement of cash flows.
The following table summarizes the term and discount rate information for Customers' operating leases at June 30, 2019:
|
| | |
(amounts in thousands) | June 30, 2019 |
Weighted average remaining lease term (years) | |
Operating leases | 5.4 years |
|
| |
Weighted average discount rate | |
Operating leases | 2.72 | % |
Future minimum rental commitments pursuant to non-cancelable operating leases as of December 31, 2018, were as follows:
|
| | | |
(amounts in thousands) | December 31, 2018 |
2019 | $ | 5,577 |
|
2020 | 5,135 |
|
2021 | 4,513 |
|
2022 | 3,885 |
|
2023 | 2,856 |
|
Thereafter | 4,699 |
|
Total minimum payments | $ | 26,665 |
|
Rent expense was approximately $1.5 million and $3.0 million for the three and six months ended June 30, 2018, respectively.
Equipment Lessor
CCF is a wholly-owned subsidiary of Customers Bank and is referred to as the Equipment Finance group. CCF is primarily focused on originating equipment operating and direct finance equipment leases for a broad range of asset classes. It services vendors, dealers, independent finance companies, bank-owned leasing companies and strategic direct customers in the plastics, packaging, machine tool, construction, transportation and franchise markets. Lease terms typically range from 24 months to 120 months. CCF offers the following lease products: Capital Lease, Purchase Upon Termination, TRAC, Split-TRAC, and FMV. Direct finance equipment leases are included in commercial and industrial loans and leases receivable.
The estimated residual values for direct finance and operating leases are established by utilizing internally developed analysis, external studies, and/or third-party appraisals to establish a residual position. For the direct finance leases, only for a Split-TRAC is there a residual risk and the unguaranteed portions are typically nominal.
Leased assets under operating leases are carried at amortized cost net of accumulated depreciation and any impairment charges and are presented in other assets. The depreciation expense of the leased assets is recognized on a straight-line basis over the contractual term of the leases up to the expected residual value. The expected residual value and, accordingly, the monthly depreciation expense, may change throughout the term of the lease. Operating lease rental income for leased assets is recognized in commercial lease income on a straight-line basis over the lease term. Customers periodically reviews its leased assets for impairment. An impairment loss is recognized if the carrying amount of the leased asset exceeds its fair value and is not recoverable. The carrying amount of leased assets is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the lease payments and the estimated residual value upon the eventual disposition of the equipment.
The following table summarizes lease receivables and investment in operating leases and their corresponding balance sheet location at June 30, 2019:
|
| | | | | |
(amounts in thousands) | Classification | | June 30, 2019 |
ASSETS | | | |
Direct financing leases | | | |
Lease receivables | Loans and leases receivable | | $ | 64,575 |
|
Guaranteed residual assets | Loans and leases receivable | | 5,144 |
|
Unguaranteed residual assets | Loans and leases receivable | | 1,266 |
|
Deferred initial direct costs | Loans and leases receivable | | 735 |
|
Unearned income | Loans and leases receivable | | (6,519 | ) |
Net investment in direct financing leases | | | $ | 65,201 |
|
| | | |
Operating leases | | | |
Investment in operating leases | Other assets | | $ | 70,974 |
|
Accumulated depreciation | Other assets | | (8,957 | ) |
Deferred initial direct costs | Other assets | | 813 |
|
Net investment in operating leases | | | 62,830 |
|
Total lease assets | | | $ | 128,031 |
|
NOTE 98 — REGULATORY CAPITAL
The Bank and the Bancorp are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can result in certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on Customers' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank and the Bancorp must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items, as calculated under the regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Bancorp to maintain minimum amounts and ratios (set forth in the following table) of common equity Tier 1, Tier 1, and total capital to risk-weighted assets, and Tier 1 capital to average assets (as defined in the regulations). At June 30, 20182019 and December 31, 2017,2018, the Bank and the Bancorp satisfied all capital requirements to which they were subject.
Generally, to comply with the regulatory definition of adequately capitalized, or well capitalized, respectively, or to comply with the Basel III capital requirements, an institution must at least maintain the common equity Tier 1, Tier 1 and total risk-based capital ratios and the Tier 1 leverage ratio in excess of the related minimum ratios as set forth in the following table:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Minimum Capital Levels to be Classified as: |
| Actual | | Adequately Capitalized | | Well Capitalized | | Basel III Compliant |
(amounts in thousands) | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
As of June 30, 2019: | | | | | | | | | | | | | | | |
Common equity Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 768,335 |
| | 8.041 | % | | $ | 429,991 |
| | 4.500 | % | | N/A |
| | N/A |
| | $ | 668,874 |
| | 7.000 | % |
Customers Bank | $ | 1,068,554 |
| | 11.190 | % | | $ | 429,727 |
| | 4.500 | % | | $ | 620,717 |
| | 6.500 | % | | $ | 668,465 |
| | 7.000 | % |
Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 985,784 |
| | 10.317 | % | | $ | 573,321 |
| | 6.000 | % | | N/A |
| | N/A |
| | $ | 812,205 |
| | 8.500 | % |
Customers Bank | $ | 1,068,554 |
| | 11.190 | % | | $ | 572,970 |
| | 6.000 | % | | $ | 763,960 |
| | 8.000 | % | | $ | 811,707 |
| | 8.500 | % |
Total capital (to risk-weighted assets) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 1,123,602 |
| | 11.759 | % | | $ | 764,428 |
| | 8.000 | % | | N/A |
| | N/A |
| | $ | 1,003,312 |
| | 10.500 | % |
Customers Bank | $ | 1,226,248 |
| | 12.841 | % | | $ | 763,960 |
| | 8.000 | % | | $ | 954,950 |
| | 10.000 | % | | $ | 1,002,697 |
| | 10.500 | % |
Tier 1 capital (to average assets) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 985,784 |
| | 9.511 | % | | $ | 414,576 |
| | 4.000 | % | | N/A |
| | N/A |
| | $ | 414,576 |
| | 4.000 | % |
Customers Bank | $ | 1,068,554 |
| | 10.318 | % | | $ | 414,241 |
| | 4.000 | % | | $ | 517,801 |
| | 5.000 | % | | $ | 414,241 |
| | 4.000 | % |
As of December 31, 2018: | | | | | | | | | | | | | | | |
Common equity Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 745,795 |
| | 8.964 | % | | $ | 374,388 |
| | 4.500 | % | | N/A |
| | N/A |
| | $ | 530,384 |
| | 6.375 | % |
Customers Bank | $ | 1,066,121 |
| | 12.822 | % | | $ | 374,160 |
| | 4.500 | % | | $ | 540,453 |
| | 6.500 | % | | $ | 530,059 |
| | 6.375 | % |
Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 963,266 |
| | 11.578 | % | | $ | 499,185 |
| | 6.000 | % | | N/A |
| | N/A |
| | $ | 655,180 |
| | 7.875 | % |
Customers Bank | $ | 1,066,121 |
| | 12.822 | % | | $ | 498,879 |
| | 6.000 | % | | $ | 665,173 |
| | 8.000 | % | | $ | 654,779 |
| | 7.875 | % |
Total capital (to risk-weighted assets) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 1,081,962 |
| | 13.005 | % | | $ | 665,580 |
| | 8.000 | % | | N/A |
| | N/A |
| | $ | 821,575 |
| | 9.875 | % |
Customers Bank | $ | 1,215,522 |
| | 14.619 | % | | $ | 665,173 |
| | 8.000 | % | | $ | 831,466 |
| | 10.000 | % | | $ | 821,072 |
| | 9.875 | % |
Tier 1 capital (to average assets) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 963,266 |
| | 9.665 | % | | $ | 398,668 |
| | 4.000 | % | | N/A |
| | N/A |
| | $ | 398,668 |
| | 4.000 | % |
Customers Bank | $ | 1,066,121 |
| | 10.699 | % | | $ | 398,570 |
| | 4.000 | % | | $ | 498,212 |
| | 5.000 | % | | $ | 398,570 |
| | 4.000 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Minimum Capital Levels to be Classified as: |
| Actual | | Adequacy Capitalized | | Well Capitalized | | Basel III Compliant |
(amounts in thousands) | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
As of June 30, 2018: | | | | | | | | | | | | | | | |
Common equity Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 735,609 |
| | 8.611 | % | | $ | 384,418 |
| | 4.500 | % | | N/A |
| | N/A |
| | $ | 544,591 |
| | 6.375 | % |
Customers Bank | $ | 1,054,613 |
| | 12.351 | % | | $ | 384,232 |
| | 4.500 | % | | $ | 555,002 |
| | 6.500 | % | | $ | 544,329 |
| | 6.375 | % |
Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 953,025 |
| | 11.156 | % | | $ | 512,557 |
| | 6.000 | % | | N/A |
| | N/A |
| | $ | 672,731 |
| | 7.875 | % |
Customers Bank | $ | 1,054,613 |
| | 12.351 | % | | $ | 512,309 |
| | 6.000 | % | | $ | 683,079 |
| | 8.000 | % | | $ | 672,406 |
| | 7.875 | % |
Total capital (to risk-weighted assets) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 1,072,072 |
| | 12.550 | % | | $ | 683,409 |
| | 8.000 | % | | N/A |
| | N/A |
| | $ | 843,583 |
| | 9.875 | % |
Customers Bank | $ | 1,202,070 |
| | 14.078 | % | | $ | 683,079 |
| | 8.000 | % | | $ | 853,849 |
| | 10.000 | % | | $ | 843,176 |
| | 9.875 | % |
Tier 1 capital (to average assets) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 953,025 |
| | 8.866 | % | | $ | 429,963 |
| | 4.000 | % | | N/A |
| | N/A |
| | $ | 429,963 |
| | 4.000 | % |
Customers Bank | $ | 1,054,613 |
| | 9.822 | % | | $ | 429,471 |
| | 4.000 | % | | $ | 536,839 |
| | 5.000 | % | | $ | 429,471 |
| | 4.000 | % |
As of December 31, 2017: | | | | | | | | | | | | | | | |
Common equity Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 689,494 |
| | 8.805 | % | | $ | 352,368 |
| | 4.500 | % | | N/A |
| | N/A |
| | $ | 450,248 |
| | 5.750 | % |
Customers Bank | $ | 1,023,564 |
| | 13.081 | % | | $ | 352,122 |
| | 4.500 | % | | $ | 508,621 |
| | 6.500 | % | | $ | 449,934 |
| | 5.750 | % |
Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 906,963 |
| | 11.583 | % | | $ | 469,824 |
| | 6.000 | % | | N/A |
| | N/A |
| | $ | 567,704 |
| | 7.250 | % |
Customers Bank | $ | 1,023,564 |
| | 13.081 | % | | $ | 469,496 |
| | 6.000 | % | | $ | 625,994 |
| | 8.000 | % | | $ | 567,307 |
| | 7.250 | % |
Total capital (to risk-weighted assets) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 1,021,601 |
| | 13.047 | % | | $ | 626,432 |
| | 8.000 | % | | N/A |
| | N/A |
| | $ | 724,313 |
| | 9.250 | % |
Customers Bank | $ | 1,170,666 |
| | 14.961 | % | | $ | 625,994 |
| | 8.000 | % | | $ | 782,493 |
| | 10.000 | % | | $ | 723,806 |
| | 9.250 | % |
Tier 1 capital (to average assets) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 906,963 |
| | 8.937 | % | | $ | 405,949 |
| | 4.000 | % | | N/A |
| | N/A |
| | $ | 405,949 |
| | 4.000 | % |
Customers Bank | $ | 1,023,564 |
| | 10.092 | % | | $ | 405,701 |
| | 4.000 | % | | $ | 507,126 |
| | 5.000 | % | | $ | 405,701 |
| | 4.000 | % |
The Basel III risk-based capital rules adopted effective January 1, 2015 require that banks and holding companies maintain a "capital conservation buffer" of 250 basis points in excess of the "minimum capital ratio" or certain elective distributions would be limited. The minimum capital ratio is equal to the prompt corrective action adequately capitalized threshold ratio. The capital conservation buffer is beingwas phased in over four years beginning on January 1, 2016, with a maximum buffer of 0.625% of risk weighted assets for 2016, 1.25%1.250% for 2017, 1.875% for 2018, and 2.5%2.500% for 2019 and thereafter.
Effective January 1, 2018,2019, the capital level required to avoid limitation on elective distributions applicable to the Bancorp and the Bank were as follows:
(i) a common equity Tier 1 risk-based capital ratio of 6.375%7.000%;
(ii) a Tier 1 risk-based capital ratio of 7.875%8.500%; and
(iii) a Total risk-based capital ratio of 9.875%10.500%.
Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers.
NOTE 109 — DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS - As Restated
Customers uses fair value measurements to record fair value adjustments to certain assets and liabilities and to disclose the fair value of its financial instruments. ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments. For Customers, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments. Many of these financial instruments lack an available trading market as characterized by a willing buyer and a willing seller engaging in an exchange transaction. For fair value disclosure purposes, Customers utilized certain fair value measurement criteria under ASC Topic 820, Fair Value Measurements and Disclosures, as explained below.
In accordance with ASC 820, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for Customers' various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The fair value guidance provides a consistent definition of fair value, focusing on an exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
The fair value guidance also establishes a fair value hierarchy and describes the following three levels used to classify fair value measurements.
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require adjustments to inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The following methods and assumptions were used to estimate the fair values of Customers' financial instruments as of June 30, 20182019 and December 31, 2017:
2018:
Financial Instruments Recorded at Fair Value on a Recurring Basis
Investment securities:
The fair values of equity securities, and available for saleavailable-for-sale debt securities and debt securities reported at fair value based on a fair value option election are determined by obtaining quoted market prices on nationally recognized and foreign securities exchanges (Level 1), quoted prices in markets that are not active (Level 2), and matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices, or internally and externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3). These assets are classified as Level 1, 2 or 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
The carrying amount of investments in FHLB, Federal Reserve Bank, and other restricted stock approximates fair value, and considers the limited marketability of such securities. These assets are classified as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Loans held for sale - Consumer residential mortgage loans (fair value option):
Customers generally estimates the fair values of residential mortgage loans held for sale based on commitments on hand from investors within the secondary market for loans with similar characteristics. These assets are classified as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Loans receivable - Commercialcommercial mortgage warehouse loans (fair value option):
The fair value of mortgage warehouse loans is the amount of cash initially advanced to fund the mortgage, plus accrued interest and fees, as specified in the respective agreements. The loan is used by mortgage companies primarily as short-term bridge financing between the funding of mortgage loans and the finalization of the sale of the loans to an investor. Changes in fair value are not generally expected to be recognized because at inception of the transaction the underlying loans have already been sold to an approved investor. Additionally, the interest rate is variable, and the transaction is short-term, with an average life of 20under 30 days from purchase to sale. These assets are classified as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Derivatives (Assets(assets and Liabilities)liabilities):
The fair values of interest rate swaps and credit derivatives are determined using models that incorporate readily observable market data into a market standard methodology. This methodology nets the discounted future cash receipts and the discounted expected cash payments. The discounted variable cash receipts and payments are based on expectations of future interest rates derived from observable market interest rate curves. In addition, fair value is adjusted for the effect of nonperformance risk by incorporating credit valuation adjustments for the BankCustomers and its counterparties. These assets and liabilities are classified as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
The fair values of the residential mortgage loan commitments are derived from the estimated fair values that can be generated when the underlying mortgage loan is sold in the secondary market. The BankCustomers generally uses commitments on hand from third-third party investors to estimate an exit price and adjusts for the probability of the commitment being exercised based on the Bank’s internal experience (i.e., pull-through rate). These assets and liabilities are classified as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Derivative assets and liabilities are presented in "Other assets" and "Accrued interest payable and other liabilities" on the consolidated balance sheet.
The following information should not be interpreted as an estimate of Customers' fair value in its entirety because fair value calculations are only provided for a limited portion of Customers' assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making these estimates, comparisons between Customers' disclosures and those of other companies may not be meaningful.
Financial Instruments Recorded at Fair Value on a Nonrecurring Basis
Impaired loans:
Impaired loans are those loans that are accounted for under ASC 310, Receivables,, in which the Bank has measured impairment generally based on the fair value of the loan’s collateral or discounted cash flow analysis. Fair value is generally determined based upon independent third-party appraisals of the properties that collateralize the loans or discounted cash flows based upon the expected proceeds. These assets are generally classified as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Other real estate owned:
The fair value of other real estate owned ("OREO") is determined by using appraisals, which may be discounted based on management’s review and changes in market conditions or sales agreements with third parties. All appraisals must be performed in accordance with the Uniform Standards of Professional Appraisal Practice. Appraisals are certified to the Bank and performed by appraisers on the Bank’s approved list of appraisers. Evaluations are completed by a person independent of management. The content of the appraisal depends on the complexity of the property. Appraisals are completed on a “retail value” and an “as is value”. These assets are classified as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
The following information should not be interpreted as an estimate of Customers' fair value in its entirety because fair value calculations are only provided for a limited portion of Customers' assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making these estimates, comparisons between Customer’s disclosures and those of other companies may not be meaningful.
The estimated fair values of Customers' financial instruments at June 30, 20182019 and December 31, 20172018 were as follows.
| | | | | | | Fair Value Measurements at June 30, 2018 | | | | | Fair Value Measurements at June 30, 2019 |
| Carrying Amount | | Estimated Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | |
(amounts in thousands) (as restated) | | | | | | | | | | |
(amounts in thousands) | | Carrying Amount | | Estimated Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | $ | 251,726 |
| | $ | 251,726 |
| | $ | 251,726 |
| | $ | — |
| | $ | — |
| $ | 95,795 |
| | $ | 95,795 |
| | $ | 95,795 |
| | $ | — |
| | $ | — |
|
Debt securities, available for sale | 1,157,944 |
| | 1,157,944 |
| | — |
| | 1,157,944 |
| | — |
| 689,829 |
| | 689,829 |
| | — |
| | 689,829 |
| | — |
|
Interest-only classes of agency-guaranteed home equity conversion mortgage-backed securities, reported at fair value based on a fair value option election | | 17,157 |
| | 17,157 |
| | — |
| | — |
| | 17,157 |
|
Equity securities | 3,056 |
| | 3,056 |
| | 3,056 |
| | — |
| | — |
| 1,373 |
| | 1,373 |
| | 1,373 |
| | — |
| | — |
|
Loans held for sale (as restated) | 1,043 |
| | 1,043 |
| | — |
| | 1,043 |
| | — |
| |
Total loans receivable, net of allowance for loan losses (as restated) | 9,074,176 |
| | 9,058,053 |
| | — |
| | 1,930,738 |
| | 7,127,315 |
| |
Loans held for sale | | 5,697 |
| | 5,697 |
| | — |
| | 4,372 |
| | 1,325 |
|
Total loans and leases receivable, net of allowance for loan and lease losses | | 9,667,258 |
| | 9,885,136 |
| | — |
| | 2,001,540 |
| | 7,883,596 |
|
FHLB, Federal Reserve Bank and other restricted stock | 136,066 |
| | 136,066 |
| | — |
| | 136,066 |
| | — |
| 101,947 |
| | 101,947 |
| | — |
| | 101,947 |
| | — |
|
Derivatives | 16,247 |
| | 16,247 |
| | — |
| | 16,114 |
| | 133 |
| 22,679 |
| | 22,679 |
| | — |
| | 22,534 |
| | 145 |
|
Liabilities: | | | | | | | | | | | | | | | | | | |
Deposits | $ | 7,295,954 |
| | $ | 7,288,828 |
| | $ | 5,223,793 |
| | $ | 2,065,035 |
| | $ | — |
| $ | 8,185,777 |
| | $ | 8,186,683 |
| | $ | 5,747,676 |
| | $ | 2,439,007 |
| | $ | — |
|
Federal funds purchased | 105,000 |
| | 105,000 |
| | 105,000 |
| | — |
| | — |
| 406,000 |
| | 406,000 |
| | 406,000 |
| | — |
| | — |
|
FHLB advances | 2,389,797 |
| | 2,389,785 |
| | 1,504,797 |
| | 884,988 |
| | — |
| 1,262,100 |
| | 1,263,718 |
| | 412,100 |
| | 851,618 |
| | — |
|
Other borrowings | 186,888 |
| | 185,364 |
| | 63,554 |
| | 121,810 |
| | — |
| 99,055 |
| | 125,245 |
| | — |
| | 125,245 |
| | — |
|
Subordinated debt | 108,929 |
| | 114,675 |
| | — |
| | 114,675 |
| | — |
| 109,026 |
| | 116,644 |
| | — |
| | 116,644 |
| | — |
|
Derivatives | 13,698 |
| | 13,698 |
| | — |
| | 13,698 |
| | — |
| 46,636 |
| | 46,636 |
| | — |
| | 46,636 |
| | — |
|
|
| | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at December 31, 2018 |
(amounts in thousands) | Carrying Amount | | Estimated Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Assets: | | | | | | | | | |
Cash and cash equivalents | $ | 62,135 |
| | $ | 62,135 |
| | $ | 62,135 |
| | $ | — |
| | $ | — |
|
Debt securities, available for sale | 663,294 |
| | 663,294 |
| | — |
| | 663,294 |
| | — |
|
Equity securities | 1,718 |
| | 1,718 |
| | 1,718 |
| | — |
| | — |
|
Loans held for sale | 1,507 |
| | 1,507 |
| | — |
| | 1,507 |
| | — |
|
Total loans and leases receivable, net of allowance for loan and lease losses | 8,503,522 |
| | 8,481,128 |
| | — |
| | 1,405,420 |
| | 7,075,708 |
|
FHLB, Federal Reserve Bank and other restricted stock | 89,685 |
| | 89,685 |
| | — |
| | 89,685 |
| | — |
|
Derivatives | 14,693 |
| | 14,693 |
| | — |
| | 14,624 |
| | 69 |
|
Liabilities: | | | | | | | | | |
Deposits | $ | 7,142,236 |
| | $ | 7,136,009 |
| | $ | 5,408,055 |
| | $ | 1,727,954 |
| | $ | — |
|
Federal funds purchased | 187,000 |
| | 187,000 |
| | 187,000 |
| | — |
| | — |
|
FHLB advances | 1,248,070 |
| | 1,248,046 |
| | 998,070 |
| | 249,976 |
| | — |
|
Other borrowings | 123,871 |
| | 121,718 |
| | — |
| | 121,718 |
| | — |
|
Subordinated debt | 108,977 |
| | 110,550 |
| | — |
| | 110,550 |
| | — |
|
Derivatives | 16,286 |
| | 16,286 |
| | — |
| | 16,286 |
| | — |
|
|
| | | | | | | | | | | | | | | | | | | |
| | | | | Fair Value Measurements at December 31, 2017 |
| Carrying Amount | | Estimated Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
(amounts in thousands) (as restated) | | | | | | | | | |
Assets: | | | | | | | | | |
Cash and cash equivalents | $ | 146,323 |
| | $ | 146,323 |
| | $ | 146,323 |
| | $ | — |
| | $ | — |
|
Investment securities, available for sale | 471,371 |
| | 471,371 |
| | 3,352 |
| | 468,019 |
| | — |
|
Loans held for sale (as restated) | 146,077 |
| | 146,251 |
| | — |
| | 1,886 |
| | 144,365 |
|
Total loans receivable, net of allowance for loan losses (as restated) | 8,523,651 |
| | 8,470,171 |
| | — |
| | 1,793,408 |
| | 6,676,763 |
|
FHLB, Federal Reserve Bank and other restricted stock | 105,918 |
| | 105,918 |
| | — |
| | 105,918 |
| | — |
|
Derivatives | 9,752 |
| | 9,752 |
| | — |
| | 9,692 |
| | 60 |
|
Liabilities: | | | | | | | | | |
Deposits | $ | 6,800,142 |
| | $ | 6,796,095 |
| | $ | 4,894,449 |
| | $ | 1,901,646 |
| | $ | — |
|
Federal funds purchased | 155,000 |
| | 155,000 |
| | 155,000 |
| | — |
| | — |
|
FHLB advances | 1,611,860 |
| | 1,611,603 |
| | 881,860 |
| | 729,743 |
| | — |
|
Other borrowings | 186,497 |
| | 193,557 |
| | 65,072 |
| | 128,485 |
| | — |
|
Subordinated debt | 108,880 |
| | 115,775 |
| | — |
| | 115,775 |
| | — |
|
Derivatives | 10,074 |
| | 10,074 |
| | — |
| | 10,074 |
| | — |
|
For financial assets and liabilities measured at fair value on a recurring and nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 20182019 and December 31, 20172018 were as follows:
| | | June 30, 2018 | June 30, 2019 |
| Fair Value Measurements at the End of the Reporting Period Using | Fair Value Measurements at the End of the Reporting Period Using |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | |
(amounts in thousands) (as restated) | | | | | | | | |
(amounts in thousands) | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
Measured at Fair Value on a Recurring Basis: | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | |
Available-for-sale debt securities: | | | | | | | | | | | | | | |
Agency-guaranteed residential mortgage-backed securities | $ | — |
| | $ | 476,563 |
| | $ | — |
| | $ | 476,563 |
| $ | — |
| | $ | 301,391 |
| | $ | — |
| | $ | 301,391 |
|
Agency-guaranteed commercial mortgage-backed securities | — |
| | 320,373 |
| | — |
| | 320,373 |
| |
Corporate notes | — |
| | 361,008 |
| | — |
| | 361,008 |
| — |
| | 388,438 |
| | — |
| | 388,438 |
|
Interest-only classes of agency-guaranteed home equity conversion mortgage-backed securities, reported at fair value based on a fair value option election | | — |
| | — |
| | 17,157 |
| | 17,157 |
|
Equity securities | 3,056 |
| | — |
| | — |
| | 3,056 |
| 1,373 |
| | — |
| | — |
| | 1,373 |
|
Derivatives | — |
| | 16,114 |
| | 133 |
| | 16,247 |
| — |
| | 22,534 |
| | 145 |
| | 22,679 |
|
Loans held for sale – fair value option (as restated) | — |
| | 1,043 |
| | — |
| | 1,043 |
| |
Loans receivable, mortgage warehouse – fair value option (as restated) | — |
| | 1,930,738 |
| | — |
| | 1,930,738 |
| |
Total assets - recurring fair value measurements | $ | 3,056 |
| | $ | 3,105,839 |
| | $ | 133 |
| | $ | 3,109,028 |
| |
Loans held for sale – fair value option | | — |
| | 4,372 |
| | — |
| | 4,372 |
|
Loans receivable, mortgage warehouse – fair value option | | — |
| | 2,001,540 |
| | — |
| | 2,001,540 |
|
Total assets – recurring fair value measurements | | $ | 1,373 |
| | $ | 2,718,275 |
| | $ | 17,302 |
| | $ | 2,736,950 |
|
Liabilities | | | | | | | | | | | | | | |
Derivatives | $ | — |
| | $ | 13,698 |
| | $ | — |
| | $ | 13,698 |
| $ | — |
| | $ | 46,636 |
| | $ | — |
| | $ | 46,636 |
|
Measured at Fair Value on a Nonrecurring Basis: | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | |
Impaired loans, net of reserves of $1,381 | $ | — |
| | $ | — |
| | $ | 11,929 |
| | $ | 11,929 |
| |
Impaired loans, net of reserves of $303 | | — |
| | — |
| | 11,577 |
| | 11,577 |
|
Other real estate owned | — |
| | — |
| | 1,027 |
| | 1,027 |
| — |
| | — |
| | 880 |
| | 880 |
|
Total assets - nonrecurring fair value measurements | $ | — |
| | $ | — |
| | $ | 12,956 |
| | $ | 12,956 |
| |
Total assets – nonrecurring fair value measurements | | $ | — |
| | $ | — |
| | $ | 12,457 |
| | $ | 12,457 |
|
| | | December 31, 2017 | December 31, 2018 |
| Fair Value Measurements at the End of the Reporting Period Using | Fair Value Measurements at the End of the Reporting Period Using |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total | |
(amounts in thousands) (as restated) | | | | | | | | |
(amounts in thousands) | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total |
Measured at Fair Value on a Recurring Basis: | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | |
Available-for-sale securities: | | | | | | | | | | | | | | |
Agency-guaranteed residential mortgage-backed securities | $ | — |
| | $ | 183,458 |
| | $ | — |
| | $ | 183,458 |
| |
Agency-guaranteed commercial real estate mortgage-backed securities | — |
| | 238,472 |
| | — |
| | 238,472 |
| |
Agency-guaranteed residential mortgage–backed securities | | $ | — |
| | $ | 305,374 |
| | $ | — |
| | $ | 305,374 |
|
Corporate notes | — |
| | 46,089 |
| | — |
| | 46,089 |
| — |
| | 357,920 |
| | — |
| | 357,920 |
|
Equity securities | 3,352 |
| | — |
| | — |
| | 3,352 |
| 1,718 |
| | — |
| | — |
| | 1,718 |
|
Derivatives | — |
| | 9,692 |
| | 60 |
| | 9,752 |
| — |
| | 14,624 |
| | 69 |
| | 14,693 |
|
Loans held for sale – fair value option (as restated) | — |
| | 1,886 |
| | — |
| | 1,886 |
| |
Loans receivable, mortgage warehouse – fair value option (as restated) | — |
| | 1,793,408 |
| | — |
| | 1,793,408 |
| |
Total assets - recurring fair value measurements | $ | 3,352 |
| | $ | 2,273,005 |
| | $ | 60 |
| | $ | 2,276,417 |
| |
Loans held for sale – fair value option | | — |
| | 1,507 |
| | — |
| | 1,507 |
|
Loans receivable, mortgage warehouse – fair value option | | — |
| | 1,405,420 |
| | — |
| | 1,405,420 |
|
Total assets – recurring fair value measurements | | $ | 1,718 |
| | $ | 2,084,845 |
| | $ | 69 |
| | $ | 2,086,632 |
|
Liabilities | | | | | | | | | | | | | | |
Derivatives | $ | — |
| | $ | 10,074 |
| | $ | — |
| | $ | 10,074 |
| $ | — |
| | $ | 16,286 |
| | $ | — |
| | $ | 16,286 |
|
Measured at Fair Value on a Nonrecurring Basis: | | | | | | | | | | | | | | |
Assets | | | | | | | | | | | | | | |
Impaired loans, net of reserves of $1,451 | $ | — |
| | $ | — |
| | $ | 13,902 |
| | $ | 13,902 |
| |
Impaired loans, net of reserves of $845 | | $ | — |
| | $ | — |
| | $ | 10,876 |
| | $ | 10,876 |
|
Other real estate owned | — |
| | — |
| | 1,449 |
| | 1,449 |
| — |
| | — |
| | 621 |
| | 621 |
|
Total assets - nonrecurring fair value measurements | $ | — |
| | $ | — |
| | $ | 15,351 |
| | $ | 15,351 |
| |
Total assets – nonrecurring fair value measurements | | $ | — |
| | $ | — |
| | $ | 11,497 |
| | $ | 11,497 |
|
The changes in Level 3 assets measured at fair value on a recurring basis for the three and six months ended June 30, 20182019 and 20172018 are summarized in the tables below. Additional information about residential mortgage loan commitments can be found in NOTE 1110 - DERIVATIVES INSTRUMENTS AND HEDGING ACTIVITIES.
| | | Residential Mortgage Loan Commitments | | | | | |
| Three Months Ended June 30, | Residential Mortgage Loan Commitments |
| 2018 | | 2017 | Three Months Ended June 30, |
(amounts in thousands) | | | | 2019 | | 2018 |
Balance at March 31 | $ | 83 |
| | $ | 95 |
| $ | 77 |
| | $ | 83 |
|
Issuances | 133 |
| | 102 |
| 145 |
| | 133 |
|
Settlements | (83 | ) | | (95 | ) | (77 | ) | | (83 | ) |
Balance at June 30 | $ | 133 |
| | $ | 102 |
| $ | 145 |
| | $ | 133 |
|
|
| | | | | | | |
| Residential Mortgage Loan Commitments |
| Six Months Ended June 30, |
(amounts in thousands) | 2019 | | 2018 |
| | | |
Balance at December 31 | $ | 69 |
| | $ | 60 |
|
Issuances | 222 |
| | 216 |
|
Settlements | (146 | ) | | (143 | ) |
Balance at June 30 | $ | 145 |
| | $ | 133 |
|
| | | |
|
| | | | | | | |
| Residential Mortgage Loan Commitments |
| Six Months Ended June 30, |
| 2018 | | 2017 |
(amounts in thousands) | | | |
Balance at December 31 | $ | 60 |
| | $ | 45 |
|
Issuances | 216 |
| | 197 |
|
Settlements | (143 | ) | | (140 | ) |
Balance at June 30 | $ | 133 |
| | $ | 102 |
|
| | | |
Customers' policy is to recognize transfers between fair value levels when events or circumstances warrant transfers. There were no transfers between levels during the three and six months ended June 30, 20182019 and 2017.
2018.
The following table summarizes financial assets and financial liabilities measured at fair value as of June 30, 20182019 and December 31, 20172018 on a recurring and nonrecurring basis for which Customers utilized Level 3 inputs to measure fair value. The unobservable Level 3 inputs noted below contain a level of uncertainty that may differ from what is realized in an immediate settlement of the assets. Therefore, Customers may realize a value higher or lower than the current estimated fair value of the assets. On June 28, 2019, Customers obtained ownership of interest-only GNMA securities that served as the primary collateral for loans made to one commercial mortgage warehouse customer through a Uniform Commercial Code ("UCC") private sale transaction. On June 28, 2019, Customers elected the fair value option for these interest-only GNMA securities acquired on such date. The fair value of these securities at June 30, 2019 was $17.2 million which reflects the valuation obtained from the third party binding bids obtained through the UCC private sale transaction. Customers corroborated the third party binding bids through internally developed discounted cash flow modeling. The significant unobservable inputs used in the discounted cash flow modeling include prepayment speeds and discount rates. Customers will mark these securities to fair value on a quarterly basis, with changes in fair value reported in non-interest income.
Customers will mark these securities to fair value on a quarterly basis, with changes in fair value reported in non-interest income.
|
| | | | | | | | | |
| Quantitative Information about Level 3 Fair Value Measurements |
June 30, 2018 | Fair Value Estimate | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) (3) |
(amounts in thousands) | | | | | | | |
Impaired loans | $ | 11,929 |
| | Collateral appraisal (1) | | Liquidation expenses (2) | | (8)% |
Other real estate owned | 1,027 |
| | Collateral appraisal (1) | | Liquidation expenses (2) | | (8)% |
Residential mortgage loan commitments | 133 |
| | Adjusted market bid | | Pull-through rate | | 90% |
| | | Quantitative Information about Level 3 Fair Value Measurements | Quantitative Information about Level 3 Fair Value Measurements |
December 31, 2017 | Fair Value Estimate | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) (3) | |
June 30, 2019 | | Fair Value Estimate | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) |
(amounts in thousands) | | | | | | | | | | | | | | |
Impaired loans | $ | 13,902 |
| | Collateral appraisal (1) | | Liquidation expenses (2) | | (8)% | |
Impaired loans - real estate | | $ | 5,015 |
| | Collateral appraisal (1) | | Liquidation expenses (2) | | 8% - 8% (8%) |
Impaired loans - commercial & industrial | | 6,562 |
| | Business asset valuation (3) | | Business asset valuation adjustments (4) | | 8% - 50% (16%) |
Other real estate owned | 1,449 |
| | Collateral appraisal (1) | | Liquidation expenses (2) | | (8)% | 880 |
| | Collateral appraisal (1) | | Liquidation expenses (2) | | 8% - 11% (8%) |
Residential mortgage loan commitments | 60 |
| | Adjusted market bid | | Pull-through rate | | 90% | 145 |
| | Adjusted market bid | | Pull-through rate | | 83% - 83% (83%) |
| |
(1) | Obtained from approved independent appraisers. Appraisals are current and in compliance with credit policy. The BankCustomers does not generally discount appraisals. |
| |
(2) | Fair value isAppraisals are adjusted by management for estimated costs to sell based onliquidation expenses. The range and weighted average of liquidation expense adjustments are presented as a percentage of the value as determined by the appraisal. |
| |
(3) | PresentedBusiness asset valuation obtained from independent party. |
| |
(4) | Business asset valuations may be adjusted by management for qualitative factors including economic conditions and the condition of the business assets. The range and weighted average of the business asset adjustments are presented as a percent of the business asset valuation. |
|
| | | | | | | | | |
| Quantitative Information about Level 3 Fair Value Measurements |
December 31, 2018 | Fair Value Estimate | | Valuation Technique | | Unobservable Input | | Range (Weighted Average) |
(amounts in thousands) | | | | | | | |
Impaired loans - real estate | $ | 10,260 |
| | Collateral appraisal (1) | | Liquidation expenses (2) | | 8% - 8% (8%) |
Impaired loans - commercial & industrial | 616 |
| | Business asset valuation (3) | | Business asset valuation adjustments (4) | | 8% - 50% (26%) |
Other real estate owned | 621 |
| | Collateral appraisal (1) | | Liquidation expenses (2) | | 8% - 8% (8%) |
Residential mortgage loan commitments | 69 |
| | Adjusted market bid | | Pull-through rate | | 90% - 90% (90%) |
| |
(1) | Obtained from approved independent appraisers. Appraisals are current and in compliance with credit policy. Customers does not generally discount appraisals. |
| |
(2) | Appraisals are adjusted by management for liquidation expenses. The range and weighted average of liquidation expense adjustments are presented as a percentage of the value determinedappraisal. |
| |
(3) | Business asset valuation obtained from independent party. |
| |
(4) | Business asset valuations may be adjusted by appraisalmanagement for impaired loansqualitative factors including economic conditions and other real estate owned.the condition of the business assets. The range and weighted average of the business asset adjustments are presented as a percent of the business asset valuation. |
NOTE 1110 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Risk Management Objectives of Using Derivatives
Customers is exposed to certain risks arising from both its business operations and economic conditions. Customers manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and durations of its assets and liabilities. Specifically, Customers enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Customers' derivative financial instruments are used to manage differences in the amount, timing, and duration of Customers' known or expected cash receipts and its known or expected cash payments principally related to certain borrowings. Customers also has interest-rate derivatives resulting from a service provided to certain qualifying customers, and therefore, they are not used to manage Customers' interest-rate risk in assets or liabilities. Customers manages a matched book with respect to its derivative instruments used in this customer service in order to minimize its net risk exposure resulting from such transactions.
Cash Flow Hedges of Interest Rate Risk
Customers' objectives in using interest-rate derivatives are to add stability to interest expense and to manage exposure to interest-rate movements. To accomplish this objective, Customers primarily uses interest rate swaps as part of its interest-rate-riskinterest rate risk management strategy. Interest-rateInterest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for Customers making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive incomeAOCI and is subsequently reclassified into earnings in the period that the hedged forecasted transactionitem affects earnings. To date, such derivatives were used to hedge the variable cash flows associated with the forecasted issuances of debt.debt and a certain variable-rate deposit relationship.
Customers discontinues cash flow hedge accounting if it is probable the forecasted hedged transactions will not occur in the initially identified time period. At such time, the associated gains and losses deferred in AOCI are reclassified immediately into earnings and any subsequent changes in the fair value of such derivatives are recognized directly in earnings.
Amounts reported in accumulated other comprehensive incomeAOCI related to derivatives will be reclassified to interest expense as interest payments are made on Customers' variable-rate debt.debt and a variable-rate deposit relationship. Customers expects to reclassify $0.5$4.5 million from accumulated other comprehensive incomeAOCI to interest expense during the next 12 months.
Customers is hedging its exposure to the variability in future cash flows for forecasted transactions (3-month FHLB advances) and a variable-rate deposit relationship over a maximum period of 60 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).
At June 30, 2018,2019, Customers had thirteenfour outstanding interest rate derivatives with notional amounts totaling $1.4 billion$725.0 million that were designated as cash flow hedges of interest rate risk. At December 31, 2017,2018, Customers had ninesix outstanding interest rate derivatives with
notional amounts totaling $550.0$750.0 million that were designated as cash flow hedges of interest rate risk. The outstanding cash flow hedges at June 30, 20182019 expire between June, 2021 and July, 2018 and June 2023.2024.
Derivatives Not Designated as Hedging Instruments
Customers executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies (typically the loan customers will swap a floating-rate loan for a fixed-rate loan). The customer interest rate swaps are simultaneously offset by interest rate swaps that Customers executes with a third party in order to minimize interest rate risk exposure resulting from such transactions. BecauseAs the interest rate swaps associated with this program do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting third-party market swaps are recognized directly in earnings. At June 30, 2018,2019, Customers had 82116 interest rate swaps with an aggregate notional amount of $779.0 million$1.2 billion related to this program. At December 31, 2017,2018, Customers had 7698 interest rate swaps with an aggregate notional amount of $800.5 million$1.0 billion related to this program.
Customers enters into residential mortgage loan commitments in connection with its consumer mortgage banking activities to fund mortgage loans at specified rates and times in the future. These commitments are short-term in nature and generally expire in 30 to 60 days. The residential mortgage loan commitments that relate to the origination of mortgage loans that will be held for sale are considered derivative instruments under the applicable accounting guidance and are reported at fair value, with changes in fair value recorded directly in earnings. At June 30, 20182019 and December 31, 2017,2018, Customers had an outstanding notional balance of residential mortgage loan commitments of $6.0$8.1 million and $2.7$3.6 million, respectively.
Customers has also purchased and sold credit derivatives to either hedge or participate in the performance risk associated with some of its counterparties. These derivatives are not designated as hedging instruments and are reported at fair value, with changes in fair value recorded directly in earnings. At June 30, 20182019 and December 31, 2017,2018, Customers had outstanding notional balances of credit derivatives of $92.6$115.1 million and $80.5$94.9 million, respectively.
Fair Value of Derivative Instruments on the Balance Sheet
The following tables present the fair value of Customers' derivative financial instruments as well as their presentation on the balance sheet as of June 30, 20182019 and December 31, 2017.
2018.
| | | | June 30, 2018 | | | | | | | | | |
| | Derivative Assets | | Derivative Liabilities | | June 30, 2019 |
| | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value | | Derivative Assets | | Derivative Liabilities |
(amounts in thousands) | | | | | | | | | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
Derivatives designated as cash flow hedges: | | | | | | | | |
Interest rate swaps | | Other assets | | $ | 2,732 |
| | Other liabilities | | $ | 416 |
| | Other assets | | $ | — |
| | Other liabilities | | $ | 22,696 |
|
Total | | $ | 2,732 |
| | $ | 416 |
| | $ | — |
| | $ | 22,696 |
|
Derivatives not designated as hedging instruments: | | | | | | | | |
Interest rate swaps | | Other assets | | $ | 13,334 |
| | Other liabilities | | $ | 13,148 |
| | Other assets | | $ | 22,278 |
| | Other liabilities | | $ | 23,841 |
|
Credit contracts | | Other assets | | 48 |
| | Other liabilities | | 134 |
| | Other assets | | 256 |
| | Other liabilities | | 99 |
|
Residential mortgage loan commitments | | Other assets | | 133 |
| | Other liabilities | | — |
| | Other assets | | 145 |
| | Other liabilities | | — |
|
Total | | $ | 13,515 |
| | $ | 13,282 |
| | $ | 22,679 |
| | $ | 23,940 |
|
|
| | | | | | | | | | | | |
| | December 31, 2018 |
| | Derivative Assets | | Derivative Liabilities |
(amounts in thousands) | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
Derivatives designated as cash flow hedges: | | | | | | | | |
Interest rate swaps | | Other assets | | $ | 256 |
| | Other liabilities | | $ | 1,502 |
|
Total | | | | $ | 256 |
| | | | $ | 1,502 |
|
Derivatives not designated as hedging instruments: | | | | | | | | |
Interest rate swaps | | Other assets | | $ | 14,300 |
| | Other liabilities | | $ | 14,730 |
|
Credit contracts | | Other assets | | 68 |
| | Other liabilities | | 54 |
|
Residential mortgage loan commitments | | Other assets | | 69 |
| | Other liabilities | | — |
|
Total | | | | $ | 14,437 |
| | | | $ | 14,784 |
|
|
| | | | | | | | | | | | |
| | December 31, 2017 |
| | Derivative Assets | | Derivative Liabilities |
| | Balance Sheet | | | | Balance Sheet | | |
| | Location | | Fair Value | | Location | | Fair Value |
(amounts in thousands) | | | | | | | | |
Derivatives designated as cash flow hedges: | | | | | | | | |
Interest rate swaps | | Other assets | | $ | 816 |
| | Other liabilities | | $ | 1,140 |
|
Total | | | | $ | 816 |
| | | | $ | 1,140 |
|
Derivatives not designated as hedging instruments: | | | | | | | | |
Interest rate swaps | | Other assets | | $ | 8,776 |
| | Other liabilities | | $ | 8,897 |
|
Credit contracts | | Other assets | | 100 |
| | Other liabilities | | 37 |
|
Residential mortgage loan commitments | | Other assets | | 60 |
| | Other liabilities | | — |
|
Total | | | | $ | 8,936 |
| | | | $ | 8,934 |
|
Effect of Derivative Instruments on Comprehensive Income
The following tables present the effect of Customers' derivative financial instruments on comprehensive income for the three and six months ended June 30, 20182019 and 2017.2018.
| | | Three Months Ended June 30, 2018 | | | | |
| Income Statement Location | | Amount of Income (Loss) Recognized in Earnings | Three Months Ended June 30, 2019 |
(amounts in thousands) | | | | Income Statement Location | | Amount of Income (Loss) Recognized in Earnings |
Derivatives not designated as hedging instruments: | | | | |
Interest rate swaps | Other non-interest income | | $ | (51 | ) | Other non-interest income | | $ | 386 |
|
Credit contracts | Other non-interest income | | (15 | ) | Other non-interest income | | 41 |
|
Residential mortgage loan commitments | Mortgage banking income | | 50 |
| Mortgage banking income | | 68 |
|
Total | | $ | (16 | ) | | $ | 495 |
|
|
| | | | | |
| Three Months Ended June 30, 2018 |
(amounts in thousands) | Income Statement Location | | Amount of Income (Loss) Recognized in Earnings |
Derivatives not designated as hedging instruments: | | | |
Interest rate swaps | Other non-interest income | | $ | (51 | ) |
Credit contracts | Other non-interest income | | (15 | ) |
Residential mortgage loan commitments | Mortgage banking income | | 50 |
|
Total | | | $ | (16 | ) |
|
| | | | | |
| Six Months Ended June 30, 2019 |
(amounts in thousands) | Income Statement Location | | Amount of Income Recognized in Earnings |
| | | |
Derivatives not designated as hedging instruments: | | | |
Interest rate swaps | Other non-interest income | | $ | 98 |
|
Credit contracts | Other non-interest income | | 144 |
|
Residential mortgage loan commitments | Mortgage banking income | | 76 |
|
Total | | | $ | 318 |
|
| | | |
| | | Three Months Ended June 30, 2017 | | | | |
| Income Statement Location | | Amount of Income (Loss) Recognized in Earnings | Six Months Ended June 30, 2018 |
(amounts in thousands) | | | | Income Statement Location | | Amount of Income (Loss) Recognized in Earnings |
| | | | |
Derivatives not designated as hedging instruments: | | | | |
Interest rate swaps | Other non-interest income | | $ | (145 | ) | Other non-interest income | | $ | 334 |
|
Credit contracts | Other non-interest income | | 1 |
| Other non-interest income | | (38 | ) |
Residential mortgage loan commitments | Mortgage banking income | | 7 |
| Mortgage banking income | | 73 |
|
Total | | $ | (137 | ) | | $ | 369 |
|
| | | |
|
| | | | | |
| Six Months Ended June 30, 2018 |
| Income Statement Location | | Amount of Income (Loss) Recognized in Earnings |
(amounts in thousands) | | | |
Derivatives not designated as hedging instruments: | | | |
Interest rate swaps | Other non-interest income | | $ | 334 |
|
Credit contracts | Other non-interest income | | (38 | ) |
Residential mortgage loan commitments | Mortgage banking income | | 73 |
|
Total | | | $ | 369 |
|
| | | |
|
| | | | | | | | | |
| Three Months Ended June 30, 2019 |
(amounts in thousands) | Amount of Gain (Loss) Recognized in OCI on Derivatives (1) | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income | | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income |
Derivatives in cash flow hedging relationships: | | | | | |
Interest rate swaps | $ | (10,435 | ) | | Interest expense | | $ | (4 | ) |
|
| | | | | |
| Six Months Ended June 30, 2017 |
| Income Statement Location | | Amount of Income Recognized in Earnings |
(amounts in thousands) | | | |
Derivatives not designated as hedging instruments: | | | |
Interest rate swaps | Other non-interest income | | $ | 338 |
|
Credit contracts | Other non-interest income | | 1 |
|
Residential mortgage loan commitments | Mortgage banking income | | 57 |
|
Total | | | $ | 396 |
|
| | | |
|
| | | | | | | | | |
| Three Months Ended June 30, 2018 |
(amounts in thousands) | Amount of Gain (Loss) Recognized in OCI on Derivatives (1) | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income | | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income |
Derivatives in cash flow hedging relationships: | | | | | |
Interest rate swaps | $ | 1,403 |
| | Interest expense | | $ | 259 |
|
|
| | | | | | | | | |
| Six Months Ended June 30, 2019 |
(amounts in thousands) | Amount of Gain (Loss) Recognized in OCI on Derivatives (1) | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income | | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income |
Derivative in cash flow hedging relationships: | | | | | |
Interest rate swaps | $ | (15,570 | ) | | Interest expense | | $ | 409 |
|
| | | | | |
| | | Three Months Ended June 30, 2018 | | | | | | | |
| Amount of Gain Recognized in OCI on Derivatives (1) | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income | | Amount of Gain Reclassified from Accumulated OCI into Income | Six Months Ended June 30, 2018 |
(amounts in thousands) | | | | | | Amount of Gain (Loss) Recognized in OCI on Derivatives (1) | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income | | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income |
Derivatives in cash flow hedging relationships: | | | | |
Derivative in cash flow hedging relationships: | | | | |
Interest rate swaps | $ | 1,403 |
| | Interest expense | | $ | 259 |
| $ | 2,049 |
| | Interest expense | | $ | 128 |
|
| | | | |
|
| | | | | | | | | |
| Three Months Ended June 30, 2017 |
| Amount of Loss Recognized in OCI on Derivatives (1) | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income | | Amount of Loss Reclassified from Accumulated OCI into Income |
(amounts in thousands) | | | | | |
Derivatives in cash flow hedging relationships: | | | | | |
Interest rate swaps | $ | (420 | ) | | Interest expense | | $ | (767 | ) |
|
| | | | | | | | | |
| Six Months Ended June 30, 2018 |
| Amount of Gain Recognized in OCI on Derivatives (1) | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income | | Amount of Gain Reclassified from Accumulated OCI into Income |
(amounts in thousands) | | | | | |
Derivative in cash flow hedging relationships: | | | | | |
Interest rate swaps | $ | 2,049 |
| | Interest expense | | $ | 128 |
|
| | | | | |
|
| | | | | | | | | |
| Six Months Ended June 30, 2017 |
| Amount of Loss Recognized in OCI on Derivatives (1) | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income | | Amount of Loss Reclassified from Accumulated OCI into Income |
(amounts in thousands) | | | | | |
Derivative in cash flow hedging relationships: | | | | | |
Interest rate swaps | $ | (219 | ) | | Interest expense | | $ | (1,594 | ) |
| | | | | |
(1) Amounts presented are net of taxes. See NOTE 54 - CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) for the total effect on other comprehensive income (loss) from derivatives designated as cash flow hedges for the periods presented.
Credit-risk-related Contingent Features
By entering into derivative contracts, Customers is exposed to credit risk. The credit risk associated with derivatives executed with customers is the same as that involved in extending the related loans and is subject to the same standard credit policies. To mitigate the credit-risk exposure to major derivative dealer counterparties, Customers only enters into agreements with those counterparties that maintain credit ratings of high quality.
Agreements with major derivative dealer counterparties contain provisions whereby default on any of Customers' indebtedness would be considered a default on its derivative obligations. Customers also has entered into agreements that contain provisions under which the counterparty could require Customers to settle its obligations if Customers fails to maintain its status as a well/adequately capitalized institution. As of June 30, 2018, all2019, the fair value of derivatives with major derivative dealer counterparties were in a net asset position.liability position (which includes accrued interest but excludes any adjustment for nonperformance risk) related to these agreements was $45.0 million. In addition, Customers has collateral posting thresholds with certain of these counterparties and at June 30, 2019, had posted $44.8 million of cash as collateral. Customers records cash posted as collateral as a reduction in the outstanding balance of cash and cash equivalents and an increase in the balance of other assets.
Disclosures about Offsetting Assets and Liabilities
The following tables present derivative instruments that are subject to enforceable master netting arrangements. Customers' interest rate swaps with institutional counterparties are subject to master netting arrangements and are included in the table below. Interest rate swaps with commercial banking customers and residential mortgage loan commitments are not subject to master netting arrangements and are excluded from the table below. Customers has not made a policy election to offset its derivative positions.
Offsetting of Financial Assets and Derivative Assets
At June 30, 20182019
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Amount of Recognized Assets | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Amounts of Assets Presented in the Consolidated Balance Sheet | | Gross Amounts Not Offset in the Consolidated Balance Sheet |
(amounts in thousands) | Financial Instruments | | Cash Collateral Received | | Net Amount |
Description | | | | | | | | | | | |
Interest rate swap derivatives with institutional counterparties | $ | 736 |
| | $ | — |
| | $ | 736 |
| | $ | — |
| | $ | — |
| | $ | 736 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Amount of Recognized Assets | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Amounts of Assets Presented in the Consolidated Balance Sheet | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | Net Amount |
| Financial Instruments | | Cash Collateral Received | |
(amounts in thousands) | | | | | | | | | | | |
Description | | | | | | | | | | | |
Interest rate swap derivatives with institutional counterparties | $ | 14,921 |
| | $ | — |
| | $ | 14,921 |
| | $ | — |
| | $ | 11,170 |
| | $ | 3,751 |
|
Offsetting of Financial Assets and Derivative Assets
At December 31, 2018
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Amount of Recognized Assets | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Amounts of Assets Presented in the Consolidated Balance Sheet | | Gross Amounts Not Offset in the Consolidated Balance Sheet |
(amounts in thousands) | Financial Instruments | | Cash Collateral Received | | Net Amount |
Description | | | | | | | | | | | |
Interest rate swap derivatives with institutional counterparties | $ | 7,529 |
| | $ | — |
| | $ | 7,529 |
| | $ | — |
| | $ | 1,860 |
| | $ | 5,669 |
|
Offsetting of Financial Liabilities and Derivative Liabilities
At June 30, 20182019
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Amount of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Amounts of Liabilities Presented in the Consolidated Balance Sheet | | Gross Amounts Not Offset in the Consolidated Balance Sheet |
(amounts in thousands) | Financial Instruments | | Cash Collateral Pledged | | Net Amount |
Description | | | | | | | | | | | |
Interest rate swap derivatives with institutional counterparties | $ | 45,777 |
| | $ | — |
| | $ | 45,777 |
| | $ | — |
| | $ | 44,832 |
| | $ | 945 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Amount of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Amounts of Liabilities Presented in the Consolidated Balance Sheet | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | |
| Financial Instruments | | Cash Collateral Pledged | | Net Amount |
(amounts in thousands) | | | | | | | | | | | |
Description | | | | | | | | | | | |
Interest rate swap derivatives with institutional counterparties | $ | 1,639 |
| | $ | — |
| | $ | 1,639 |
| | $ | — |
| | $ | 2 |
| | $ | 1,637 |
|
Offsetting of Financial Assets and Derivative Assets
At December 31, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Amount of Recognized Assets | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Amounts of Assets Presented in the Consolidated Balance Sheet | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | Net Amount |
| Financial Instruments | | Cash Collateral Received | |
(amounts in thousands) | | | | | | | | | | | |
Description | | | | | | | | | | | |
Interest rate swap derivatives with institutional counterparties | $ | 5,930 |
| | $ | — |
| | $ | 5,930 |
| | $ | — |
| | $ | 5,070 |
| | $ | 860 |
|
Offsetting of Financial Liabilities and Derivative Liabilities
At December 31, 20172018
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Amount of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Amounts of Liabilities Presented in the Consolidated Balance Sheet | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | Net Amount |
(amounts in thousands) | Financial Instruments | | Cash Collateral Pledged | |
Description | | | | | | | | | | | |
Interest rate swap derivatives with institutional counterparties | $ | 9,077 |
| | $ | — |
| | $ | 9,077 |
| | $ | — |
| | $ | 702 |
| | $ | 8,375 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Amount of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Amounts of Liabilities Presented in the Consolidated Balance Sheet | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | Net Amount |
| Financial Instruments | | Cash Collateral Pledged | |
(amounts in thousands) | | | | | | | | | | | |
Description | | | | | | | | | | | |
Interest rate swap derivatives with institutional counterparties | $ | 5,058 |
| | $ | — |
| | $ | 5,058 |
| | $ | — |
| | $ | 4,872 |
| | $ | 186 |
|
NOTE 1211 — BUSINESS SEGMENTS
Customers' segment financial reporting reflects the manner in which its chief operating decision makers allocate resources and assess performance. Management has determined that Customers' operations consist of two reportable segments - CommunityCustomers Bank Business Banking and BankMobile. Each segment generates revenues, manages risk, and offers distinct products and services to targeted customers through different delivery channels. The strategy, marketing, and analysis of these segments vary considerably.
The CommunityCustomers Bank Business Banking segment is delivered predominately to commercial customers in Southeastern Pennsylvania, New York, New Jersey, Massachusetts, Rhode Island, New Hampshire, Washington D.C., and Illinois through a single-point-of-contact business model and provides liquidity to residential mortgage originators nationwide through commercial loans to mortgage companies. Lending and deposit gathering activities are focused primarily on privately held businesses, high-net-worth families, selected commercial real estate lending, and commercial mortgage companies.companies, and equipment finance. Revenues are generated primarily through net interest income (the difference between interest earned on loans and leases, investments, and other interest earning assets and interest paid on deposits and other borrowed funds) and other non-interest income, such as mortgage warehouse transactional fees and bank owned life insurance.BOLI.
The BankMobile segment provides state-of-the-art high-tech digital banking and disbursement services to consumers, students, and the "under banked" nationwide. BankMobile,nationwide, along with "Banking as a division of Customers Bank,Service" offerings with white label partners. BankMobile is a full-service fintech banking platform that is accessible to customers anywhere and anytime through the customer's smartphone or other web-enabled device. Revenues are currently being generated primarily through interchange and card revenue, deposit and wire transfer fees and university fees. The majority of revenue and expenses for BankMobile are related to the segment's operation of the ongoing business acquired through the Disbursement business acquisition.acquisition and costs associated with the development of white label products for its partners.
The following tables present the operating results for Customers' reportable business segments for the three and six month periodsmonths ended June 30, 20182019 and 2017.2018. The segment financial results include directly attributable revenues and expenses. CorporateConsistent with the presentation of segment results to Customers' chief operating decision makers, overhead costs and preferred stock dividends are assigned to the Community Business Banking segment as those expenses are expected to continue following the planned spin-off of BankMobile. Similarly, the preferred stock dividends have been allocated in their entirety to the CommunityCustomers Bank Business Banking segment. The tax benefit assigned to BankMobile was based on an estimated effective tax rate of 23.15% for 2019 and 24.57% for 2018, and 38.00% for 2017, respectively.
|
| | | | | | | | | | | |
| Three Months Ended June 30, 2019 |
(amounts in thousands) | Customers Bank Business Banking | | BankMobile | | Consolidated |
Interest income (1) | $ | 103,014 |
| | $ | 8,936 |
|
| $ | 111,950 |
|
Interest expense | 47,061 |
| | 210 |
|
| 47,271 |
|
Net interest income | 55,953 |
| | 8,726 |
| | 64,679 |
|
Provision for loan losses | (2,206 | ) | | 7,552 |
| | 5,346 |
|
Non-interest income | 970 |
| | 11,066 |
| | 12,036 |
|
Non-interest expense | 38,107 |
| | 21,475 |
|
| 59,582 |
|
Income (loss) before income tax expense (benefit) | 21,022 |
| | (9,235 | ) | | 11,787 |
|
Income tax expense (benefit) | 4,629 |
| | (2,138 | ) | | 2,491 |
|
Net income (loss) | 16,393 |
| | (7,097 | ) | | 9,296 |
|
Preferred stock dividends | 3,615 |
| | — |
| | 3,615 |
|
Net income (loss) available to common shareholders | $ | 12,778 |
| | $ | (7,097 | ) | | $ | 5,681 |
|
| | | | | |
|
| | | | | | | | | | | |
| Three Months Ended June 30, 2018 |
(amounts in thousands) | Customers Bank Business Banking | | BankMobile | | Consolidated |
Interest income (1) | $ | 104,110 |
| | $ | 3,529 |
| | $ | 107,639 |
|
Interest expense | 40,182 |
| | 135 |
| | 40,317 |
|
Net interest income | 63,928 |
| | 3,394 |
| | 67,322 |
|
Provision for loan losses | (1,247 | ) | | 463 |
| | (784 | ) |
Non-interest income | 7,465 |
| | 8,662 |
| | 16,127 |
|
Non-interest expense | 37,721 |
| | 16,029 |
| | 53,750 |
|
Income (loss) before income tax expense (benefit) | 34,919 |
| | (4,436 | ) | | 30,483 |
|
Income tax expense (benefit) | 7,910 |
| | (1,090 | ) | | 6,820 |
|
Net income (loss) | 27,009 |
| | (3,346 | ) | | 23,663 |
|
Preferred stock dividends | 3,615 |
| | — |
| | 3,615 |
|
Net income (loss) available to common shareholders | $ | 23,394 |
| | $ | (3,346 | ) | | $ | 20,048 |
|
| | | | | |
|
| | | | | | | | | | | |
| Three Months Ended June 30, 2018 |
(amounts in thousands) | Community Business Banking | | BankMobile | | Consolidated |
Interest income (1) | $ | 104,110 |
| | $ | 3,529 |
|
| $ | 107,639 |
|
Interest expense | 40,182 |
| | 135 |
|
| 40,317 |
|
Net interest income | 63,928 |
| | 3,394 |
| | 67,322 |
|
Provision for loan losses | (1,247 | ) | | 463 |
| | (784 | ) |
Non-interest income | 7,465 |
| | 8,662 |
| | 16,127 |
|
Non-interest expense | 37,721 |
| | 16,029 |
|
| 53,750 |
|
Income (loss) before income tax expense (benefit) | 34,919 |
| | (4,436 | ) | | 30,483 |
|
Income tax expense (benefit) | 7,910 |
| | (1,090 | ) | | 6,820 |
|
Net income (loss) | 27,009 |
| | (3,346 | ) | | 23,663 |
|
Preferred stock dividends | 3,615 |
| | — |
| | 3,615 |
|
Net income (loss) available to common shareholders | $ | 23,394 |
| | $ | (3,346 | ) | | $ | 20,048 |
|
| | | | | |
|
| | | | | | | | | | | |
| Three Months Ended June 30, 2017 |
(amounts in thousands) | Community Business Banking | | BankMobile | | Consolidated |
Interest income (1) | $ | 91,107 |
| | $ | 2,745 |
| | $ | 93,852 |
|
Interest expense | 25,228 |
| | 18 |
| | 25,246 |
|
Net interest income | 65,879 |
| | 2,727 |
| | 68,606 |
|
Provision for loan losses | 535 |
| | — |
| | 535 |
|
Non-interest income | 6,971 |
| | 11,420 |
| | 18,391 |
|
Non-interest expense | 30,567 |
| | 19,846 |
| | 50,413 |
|
Income (loss) before income tax expense (benefit) | 41,748 |
| | (5,699 | ) | | 36,049 |
|
Income tax expense (benefit) | 14,493 |
| | (2,166 | ) | | 12,327 |
|
Net income (loss) | 27,255 |
| | (3,533 | ) | | 23,722 |
|
Preferred stock dividends | 3,615 |
| | — |
| | 3,615 |
|
Net income (loss) available to common shareholders | $ | 23,640 |
| | $ | (3,533 | ) | | $ | 20,107 |
|
| | | | | |
(1) - Amounts reported include funds transfer pricing of $2.2 million and $3.5 million and $2.7 million for the three months ended June 30, 20182019 and 2017,2018, respectively, credited to BankMobile for the value provided to the CommunityCustomers Bank Business Banking segment for the use of excess low/no cost deposits.
| | | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2019 |
(amounts in thousands) | Community Business Banking | | BankMobile | | Consolidated | Customers Bank Business Banking | | BankMobile | | Consolidated |
Interest income (1) | $ | 196,664 |
| | $ | 7,940 |
| | $ | 204,604 |
| $ | 195,885 |
| | $ | 17,140 |
| | $ | 213,025 |
|
Interest expense | 72,100 |
| | 151 |
| | 72,251 |
| 88,666 |
| | 376 |
| | 89,042 |
|
Net interest income | 124,564 |
| | 7,789 |
| | 132,353 |
| 107,219 |
| | 16,764 |
| | 123,983 |
|
Provision for loan losses | 627 |
| | 706 |
| | 1,333 |
| 770 |
| | 9,343 |
| | 10,113 |
|
Non-interest income | 15,904 |
| | 21,133 |
| | 37,037 |
| 8,547 |
| | 23,207 |
| | 31,754 |
|
Non-interest expense | 72,052 |
| | 33,979 |
| | 106,031 |
| 73,491 |
| | 40,075 |
| | 113,566 |
|
Income (loss) before income tax expense (benefit) | 67,789 |
| | (5,763 | ) | | 62,026 |
| 41,505 |
| | (9,447 | ) | | 32,058 |
|
Income tax expense (benefit) | 15,638 |
| | (1,416 | ) | | 14,222 |
| 9,510 |
| | (2,187 | ) | | 7,323 |
|
Net income (loss) | 52,151 |
| | (4,347 | ) | | 47,804 |
| 31,995 |
| | (7,260 | ) | | 24,735 |
|
Preferred stock dividends | 7,229 |
| | — |
| | 7,229 |
| 7,229 |
| | — |
| | 7,229 |
|
Net income (loss) available to common shareholders | $ | 44,922 |
| | $ | (4,347 | ) | | $ | 40,575 |
| $ | 24,766 |
| | $ | (7,260 | ) | | $ | 17,506 |
|
| | | | | | | | | | |
As of June 30, 2018 | | | | | | |
As of June 30, 2019 | | | | | | |
Goodwill and other intangibles | $ | 3,629 |
| | $ | 13,521 |
| | $ | 17,150 |
| $ | 3,629 |
| | $ | 12,218 |
| | $ | 15,847 |
|
Total assets(2) | $ | 11,017,272 |
| | $ | 75,574 |
| | $ | 11,092,846 |
| $ | 10,555,141 |
| | $ | 627,286 |
| | $ | 11,182,427 |
|
Total deposits | $ | 6,876,688 |
| | $ | 419,266 |
| | $ | 7,295,954 |
| $ | 7,729,580 |
| | $ | 456,197 |
| | $ | 8,185,777 |
|
Total non-deposit liabilities(2) | $ | 2,843,360 |
| | $ | 17,305 |
| | $ | 2,860,665 |
| $ | 1,970,391 |
| | $ | 34,854 |
| | $ | 2,005,245 |
|
| | | | |
|
| | | | |
|
|
|
| | | | | | | | | | | |
| Six Months Ended June 30, 2018 |
(amounts in thousands) | Customers Bank Business Banking | | BankMobile | | Consolidated |
Interest income (1) | $ | 196,664 |
| | $ | 7,940 |
| | $ | 204,604 |
|
Interest expense | 72,100 |
| | 151 |
| | 72,251 |
|
Net interest income | 124,564 |
| | 7,789 |
| | 132,353 |
|
Provision for loan losses | 627 |
| | 706 |
| | 1,333 |
|
Non-interest income | 15,904 |
| | 21,133 |
| | 37,037 |
|
Non-interest expense | 72,052 |
| | 33,979 |
| | 106,031 |
|
Income (loss) before income tax expense (benefit) | 67,789 |
| | (5,763 | ) | | 62,026 |
|
Income tax expense (benefit) | 15,638 |
| | (1,416 | ) | | 14,222 |
|
Net income (loss) | 52,151 |
| | (4,347 | ) | | 47,804 |
|
Preferred stock dividends | 7,229 |
| | — |
| | 7,229 |
|
Net income (loss) available to common shareholders | $ | 44,922 |
| | $ | (4,347 | ) | | $ | 40,575 |
|
| | | | | |
As of June 30, 2018 | | | | | |
Goodwill and other intangibles | $ | 3,629 |
| | $ | 13,521 |
| | $ | 17,150 |
|
Total assets (2) | $ | 11,017,272 |
| | $ | 75,574 |
| | $ | 11,092,846 |
|
Total deposits | $ | 6,876,688 |
| | $ | 419,266 |
| | $ | 7,295,954 |
|
Total non-deposit liabilities (2) | $ | 2,843,360 |
| | $ | 17,305 |
| | $ | 2,860,665 |
|
| | | | | |
|
| | | | | | | | | | | |
| Six Months Ended June 30, 2017 |
(amounts in thousands) | Community Business Banking | | BankMobile | | Consolidated |
Interest income (1) | $ | 169,938 |
| | $ | 7,008 |
| | $ | 176,946 |
|
Interest expense | 45,883 |
| | 39 |
| | 45,922 |
|
Net interest income | 124,055 |
| | 6,969 |
| | 131,024 |
|
Provision for loan losses | 3,585 |
| | — |
| | 3,585 |
|
Non-interest income | 12,398 |
| | 28,746 |
| | 41,144 |
|
Non-interest expense | 60,714 |
| | 39,064 |
| | 99,778 |
|
Income (loss) before income tax expense (benefit) | 72,154 |
| | (3,349 | ) | | 68,805 |
|
Income tax expense (benefit) | 20,609 |
| | (1,273 | ) | | 19,336 |
|
Net income (loss) | 51,545 |
| | (2,076 | ) | | 49,469 |
|
Preferred stock dividends | 7,229 |
| | — |
| | 7,229 |
|
Net income (loss) available to common shareholders | $ | 44,316 |
| | $ | (2,076 | ) | | $ | 42,240 |
|
| | | | | |
As of June 30, 2017 | | | | | |
Goodwill and other intangibles | $ | 3,633 |
| | $ | 13,982 |
| | $ | 17,615 |
|
Total assets | $ | 10,815,752 |
| | $ | 67,796 |
| | $ | 10,883,548 |
|
Total deposits | $ | 7,021,922 |
| | $ | 453,441 |
| | $ | 7,475,363 |
|
Total non-deposit liabilities | $ | 2,481,618 |
| | $ | 16,278 |
| | $ | 2,497,896 |
|
| | | | | |
(1) Amounts reported include funds transfer pricing of $7.9$7.8 million and $7.0$7.9 million, for the six months ended June 30, 20182019 and 2017,2018, respectively, credited to BankMobile for the value provided to the CommunityCustomers Bank Business Banking segment for the use of excess low/no cost deposits.
(2) Amounts reported exclude inter-segment receivables/payables.
NOTE 1312 - NON-INTEREST REVENUES
As providedCustomers' revenue from contracts with customers in NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION, Customers' adoptionscope of ASU 2014-09, Revenue from Contracts with Customers (ASC 606), on January 1, 2018 did not have a significant impact to Customers' consolidated financial statements and, as such, a cumulative effect adjustment to beginning retained earnings was not necessary. Customers determined that its debit and prepaid card interchange income, previously reported on a gross basis for periods prior to adoption will need to be presented on a net basis under this ASU. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606 while prior period amounts were not adjusted and continue to be reported in accordance with the previous accounting guidance underis recognized within non-interest income.
The following tables present Customers' non-interest revenues affected by ASC 605. Debit and prepaid card interchange expense606 by business segment for the three months ended June 30, 2018 and 2017 amounted to $1.2 million and $1.3 million, respectively. Debit and prepaid card interchange expense for the six months ended June 30, 20182019 and 2017 amounted to $2.7 million and $3.2 million, respectively.2018: |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2018 |
(amounts in thousands) | Customers Bank Business Banking | | BankMobile | | Consolidated | | Customers Bank Business Banking | | BankMobile | | Consolidated |
Revenue from contracts with customers: | | | | | | | | | | | |
Revenue recognized at point in time: | | | | | | | | | | | |
Interchange and card revenue | $ | 219 |
| | $ | 6,541 |
| | $ | 6,760 |
| | $ | 183 |
| | $ | 6,199 |
| | $ | 6,382 |
|
Deposit fees | 433 |
| | 2,915 |
| | 3,348 |
| | 294 |
| | 1,338 |
| | 1,632 |
|
University fees - card and disbursement fees | — |
| | 167 |
| | 167 |
| | — |
| | 185 |
| | 185 |
|
Total revenue recognized at point in time | 652 |
| | 9,623 |
| | 10,275 |
| | 477 |
| | 7,722 |
| | 8,199 |
|
Revenue recognized over time: | | | | | | | | | | | |
University fees - subscription revenue | — |
| | 968 |
| | 968 |
| | — |
| | 907 |
| | 907 |
|
Total revenue recognized over time | — |
| | 968 |
| | 968 |
| | — |
| | 907 |
| | 907 |
|
Total revenue from contracts with customers | $ | 652 |
| | $ | 10,591 |
| | $ | 11,243 |
| | $ | 477 |
| | $ | 8,629 |
| | $ | 9,106 |
|
In addition, as part of the enhanced disclosure requirements under the new guidance, Customers is presenting disaggregated revenue by business segment, nature of the revenue stream, and the pattern or timing of revenue recognition. The accounting treatment for interest-related revenues is covered under ASC-310 and is out of the scope of ASU 2014-09.
The following tables present Customers' non-interest revenues affected by ASU 2014-09 by business segment for the three and six months ended June 30, 2018 and 2017:
| | | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | | Six Months Ended June 30, 2018 |
(amounts in thousands) | Community Business Banking | | BankMobile | | Consolidated | Customers Bank Business Banking | | BankMobile | | Consolidated | | Customers Bank Business Banking | | BankMobile | | Consolidated |
Revenue from contracts with customers: | | | | | | | | | | | | | | | | |
Revenue recognized at point in time: | | | | | | | | | | | | | | | | |
Interchange and Card Revenue | $ | 183 |
| | $ | 6,199 |
| | $ | 6,382 |
| |
Deposit Fees | 294 |
| | 1,338 |
| | 1,632 |
| |
University Fees - Card and Disbursement Fees | — |
| | 185 |
| | 185 |
| |
Interchange and card revenue | | $ | 398 |
| | $ | 15,167 |
| | $ | 15,565 |
| | $ | 406 |
| | $ | 15,637 |
| | $ | 16,043 |
|
Deposit fees | | 733 |
| | 4,824 |
| | 5,557 |
| | 580 |
| | 3,144 |
| | 3,724 |
|
University fees - card and disbursement fees | | — |
| | 522 |
| | 522 |
| | — |
| | 512 |
| | 512 |
|
Total revenue recognized at point in time | 477 |
| | 7,722 |
| | 8,199 |
| 1,131 |
| | 20,513 |
| | 21,644 |
| | 986 |
| | 19,293 |
| | 20,279 |
|
Revenue recognized over time: | | | | | | | | | | | | | | | | |
University Fees - Subscription Revenue | — |
| | 907 |
| | 907 |
| |
University fees - subscription revenue | | — |
| | 1,947 |
| | 1,947 |
| | — |
| | 1,777 |
| | 1,777 |
|
Total revenue recognized over time | — |
| | 907 |
| | 907 |
| — |
| | 1,947 |
| | 1,947 |
| | — |
| | 1,777 |
| | 1,777 |
|
| | | | | | |
Total revenue from contracts with customers | $ | 477 |
| | $ | 8,629 |
| | $ | 9,106 |
| $ | 1,131 |
| | $ | 22,460 |
| | $ | 23,591 |
| | $ | 986 |
| | $ | 21,070 |
| | $ | 22,056 |
|
NOTE 13 — LOSS CONTINGENCIES
Halbreiner Matter
On December 16, 2016, Elizabeth Halbreiner and Robert Halbreiner (“Plaintiffs”) filed a Second Amended Complaint captioned Elizabeth Halbreiner and Robert Halbreiner, v. Customers Bank, Robert B.White, Richard A. Ehst, Thomas Jastrem, Timothy D. Romig, Andrew Bowman, Michael Fuoco, Saldutti Law Group f/k/a Saldutti, LLC a/k/a Saldutti Law, LLC, Robert L. Saldutti, LLC, Robert L. Saldutti, Esquire, Brian J. Schaffer, Esquire, Robert Lieber, Jr., Esquire, Jay Sidhu, James Zardecki, Zardecki Associates LLC, No. 01419 in the First Judicial District of Pennsylvania, Court of Common Pleas of Philadelphia, Trial Division. In this Second Amended Complaint, the Plaintiffs generally allege that Customers Bank, and the other named defendants, conspired to misuse the legal
|
| | | | | | | | | | | |
| Three Months Ended June 30, 2017 |
(amounts in thousands) | Community Business Banking | | BankMobile | | Consolidated |
Revenue from contracts with customers: | | | | | |
Revenue recognized at point in time: | | | | | |
Interchange and Card Revenue | $ | 126 |
| | $ | 8,522 |
| | $ | 8,648 |
|
Deposit Fees | 258 |
| | 1,875 |
| | 2,133 |
|
University Fees - Card and Disbursement Fees | — |
| | 206 |
| | 206 |
|
Total revenue recognized at point in time | 384 |
| | 10,603 |
| | 10,987 |
|
Revenue recognized over time: | | | | | |
University Fees - Subscription Revenue | — |
| | 784 |
| | 784 |
|
Total revenue recognized over time | — |
| | 784 |
| | 784 |
|
Total revenue from contracts with customers | $ | 384 |
| | $ | 11,387 |
| | $ | 11,771 |
|
|
| | | | | | | | | | | |
| Six Months Ended June 30, 2018 |
(amounts in thousands) | Community Business Banking | | BankMobile | | Consolidated |
Revenue from contracts with customers: | | | | | |
Revenue recognized at point in time: | | | | | |
Interchange and Card Revenue | $ | 406 |
| | $ | 15,637 |
| | $ | 16,043 |
|
Deposit Fees | 580 |
| | 3,144 |
| | 3,724 |
|
University Fees - Card and Disbursement Fees | — |
| | 512 |
| | 512 |
|
Total revenue recognized at point in time | 986 |
| | 19,293 |
| | 20,279 |
|
Revenue recognized over time: | | | | | |
University Fees - Subscription Revenue | — |
| | 1,777 |
| | 1,777 |
|
Total revenue recognized over time | — |
| | 1,777 |
| | 1,777 |
|
| | | | | |
Total revenue from contracts with customers | $ | 986 |
| | $ | 21,070 |
| | $ | 22,056 |
|
|
| | | | | | | | | | | |
| Six Months Ended June 30, 2017 |
(amounts in thousands) | Community Business Banking | | BankMobile | | Consolidated |
Revenue from contracts with customers: | | | | | |
Revenue recognized at point in time: | | | | | |
Interchange and Card Revenue | $ | 328 |
| | $ | 21,830 |
| | $ | 22,158 |
|
Deposit Fees | 582 |
| | 4,678 |
| | 5,260 |
|
University Fees - Card and Disbursement Fees | — |
| | 595 |
| | 595 |
|
Total revenue recognized at point in time | 910 |
| | 27,103 |
| | 28,013 |
|
Revenue recognized over time: | | | | | |
University Fees - Subscription Revenue | — |
| | 1,579 |
| | 1,579 |
|
Total revenue recognized over time | — |
| | 1,579 |
| | 1,579 |
|
Total revenue from contracts with customers | $ | 910 |
| | $ | 28,682 |
| | $ | 29,592 |
|
The following is a discussionsystem for improper purposes and it also alleges defamation, false light, tortious interference with contractual relations, infliction of revenues withinemotional distress, negligent infliction of emotional distress and loss of consortium. On January 6, 2017, Customers Bank filed Preliminary Objections to the scope of ASC 606:
Card revenue
Card revenue primarily relates to debit and prepaid card fees earned from interchange and ATM fees. Interchange fees are earned whenever Customers' issued debit and prepaid cards are processed through card payment networks. Interchange fees are recognized concurrent with the processingComplaint seeking dismissal of the debit or prepaid card transaction.
Deposit Fees
Deposit fees relate to service charges on deposit accounts for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such as stop-payment charges, wire transfer fees, cashier or money order fees are recognized at the time the transaction is executed. Account maintenance fees, which relate primarily to monthly maintenance and account analysis fees, are earned on a monthly basis representing the period over whichPlaintiff’s claims against Customers satisfies its performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposit accounts are withdrawn from the depositor's account balance.
The revenues recognized at a point in time primarily consist of contracts with no specified terms, but which may be terminated at any time by the customer without penalty. Due to the transactional nature and indefinite term of these agreements, there were no related contract balances that were recorded for these revenue streams on Customers' consolidated balance sheets as of June 30, 2018 and December 31, 2017.
University Fees
University fees represent revenues from higher education institutions and is generated from fees charged for the services provided. For higher education institution clients, Customers through BankMobile facilitates the distribution of financial aid and other refunds to students, while simultaneously enhancing the ability of the higher education institutions to comply with the federal regulations applicable to financial aid transactions. For these services, higher education institution clients are charged an annual subscription fee and/or per-transaction fee (e.g., new card or card replacement fees) for certain transactions. The annual subscription fee is recognized ratably over the period of serviceBank and the transaction fees are recognized whenemployees of Customers Bank named as co-defendants.On April 6, 2017, the transactionCourt dismissed certain counts and determined to allow certain other counts to proceed. Customers Bank intends to vigorously defend itself against these allegations but is completed. BankMobile also enters into long-term (generally three- or five-year initial term) contracts with higher education institutionscurrently unable to provide these refund management disbursement services. Deferred revenue consistspredict the outcome of amounts billed to or received from clients prior tothis lawsuit and therefore cannot determine the performancelikelihood of services. The deferred revenues are earned overloss nor estimate a range of possible loss.
Lifestyle Healthcare Group, Inc. Matter
On January 9, 2017, Lifestyle Healthcare Group, Inc., et al (“Plaintiffs”) filed a Complaint captioned Lifestyle Healthcare Group, Inc.; Fred Rappaport; Victoria Rappaport; Lifestyle Management Group, LLC Trading as Lifestyle Real Estate I, LP; Lifestyle Real Estate I GP, LLC; Daniel Muck; Lifestyle Management Group, LLC; Lifestyle Management Group, LLC Trading as Lifestyle I, LP D/B/A Lifestyle Medspa, Plaintiffs v. Customers Bank, Robert White; Saldutti Law, LLC a/k/a Saldutti Law Group; Robert L. Saldutti, Esquire; and Michael Fuoco, Civil Action No. 01206, in the service period on a straight line basis. AsFirst Judicial District of June 30, 2018 and December 31, 2017, Customers recorded deferred revenuePennsylvania, Court of $3.1 million and $2.0 million, respectively, related to these university subscription contracts. At June 30, 2018 and December 31, 2017, Customers had accounts receivableCommon Pleas of $2.5 million and $1.1 million, respectively,Philadelphia. In this Complaint, which is related to the university fee arrangements.Halbreiner Matter described above, the Plaintiffs generally allege wrongful use of civil proceedings and abuse of process in connection with a case filed and later dismissed in federal court, titled, Customers Bank v. Fred Rappaport, et al., U.S.D.C.E.D. Pa., No. 15-6145. On January 30, 2017, Customers Bank filed Preliminary Objections to the Complaint seeking dismissal of Plaintiff’s claims against Customers Bank and Robert White, named as co-defendants.In response to the Preliminary Objections, Lifestyle filed an Amended Complaint against Customers Bank and Robert White. Customers Bank has filed Preliminary Objections to the Second Amended Complaint seeking dismissal of Plaintiff's claim against Customers Bank and Robert White, named as co-defendants. The Court has dismissed certain counts and determined to allow certain other counts to proceed. Customers Bank intends to vigorously defend itself against these allegations but is currently unable to predict the outcome of this lawsuit and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.
United States Department of Education Matter
In third quarter 2018, Customers received a FPRD letter dated September 5, 2018 from the DOE regarding a focused program review of Higher One's/Customers Bank's administration, as a third party servicer, of the programs authorized pursuant to Title IV of the Higher Education Act of 1965. The DOE program review covered the award years beginning in 2013 through the FPRD issuance date, including the time period when Higher One was acting as the third party servicer prior to Customers' acquisition of the Disbursement business on June 15, 2016. The FPRD determined that, with respect to students enrolled at specified partner institutions, Higher One/Customers did not provide convenient fee-free access to ATMs or bank branch offices in such locations as required by the DOE’s cash management regulations. Those regulations, which were in effect during the period covered by the program review and were revised during that period, seek, among other purposes, to ensure that students can make fee-free cash withdrawals. The FPRD determined that students incurred prohibited costs in accessing Title IV credit balance funds, and the FPRD classifies those costs as financial liabilities of Customers. The FPRD also requires Customers to take prospective action to increase ATM access for students at certain of its partner institutions. Customers disagrees with the FPRD and has elected to appeal the FPRD, including the asserted financial liabilities of $6.5 million, and a request for review has been submitted to trigger an administrative process before the DOE’s Office of Hearing and Appeals. Customers intends to vigorously defend itself against the financial liabilities established in the FPRD through that administrative appeals process and it further intends to pursue resolution of the FPRD’s prospective action requirements during the appeals resolution process. Customers is currently unable to predict the outcome of the appeal and resolution efforts, and therefore cannot determine the likelihood of loss nor estimate a range of possible loss. Customers does not believe that this matter will have a material effect on the consolidated financial statements.
Bureau of the Fiscal Service Notice of Direct Debit (U.S. Treasury Check Reclamation)
On June 21, 2019, Customers received a Notice of Direct Debit (U.S. Treasury Check Reclamation) from the Bureau of the Fiscal Service (“Reclamation Notice”). The Reclamation Notice represents a demand to Customers for the return of funds on a U.S. Treasury check for approximately $5.4 million. Customers filed a written protest pursuant to Code of Federal Regulations, Title 31, Chapter II, Part 240, which resulted in a suspension of the direct debit by the Bureau of the Fiscal Service. Customers is currently unable to predict the outcome of the written protest, and therefore cannot determine the likelihood of loss nor estimate a range of loss. Customers intends to vigorously defend itself against the Reclamation Notice. Customers does not believe that this matter will have a material effect on the consolidated financial statements.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - As Restated.Operations.
Cautionary Note Regarding Forward-Looking Statements
This report and all attachments hereto, as well as other written or oral communications made from time to time by us, may contain forward-looking information within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements relate to future events or future predictions, including events or predictions relating to future financial performance, and are generally identifiable by the use of forward-looking terminology such as “believe,” “expect,” “may,” “will,” “should,” “plan,” “intend,” or “anticipate” or the negative thereof or comparable terminology. Forward-looking statements reflect numerous assumptions, estimates and forecasts as to future events. No assurance can be given that the assumptions, estimates and forecasts underlying such forward-looking statements will accurately reflect future conditions, or that any guidance, goals, targets or projected results will be realized. The assumptions, estimates and forecasts underlying such forward-looking statements involve judgments with respect to, among other things, future economic, competitive, regulatory and financial market conditions and future business decisions, which may not be realized and which are inherently subject to significant business, economic, competitive and regulatory uncertainties and known and unknown risks, including the risks described under “Risk Factors” in Customers Bancorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 20172018 (the “Original“2018 Form 10-K Filing”10-K”), which was filed with the SEC on February 23, 2018, as such factors may be updated from time to time in our filings with the SEC, including our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Our actual results may differ materially from those reflected in the forward-looking statements. You are cautioned not to place undue reliance on any forward-looking statements we make, which speak only as of the date they are made. We do not undertake any obligation to release publicly or otherwise provide any revisions to any forward-looking statements we may make, including any forward-looking financial information, to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events, except as may be required under applicable law.
Management’s discussion and analysis represents an overview of the financial condition and results of operations, and highlights the significant changes in the financial condition and results of operations, as presented in the accompanying consolidated financial statements for Customers Bancorp, Inc. (the "Bancorp" or "Customers Bancorp"), a financial holding company, and its wholly owned subsidiaries, including Customers Bank (the "Bank"), collectively referred to as "Customers" herein. This information is intended to facilitate your understanding and assessment of significant changes and trends related to Customers' financial condition and results of operations as of and for the three and six months ended June 30, 2018.2019. All quarterly information in this Management’s Discussion and Analysis is unaudited. You should read this section in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Customers' 20172018 Form 10-K/A.10-K.
Restatement of Previously Issued Financial Statements
In November 2018, Customers determined that its commercial mortgage warehouse loans should have been classified as loans receivable, rather than loans held for sale. The discussion and analysis included herein has been amended and restated to present the corrected classification of Customers' commercial mortgage warehouse lending activities. Additional discussion regarding the restatement of previously issued financial statements is included in the Explanatory Note to this Form 10-Q/A and NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION included in Part 1 of this Form 10-Q/A.
Critical Accounting Policies
Customers has adopted various accounting policies that govern the application of accounting principles generally accepted in the United States of America and that are consistent with general practices within the banking industry in the preparation of its financial statements. Customers' significant accounting policies are described in “NOTE 42 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION” in Customers' audited financial statements included in its 20172018 Form 10-K/A10-K and updated in this Form 10-Q/A10-Q for the quarterly period ended June 30, 20182019 in “NOTE 32 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION."
Certain accounting policies involve significant judgments and assumptions by Customers that have a material impact on the carrying value of certain assets and liabilities. Customers considers these accounting policies to be critical accounting policies. The judgment and assumptions used are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions management makes, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of Customers' assets and liabilities and its results of operations.
Overview
Customers' strategic priorities include creating shareholder value through improved profitability, targeting a return on average assets of approximately 1.25% and a double-digit return on tangible common equity within the next 2 - 3 years. Customers is also targeting NIM expansion to 2.80% by fourth quarter 2019, with a full-year 2019 NIM above 2.70%, through an expected shift in asset and funding mix. Total assets at year-end 2019 are expected to be under $10 billion, while the average balance of interest-earning assets for 2019 are expected to be comparable to 2018 average interest-earning assets, and the BankMobile segment is expected to become profitable by the fourth quarter 2019. Customers intends to continue to de-emphasize its lower-yielding multi-family loan portfolio, and invest in higher-yielding commercial and industrial and other consumer loan portfolios with the multi-family loan portfolio run-off. Similarly, Customers plans to replace higher-rate non-core deposits and borrowings with less expensive core deposits.
In late November 2018, BankMobile's first White Label banking partnership went live in beta test phase, offering BankMobile's best in class banking products to the partner's broad customer base. On April 18, 2019, the partner made a public announcement regarding the
partnership and began the first phase of national digital marketing efforts. At June 30, 2019, the partnership had generated $46.5 million in total deposits.
Second Quarter Events of Note
Customers reported net income available to common shareholders of $20.0$5.7 million, or $0.62 per diluted share, for second quarter 2018. Customers' net income to common shareholders was $40.6 million, or $1.26$0.18 per diluted share, for the sixthree months ended June 30, 2019. The second quarter 2019 financial results included certain notable charges, including a $7.5 million loss realized upon the acquisition of certain interest-only GNMA securities that served as the primary collateral for a mortgage warehouse customer that unexpectedly ceased operations in second quarter 2019 ($0.18 per diluted share), accrued severance expense of $0.5 million resulting from Customers continued analysis of staffing and de-emphasis of less profitable lines of business ($0.01 per diluted share), and other securities losses of $0.3 million ($0.01 per diluted share). NIM expanded 5 basis points from first quarter 2019 to 2.64% in second quarter 2019, which marks Customers' third consecutive quarter of NIM expansion from the trough of 2.47% reported in third quarter 2018.
Total assets were $11.1$11.2 billion at June 30, 2018,2019, an increase of $1.3 billion from December 31, 2017, including $405.82018. The increase in total assets was primarily driven by a $1.2 billion increase in total loans and leases. Mortgage warehouse loans, at fair value, increased $596.1 million, or 42.4%, commercial and industrial loans (including owner occupied commercial real estate) increased $233.3 million, or 12.0%, commercial real estate non-owner occupied loans increased $51.5 million, or 4.6%, residential real estate loans increased $82.3 million, or 14.5%, and other consumer loans increased $478.8 million, or 647%. As planned, multi-family loans decreased $267.8 million, or 8.2%. Total asset growth reflected a stronger than expected seasonal increase in mortgage warehouse loans in second quarter 2019 primarily resulting from increased refinancing activity. Customers plans to reduce total assets to below $10 billion at year-end 2019 by reducing its multi-family loan portfolio by $1 billion or more in the second half of total loan growth2019 and $689.6 million of investment securities growth. Customers expects a more moderate pace of growth through the restnormal seasonality of the year with an emphasis on shifting from lower yieldingmortgage warehouse business, which tends to higher yielding assets, anddecline in the development of sustainable deposits to replace short-term borrowings and fund future growth.winter months.
Asset quality remained exceptionalremains strong with non-performing loansNPLs of $26.0$14.8 million, or 0.29%0.15% of total loans and leases, and total non-performing assets (non-performing loans(NPLs and other real estate owned)OREO) only 0.25%0.14% of total assets at June 30, 2018,2019, reflecting Customers' conservative lending practices and continued focus on credit risk management. Customers' level of non-performing loansNPLs to total loans and leases at June 30, 20182019 remained well below industry average non-performing loansNPLs to total loans and leases of 1.26%1.13% and Customers' peer group non-performing loansNPLs to total loans and leases of 0.82%0.74% (peer data is the most recent period available from S&P Global Market Intelligence). Customers' capital ratios at the holding company and its bank subsidiary continue to exceed the “well-capitalized” threshold established by regulation at the Bank and exceed the applicable Basel III regulatory threshold ratios for the Bancorp and the Bank at June 30, 2018. Customers Bancorp's Tier 1 leverage ratio was 8.87%, and its total risk-based capital ratio was 12.55%, at June 30, 2018.
2019.
Results of Operations
Three Months EndedThe following table sets forth the condensed statements of income for the three and six months ended June 30, 2018 Compared to Three Months Ended June 30, 20172019 and 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | QTD | | Six Months Ended June 30, | | YTD |
(dollars in thousands) | 2019 | | 2018 | | Change | | % Change | | 2019 | | 2018 | | Change | | % Change |
Net interest income | $ | 64,679 |
| | $ | 67,322 |
| | $ | (2,643 | ) | | (3.9 | )% | | $ | 123,983 |
| | $ | 132,353 |
| | $ | (8,370 | ) | | (6.3 | )% |
Provision for loan and lease losses | 5,346 |
| | (784 | ) | | 6,130 |
| | NM |
| | 10,113 |
| | 1,333 |
| | 8,780 |
| | 658.7 | % |
Total non-interest income | 12,036 |
| | 16,127 |
| | (4,091 | ) | | (25.4 | )% | | 31,754 |
| | 37,037 |
| | (5,283 | ) | | (14.3 | )% |
Total non-interest expense | 59,582 |
| | 53,750 |
| | 5,832 |
| | 10.9 | % | | 113,566 |
| | 106,031 |
| | 7,535 |
| | 7.1 | % |
Income before income income tax expense | 11,787 |
| | 30,483 |
| | (18,696 | ) | | (61.3 | )% | | 32,058 |
| | 62,026 |
| | (29,968 | ) | | (48.3 | )% |
Income tax expense | 2,491 |
| | 6,820 |
| | (4,329 | ) | | (63.5 | )% | | 7,323 |
| | 14,222 |
| | (6,899 | ) | | (48.5 | )% |
Net income | 9,296 |
| | 23,663 |
| | (14,367 | ) | | (60.7 | )% | | 24,735 |
| | 47,804 |
| | (23,069 | ) | | (48.3 | )% |
Preferred stock dividends | 3,615 |
| | 3,615 |
| | — |
| | — | % | | 7,229 |
| | 7,229 |
| | — |
| | — | % |
Net income available to common shareholders | $ | 5,681 |
| | $ | 20,048 |
| | $ | (14,367 | ) | | (71.7 | )% | | $ | 17,506 |
| | $ | 40,575 |
| | $ | (23,069 | ) | | (56.9 | )% |
Customers reported net income available to common shareholders decreased $0.1of $5.7 million or 0.3%,and $17.5 million for the three and six months ended June 30, 2019, respectively, compared to $20.0 million and $40.6 million for the three and six months ended June 30, 2018, respectively. Factors contributing to the change in net income available to common shareholders for the three and six months ended June 30, 2019 compared to the three and six months ended June 30, 2018 were as follows:
Net interest income
Net interest income decreased $2.6 million for the three months ended June 30, 2018 when2019 compared to net income availablethe three months ended June 30, 2018 as average interest-earning assets decreased by $0.5 billion. NIM expanded by two basis points to common shareholders of $20.1 million2.64% for the three months ended June 30, 2017. The decreased net income available to common shareholders primarily resulted2019 from an increase in non-interest expense of $3.3 million, or 6.6%, a decrease in non-interest income of $2.3 million, or 12.3%, and a decrease in net interest income of $1.3 million, or 1.9%, offset in part by a decrease in income tax expense of $5.5 million and a decrease in the provision for loan losses of $1.3 million.
Net interest income of $67.3 million decreased $1.3 million, or 1.9%,2.62% for the three months ended June 30, 2018 when compared to net interest incomeas the shift in the mix of $68.6 millioninterest-earning assets drove a 38 basis point increase in the yield on interest-earnings assets for the three months ended June 30, 2017. This decrease2019, offset in part by higher funding costs as the cost of interest-bearing liabilities increased by 51 basis points for the three months ended June 30, 2019. Compared to the three months ended June 30, 2018, total loan yields increased 27 basis points to 4.62%, and total investment securities yields increased 55 basis points to 3.77% mostly due to the sale of $495 million of lower-yielding securities during the three months ended September 30, 2018. Given the Federal Reserve interest rate hikes in 2018 and the associated increases in market interest rates, the cost of interest-bearing deposits increased 58 basis points to 2.23% and borrowing costs increased 73 basis points to 3.09% for the three months ended June 30, 2019. Customers' total costs of deposits (including interest-bearing and non-interest-bearing) were 1.85% and 1.39% for the three months ended June 30, 2019 and 2018, respectively, an increase of 46 basis points.
Net interest income decreased $8.4 million for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 as average interest-earning assets decreased by $0.5 billion. NIM narrowed by two basis points to 2.62% for the six months ended June 30, 2019 from 2.64% for the six months ended June 30, 2018. The NIM compression largely resulted primarily from ana 60 basis point increase in the cost of funds, primarily in money market deposit accounts, certificates of deposit, and short term borrowings, drivinginterest-bearing liabilities for the six months ended June 30, 2019, partially offset by a 16 basis point decline in net interest margin (tax-equivalent) to 2.62% for second quarter 2018 from 2.78% for second quarter 2017. The 58 basis point higher cost of funds was offset in part by an increase in the average balance of interest-earning assets of $0.4 billion over the prior year period and a 3741 basis point increase in the yield on loans.interest-earning assets for the six months ended June 30, 2019. The 456 basis point increase in the yield on other consumer loans principally reflects the purchase of other consumer loans totaling $447.0 million during the six months ended June 30, 2019. The yield on commercial and industrial loans and leases increased 61 basis points for the six months ended June 30, 2019 given higher market interest rates. Given the Federal Reserve interest rate hikes in 2018 and the associated increases in market interest rates, the cost of interest-bearing deposits increased 67 basis points to 2.19% and borrowing costs increased 73 basis points to 3.04% for the six months ended June 30, 2019. Customers' total costs of deposits (including interest-bearing and non-interest-bearing) were 1.80% and 1.26% for the six months ended June 30, 2019 and 2018, respectively, an increase of 54 basis points.
Provision for loan and lease losses
The $6.1 million increase in the provision for loan and lease losses for the three months ended June 30, 2019 compared to the three months ended June 30, 2018, reflects Customers' initiative to increase other consumer and commercial and industrial loans and leases. The provision for loan and lease losses decreased $1.3for the three months ended June 30, 2019 included $8.0 million for loan growth in the other consumer and commercial and industrial loan and lease portfolios, net of the multi-family loan run-off, and $0.1 million for impaired loan provisions, offset in part by a release of reserve of $2.9 million resulting from refinement in assumptions within the allowance for loan losses due to lower than expected credit losses than previously estimated, primarily in the residential mortgage loan portfolio. The provision for loan and lease losses for the three months ended June 30, 2018 when compared to the provision for loan losses of $0.5 million for the three months ended June 30, 2017. The second quarter 2018 provision for loan losses included a release of $0.8 million that resultedresulting from continued strong asset quality and lower incurred losses than previously estimated and a release of $0.3 million for impaired loans, offset in part by provisions of $0.3 million of provision for loan and lease portfolio growth.
Non-interest income of $16.1 million decreased $2.3 million, or 12.3%, Net charge-offs for the three months ended June 30, 2018 when2019 were $0.6 million, or 3 basis points of average loans and leases on an annualized basis, compared to non-interest incomenet charge-offs of $18.4$0.4 million, or 2 basis points on an annualized basis for the three months ended June 30, 2017. Included within non-interest income2018.
The $8.8 million increase in the provision for loan and lease losses for the threesix months ended June 30, 2019 compared to six months ended June 30, 2018, was $1.2 million of debitreflects Customers' initiatives to increase other consumer and prepaid card interchange expense, which was recorded as a reduction tocommercial and industrial loans and leases. The provision for loan and lease losses for the gross amount of interchange and card revenue of $7.6 million as a result of the adoption of the new revenue recognition guidance as described in NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION on a modified retrospective basis. Prior to the adoption of the new revenue recognition guidance, these expenses were included within non-interest expense and reported as technology, communication and bank operations expense. For the threesix months ended June 30, 2017, debit2019 included $12.2 million for growth in the other consumer and prepaid card interchange expense was $1.3 million. Ifcommercial and industrial loan and lease portfolios, net of the three months ended June 30, 2017 was presented onmulti-family run-off, and $0.7 million for impaired loan provisions, offset in part by a consistent basis withrelease of reserve of $2.9 million resulting from refinement in assumptions within the threeallowance for loan losses due to lower than expected credit losses than previously estimated, primarily in the residential mortgage loan portfolio. The provision for loan and lease losses for the six months ended June 30, 2018 the reported amountincluded provisions of non-interest income of $18.4$1.2 million would have been $17.1for loan and lease portfolio growth and $1.1 million for impaired loan provisions, offset in part by a $0.9 million release resulting from improved asset quality and the gross interchange and card revenue of $8.6 million would have been presented net of the debit and prepaid card interchange expense of $1.3 million, or $7.4 million. When presented on a consistent basis, the $1.0 million decline in interchange and card revenue was largely the result of lower activity volumes in the BankMobile business segment. Other decreases in total non-interest incomeincurred losses than previously estimated. Net charge-offs for the threesix months ended June 30, 20182019 were $1.7 million, or 4 basis points of average loans and leases on an annualized basis, compared to net charge-offs of $1.1 million, or 2 basis points on an annualized basis for the threesix months ended June 30, 2017 included decreases in mortgage warehouse transactional fees and deposit fees of $0.62018.
Non-interest income
The $4.1 million and $0.5 million, respectively, primarily resulting from reduced transaction volumes. For the three months ended June 30, 2017, Customers also realized $3.2 million of gains from the sale of investment securities. The decreasesdecrease in non-interest income for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 primarily resulted from a $7.5 million loss upon acquisition of interest-only GNMA securities and decreases of $0.9 million in gains on sales of SBA loans, and $0.3 million in mortgage warehouse transactional fees. These decreases were partially offset in part by an increaseincreases of $1.7 million in deposit fees, $1.6 million in commercial lease income, $0.9 million in other non-interest income, of $1.5and $0.4 million primarily from increased income on commercial operating leases of $1.1 million,in interchange and a decline in other-than temporary impairment losses from the $2.9 million recognized in second quarter 2017.
Non-interest expense of $53.8 million increased $3.3 million, or 6.6%,card revenue for the three months ended June 30, 2018 when2019 compared to non-interest expense of $50.4 million for the three months ended June 30, 2017. This increase2018.
The $5.3 million decrease in non-interest income for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily resulted from a $7.5 million loss upon acquisition of interest-only GNMA securities and decreases of $2.3 million in gains on sales of SBA loans, $0.9 million in mortgage warehouse transaction fees, and $0.5 million in interchange and card revenue. These decreases were offset in part by increases of $3.2 million in salariescommercial lease income and employee benefits of $4.1$1.8 million as Customers continuesin deposit fees for the six months ended June 30, 2019 compared to hire new team membersthe six months ended June 30, 2018.
Non-interest expense
The $5.8 million increase in the markets that it serves. Total non-interest expense for the three months ended June 30, 2018 excludes $1.2 million of debit and prepaid card interchange expense as a result of the adoption of the new revenue recognition guidance on January 1, 2018. If the three months ended June 30, 2017 was presented on a consistent basis with2019 compared to the three months ended June 30, 2018 the reported amountprimarily resulted from increases of non-interest expense of $50.4$1.9 million would have been $49.1in professional services, $1.3 million andin commercial lease depreciation, $1.2 million in provision for operating losses, $1.1 million in technology, communication, and bank operations, $1.1 million in other non-interest expense, and $1.0 million in advertising and promotion expenses. These increases were offset in part by decreases of $8.9$0.9 million would have been $7.6 million. When presented on a consistent basis, technology, communicationin merger-related expenses and bank operations expense increased $3.7$0.8 million or 48.7%, to $11.3 millionin salaries and employee benefits for the three months ended June 30, 2019 compared to the three months ended June 30, 2018.
The $7.5 million increase in non-interest expense for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily resulted from $7.6increases of $3.1 million in technology, communication, and bank operations, $2.4 million in commercial lease depreciation, $1.5 million in advertising and promotion expenses, $1.5 million in provision for operating losses, and $0.5 million in professional services. These increases were offset in part by decreases of $1.0 million in merger-related expenses and $0.3 million in loan workout expenses for the six months ended June 30, 2019 compared to the six months ended June 30, 2018.
Income tax expense
Customers' effective tax rate was 21.1% for the three months ended June 30, 2017 given the continued investment in the BankMobile segment infrastructure and Customers' recent system conversion. These increases in non-interest expense were partially offset by a decrease in professional services of $2.4 million, primarily attributable2019 compared to reductions in consulting, legal and other professional services as management continues its efforts to monitor and control expenses.
Income tax expense of $6.8 million decreased $5.5 million, or 44.7%,22.4% for the three months ended June 30, 2018 when compared2018. The decrease in the effective tax rate primarily resulted from a favorable return to income tax expense of $12.3 million forprovision adjustment recorded during the three months ended June 30, 2017. The decrease in income tax expense was driven primarily by a lower federal income tax rate from the adoption of the Tax Cut and Jobs Act of 2017, as well as by a decrease in pre-tax income of $5.6 million in second quarter 2018 compared to second quarter 2017. 2019.
Customers' effective tax rate decreased to 22.37%was 22.8% for the threesix months ended June 30, 2018,2019 compared to 34.20%22.9% for the same period in 2017.six months ended June 30, 2018.
Preferred stock dividends
Preferred stock dividends were $3.6 million and $7.2 million for the three and six months ended June 30, 2019 and 2018, respectively. There were no changes to the amount of preferred stock outstanding or the dividends paid during the three and 2017, respectively.six months ended June 30, 2019 and 2018.
NET INTEREST INCOME
Net interest income (the difference between the interest earned on loans and leases, investments and interest-earning deposits with banks, and interest paid on deposits, borrowed funds and subordinated debt) is the primary source of Customers' earnings.
The following table summarizestables summarize Customers' net interest income, and related interest spread, and net interest margin for the periods indicated.
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
| 2018 | | 2017 |
| Average Balance | | Interest Income or Expense | | Average Yield or Cost (%) | | Average Balance | | Interest Income or Expense | | Average Yield or Cost (%) |
(dollars in thousands) | | | | | | | | | | | |
Assets | | | | | | | | | | | |
Interest-earning deposits | $ | 188,880 |
| | $ | 839 |
| | 1.78 | % | | $ | 203,460 |
| | $ | 549 |
| | 1.08 | % |
Investment securities (1) | 1,213,989 |
| | 9,765 |
| | 3.22 | % | | 1,066,277 |
| | 7,823 |
| | 2.94 | % |
Loans: | | | | | | | | | | | |
Commercial loans to mortgage companies | 1,760,519 |
| | 21,626 |
| | 4.93 | % | | 1,762,469 |
| | 18,198 |
| | 4.14 | % |
Multi-family loans | 3,561,679 |
| | 34,646 |
| | 3.90 | % | | 3,508,619 |
| | 32,762 |
| | 3.75 | % |
Commercial and industrial loans (2) | 1,713,150 |
| | 20,303 |
| | 4.75 | % | | 1,405,150 |
| | 14,746 |
| | 4.21 | % |
Non-owner occupied commercial real estate | 1,269,373 |
| | 12,830 |
| | 4.05 | % | | 1,299,809 |
| | 12,964 |
| | 4.00 | % |
All other loans | 482,098 |
| | 5,835 |
| | 4.85 | % | | 542,093 |
| | 5,890 |
| | 4.36 | % |
Total loans (3) | 8,786,819 |
| | 95,240 |
| | 4.35 | % | | 8,518,140 |
| | 84,560 |
| | 3.98 | % |
Other interest-earning assets | 139,842 |
| | 1,795 |
| | 5.15 | % | | 105,908 |
| | 920 |
| | 3.48 | % |
Total interest-earning assets | 10,329,530 |
| | 107,639 |
| | 4.18 | % | | 9,893,785 |
| | 93,852 |
| | 3.80 | % |
Non-interest-earning assets | 391,660 |
| | | | | | 371,548 |
| | | | |
Total assets | $ | 10,721,190 |
| | | | | | $ | 10,265,333 |
| | | | |
Liabilities | | | | | | | | | | | |
Interest checking accounts | $ | 554,441 |
| | 2,183 |
| | 1.58 | % | | $ | 346,940 |
| | 634 |
| | 0.73 | % |
Money market deposit accounts | 3,310,979 |
| | 13,444 |
| | 1.63 | % | | 3,456,638 |
| | 8,369 |
| | 0.97 | % |
Other savings accounts | 36,784 |
| | 25 |
| | 0.27 | % | | 41,491 |
| | 30 |
| | 0.29 | % |
Certificates of deposit | 1,960,007 |
| | 8,530 |
| | 1.75 | % | | 2,413,241 |
| | 7,195 |
| | 1.20 | % |
Total interest-bearing deposits | 5,862,211 |
| | 24,182 |
| | 1.65 | % | | 6,258,310 |
| | 16,228 |
| | 1.04 | % |
Borrowings | 2,736,644 |
| | 16,135 |
| | 2.36 | % | | 1,951,282 |
| | 9,018 |
| | 1.85 | % |
Total interest-bearing liabilities | 8,598,855 |
| | 40,317 |
| | 1.88 | % | | 8,209,592 |
| | 25,246 |
| | 1.23 | % |
Non-interest-bearing deposits | 1,109,527 |
| | | | | | 1,082,799 |
| | | | |
Total deposits and borrowings | 9,708,382 |
| | | | 1.67 | % | | 9,292,391 |
| | | | 1.09 | % |
Other non-interest-bearing liabilities | 84,788 |
| | | | | | 74,429 |
| | | | |
Total liabilities | 9,793,170 |
| | | | | | 9,366,820 |
| | | | |
Shareholders’ Equity | 928,020 |
| | | | | | 898,513 |
| | | | |
Total liabilities and shareholders’ equity | $ | 10,721,190 |
| | | | | | $ | 10,265,333 |
| | | | |
Net interest income | | | 67,322 |
| | | | | | 68,606 |
| | |
Tax-equivalent adjustment (4) | | | 171 |
| | | | | | 104 |
| | |
Net interest earnings | | | $ | 67,493 |
| | | | | | $ | 68,710 |
| | |
Interest spread | | | | | 2.51 | % | | | | | | 2.71 | % |
Net interest margin | | | | | 2.61 | % | | | | | | 2.78 | % |
Net interest margin tax equivalent (4) | | | | | 2.62 | % | | | | | | 2.78 | % |
| |
(1) | For presentation in this table, average balances and the corresponding average yields for investment securities are based upon historical cost, adjusted for other-than-temporary impairment and amortization of premiums and accretion of discounts. |
| |
(2) | Includes owner occupied commercial real estate loans. |
| |
(3) | Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees. |
| |
(4) | Non-GAAP tax-equivalent basis, using an estimated marginal tax rate of 26% for the three months ended June 30, 2018 and 35% for the three months ended June 30, 2017, presented to approximate interest income as a taxable asset. Management uses non-GAAP measures to present historical periods comparable to the current period presentation. In addition, management believes the use of these non-GAAP measures provides additional clarity when assessing Customers’ financial results. These disclosures should not be viewed as substitutes for results determined to be in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other entities. |
The following table presents the dollar amount of changes in interest income and interest expense for the major categories of interest-earning assets and interest-bearing liabilities.liabilities for the three and six months ended June 30, 2019 and 2018. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.
| | | Three Months Ended June 30, | |
| 2018 vs. 2017 | | | | | | | | | | | | | | | | | | | |
| Increase (Decrease) due to Change in | | | Three Months Ended June 30, | | Three Months Ended June 30, |
| Rate | | Volume | | Total | 2019 | | 2018 | | 2019 vs. 2018 |
(amounts in thousands) | | | | | | Average balance | | Interest income or expense | | Average yield or cost | | Average balance | | Interest income or expense | | Average yield or cost | | Due to rate | | Due to volume | | Total |
Interest income | | | | | | |
Assets | | | | | | | | | | | | | | | | | | |
Interest-earning deposits | $ | 332 |
| | $ | (42 | ) | | $ | 290 |
| $ | 78,666 |
| | $ | 590 |
| | 3.01 | % | | $ | 188,880 |
| | $ | 839 |
| | 1.78 | % | | $ | 395 |
| | $ | (644 | ) | | $ | (249 | ) |
Investment securities | 797 |
| | 1,145 |
| | 1,942 |
| |
Loans: | | | | | | |
Investment securities (1) | | 687,048 |
| | 6,481 |
| | 3.77 | % | | 1,213,989 |
| | 9,765 |
| | 3.22 | % | | 1,462 |
| | (4,746 | ) | | (3,284 | ) |
Loans and leases: | | | | | | | | | | | | | | | | | | |
Commercial loans to mortgage companies | 3,448 |
| | (20 | ) | | 3,428 |
| 1,658,070 |
| | 19,678 |
| | 4.76 | % | | 1,760,519 |
| | 21,626 |
| | 4.93 | % | | (725 | ) | | (1,223 | ) | | (1,948 | ) |
Multi-family loans | 1,383 |
| | 501 |
| | 1,884 |
| 3,097,537 |
| | 29,630 |
| | 3.84 | % | | 3,561,679 |
| | 34,646 |
| | 3.90 | % | | (530 | ) | | (4,486 | ) | | (5,016 | ) |
Commercial and industrial loans, including owner occupied commercial real estate | 2,062 |
| | 3,495 |
| | 5,557 |
| |
Non-owner occupied commercial real estate | 172 |
| | (306 | ) | | (134 | ) | |
All other loans | 634 |
| | (689 | ) | | (55 | ) | |
Total loans | 7,699 |
| | 2,981 |
| | 10,680 |
| |
Commercial and industrial loans and leases (2) | | 2,041,315 |
| | 26,411 |
| | 5.19 | % | | 1,713,150 |
| | 20,303 |
| | 4.75 | % | | 1,991 |
| | 4,117 |
| | 6,108 |
|
Non-owner occupied commercial real estate loans | | 1,181,455 |
| | 13,329 |
| | 4.53 | % | | 1,269,373 |
| | 13,750 |
| | 4.34 | % | | 574 |
| | (995 | ) | | (421 | ) |
Residential mortgages | | 723,160 |
| | 7,724 |
| | 4.28 | % | | 477,932 |
| | 4,867 |
| | 4.08 | % | | 249 |
| | 2,608 |
| | 2,857 |
|
Other consumer loans | | 289,511 |
| | 6,795 |
| | 9.41 | % | | 4,166 |
| | 48 |
| | 4.62 | % | | 101 |
| | 6,646 |
| | 6,747 |
|
Total loans and leases (3) | | 8,991,048 |
| | 103,567 |
| | 4.62 | % | | 8,786,819 |
| | 95,240 |
| | 4.35 | % | | 6,058 |
| | 2,269 |
| | 8,327 |
|
Other interest-earning assets | 524 |
| | 351 |
| | 875 |
| 94,388 |
| | 1,312 |
| | 5.58 | % | | 139,842 |
| | 1,795 |
| | 5.15 | % | | 140 |
| | (623 | ) | | (483 | ) |
Total interest income | 9,352 |
| | 4,435 |
| | 13,787 |
| |
Interest expense | | | | | | |
Total interest-earning assets | | 9,851,150 |
| | 111,950 |
| | 4.56 | % | | 10,329,530 |
| | 107,639 |
| | 4.18 | % | | 9,462 |
| | (5,151 | ) | | 4,311 |
|
Non-interest-earning assets | | 520,692 |
| |
| | | | 391,660 |
| |
| | | | | | | | |
Total assets | | $ | 10,371,842 |
| |
| | | | $ | 10,721,190 |
| |
| | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | | |
Interest checking accounts | 1,021 |
| | 528 |
| | 1,549 |
| $ | 836,154 |
| | 4,078 |
| | 1.96 | % | | $ | 554,441 |
| | 2,183 |
| | 1.58 | % | | 609 |
| | 1,286 |
| | 1,895 |
|
Money market deposit accounts | 5,442 |
| | (367 | ) | | 5,075 |
| 3,168,957 |
| | 17,842 |
| | 2.26 | % | | 3,310,979 |
| | 13,444 |
| | 1.63 | % | | 4,998 |
| | (600 | ) | | 4,398 |
|
Other savings accounts | (2 | ) | | (3 | ) | | (5 | ) | 484,303 |
| | 2,608 |
| | 2.16 | % | | 36,784 |
| | 25 |
| | 0.27 | % | | 943 |
| | 1,640 |
| | 2,583 |
|
Certificates of deposit | 2,867 |
| | (1,532 | ) | | 1,335 |
| 1,972,792 |
| | 11,452 |
| | 2.33 | % | | 1,960,007 |
| | 8,530 |
| | 1.75 | % | | 2,866 |
| | 56 |
| | 2,922 |
|
Total interest-bearing deposits | 9,328 |
| | (1,374 | ) | | 7,954 |
| |
Total interest-bearing deposits (4) | | 6,462,206 |
| | 35,980 |
| | 2.23 | % | | 5,862,211 |
| | 24,182 |
| | 1.65 | % | | 9,137 |
| | 2,661 |
| | 11,798 |
|
Borrowings | 2,894 |
| | 4,223 |
| | 7,117 |
| 1,462,362 |
| | 11,291 |
| | 3.09 | % | | 2,736,644 |
| | 16,135 |
| | 2.36 | % | | 4,052 |
| | (8,896 | ) | | (4,844 | ) |
Total interest expense | 12,222 |
| | 2,849 |
| | 15,071 |
| |
Total interest-bearing liabilities | | 7,924,568 |
| | 47,271 |
| | 2.39 | % | | 8,598,855 |
| | 40,317 |
| | 1.88 | % | | 10,298 |
| | (3,344 | ) | | 6,954 |
|
Non-interest-bearing deposits (4) | | 1,345,494 |
| |
| | | | 1,109,527 |
| |
| | | | | | | | |
Total deposits and borrowings | | 9,270,062 |
| |
| | 2.04 | % | | 9,708,382 |
| |
| | 1.67 | % | | | | | | |
Other non-interest-bearing liabilities | | 115,717 |
| |
| | | | 84,788 |
| |
| | | | | | | | |
Total liabilities | | 9,385,779 |
| |
| | | | 9,793,170 |
| |
| | | | | | | | |
Shareholders' equity | | 986,063 |
| |
| | | | 928,020 |
| |
| | | | | | | | |
Total liabilities and shareholders' equity | | $ | 10,371,842 |
| |
| | | | $ | 10,721,190 |
| |
| | | | | | | | |
Net interest income | $ | (2,870 | ) | | $ | 1,586 |
| | $ | (1,284 | ) | | | 64,679 |
| | | | | | 67,322 |
| | | | $ | (836 | ) | | $ | (1,807 | ) | | $ | (2,643 | ) |
Tax-equivalent adjustment (5) | | | | 183 |
| | | | | | 171 |
| | | | | | | | |
Net interest earnings | | | | $ | 64,862 |
| | | | | | $ | 67,493 |
| | | | | | | | |
Interest spread | | | | | | 2.51 | % | | | | | | 2.51 | % | | | | | | |
Net interest margin | | | | | | 2.63 | % | | | | | | 2.61 | % | | | | | | |
Net interest margin tax equivalent (5) | | | | | | 2.64 | % | | | | | | 2.62 | % | | | | | | |
| |
(1) | For presentation in this table, average balances and the corresponding average yields for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts. |
| |
(2) | Includes owner occupied commercial real estate loans. |
| |
(3) | Includes non-accrual loans, the effect of which is to reduce the yield earned on loans and leases, and deferred loan fees. |
| |
(4) | Total costs of deposits (including interest bearing and non-interest-bearing) were 1.85% and 1.39% for the three months ended June 30, 2019 and 2018, respectively. |
| |
(5) | Non-GAAP tax-equivalent basis, using an estimated marginal tax rate of 26% for both the three months ended June 30, 2019 and 2018, presented to approximate interest income as a taxable asset. Management uses non-GAAP measures to present historical periods comparable to the current period presentation. In addition, management believes the use of these non-GAAP measures provides additional clarity when assessing Customers’ financial results. These disclosures should not be viewed as substitutes for results determined to be in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other entities. |
Net interest income for the three months ended June 30, 20182019 was $67.3$64.7 million, a decrease of $1.3$2.6 million, or 1.9%3.9%, from net interest income of $68.6$67.3 million for the three months ended June 30, 2017,2018. This decrease primarily resulted from a $0.5 billion reduction in average interest-earning assets, offset in part by two basis points of NIM expansion. Compared to the three months ended June 30, 2018, total loan yields increased 27 basis points to 4.62%. Total investment securities yields increased 55 basis points to 3.77% mostly due to the sale of $495 million of lower-yielding securities in third quarter 2018. Given the Federal Reserve interest rate hikes in 2018
and the associated increases in market interest rates, the cost of total deposits and borrowings increased 37 basis points to 2.04% for the three months ended June 30, 2019, up from 1.67% for the same period in the prior year.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 vs. 2018 |
(amounts in thousands) | Average Balance | | Interest Income or Expense | | Average Yield or Cost (%) | | Average Balance | | Interest Income or Expense | | Average Yield or Cost | | Due to rate | | Due to volume | | Total |
Assets | | | | | | | | | | | | | | | | | |
Interest-earning deposits | $ | 81,947 |
| | $ | 1,120 |
| | 2.76 | % | | $ | 186,470 |
| | $ | 1,533 |
| | 1.66 | % | | 709 |
| | (1,122 | ) | | (413 | ) |
Investment securities (1) | 689,422 |
| | 12,722 |
| | 3.69 | % | | 1,150,064 |
| | 18,437 |
| | 3.21 | % | | 2,433 |
| | (8,148 | ) | | (5,715 | ) |
Loans and leases: | | | | | | | | | | | | | | | | | |
Commercial loans to mortgage companies | 1,462,362 |
| | 35,430 |
| | 4.89 | % | | 1,676,601 |
| | 40,021 |
| | 4.81 | % | | 648 |
| | (5,239 | ) | | (4,591 | ) |
Multi-family loans | 3,175,233 |
| | 60,006 |
| | 3.81 | % | | 3,599,593 |
| | 67,958 |
| | 3.81 | % | | — |
| | (7,952 | ) | | (7,952 | ) |
Commercial and industrial loans and leases (2) | 1,981,559 |
| | 50,744 |
| | 5.16 | % | | 1,683,566 |
| | 37,990 |
| | 4.55 | % | | 5,497 |
| | 7,257 |
| | 12,754 |
|
Non-owner occupied commercial real estate loans | 1,175,428 |
| | 26,225 |
| | 4.50 | % | | 1,275,404 |
| | 26,950 |
| | 4.26 | % | | 1,463 |
| | (2,188 | ) | | (725 | ) |
Residential mortgages | 709,529 |
| | 14,859 |
| | 4.22 | % | | 402,638 |
| | 8,160 |
| | 4.09 | % | | 268 |
| | 6,431 |
| | 6,699 |
|
Other consumer loans | 203,381 |
| | 9,419 |
| | 9.34 | % | | 3,881 |
| | 92 |
| | 4.78 | % | | 170 |
| | 9,157 |
| | 9,327 |
|
Total loans and leases (3) | 8,707,492 |
| | 196,683 |
| | 4.55 | % | | 8,641,683 |
| | 181,171 |
| | 4.23 | % | | 14,093 |
| | 1,419 |
| | 15,512 |
|
Other interest-earning assets | 87,503 |
| | 2,500 |
| | 5.76 | % | | 128,396 |
| | 3,463 |
| | 5.44 | % | | 194 |
| | (1,157 | ) | | (963 | ) |
Total interest-earning assets | 9,566,364 |
| | 213,025 |
| | 4.49 | % | | 10,106,613 |
| | 204,604 |
| | 4.08 | % | | 19,767 |
| | (11,346 | ) | | 8,421 |
|
Non-interest-earning assets | 501,013 |
| | | | | | 393,066 |
| | | | | | | | | | |
Total assets | $ | 10,067,377 |
| | | | | | $ | 10,499,679 |
| | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | |
Interest checking accounts | $ | 825,672 |
| | 7,893 |
| | 1.93 | % | | $ | 526,995 |
| | 3,615 |
| | 1.38 | % | | 1,766 |
| | 2,512 |
| | 4,278 |
|
Money market deposit accounts | 3,156,988 |
| | 35,179 |
| | 2.25 | % | | 3,356,717 |
| | 24,914 |
| | 1.50 | % | | 11,829 |
| | (1,564 | ) | | 10,265 |
|
Other savings accounts | 432,893 |
| | 4,508 |
| | 2.10 | % | | 37,138 |
| | 50 |
| | 0.27 | % | | 1,733 |
| | 2,725 |
| | 4,458 |
|
Certificates of deposit | 1,763,634 |
| | 19,624 |
| | 2.24 | % | | 1,916,421 |
| | 15,396 |
| | 1.62 | % | | 5,531 |
| | (1,303 | ) | | 4,228 |
|
Total interest-bearing deposits (4) | 6,179,187 |
| | 67,204 |
| | 2.19 | % | | 5,837,271 |
| | 43,975 |
| | 1.52 | % | | 20,504 |
| | 2,725 |
| | 23,229 |
|
Borrowings | 1,447,606 |
| | 21,838 |
| | 3.04 | % | | 2,461,085 |
| | 28,276 |
| | 2.31 | % | | 7,286 |
| | (13,724 | ) | | (6,438 | ) |
Total interest-bearing liabilities | 7,626,793 |
| | 89,042 |
| | 2.35 | % | | 8,298,356 |
| | 72,251 |
| | 1.75 | % | | 23,014 |
| | (6,223 | ) | | 16,791 |
|
Non-interest-bearing deposits (4) | 1,353,112 |
| | | | | | 1,193,769 |
| | | | | | | | | | |
Total deposits and borrowings | 8,979,905 |
| | | | 2.00 | % | | 9,492,125 |
| | | | 1.53 | % | | | | | | |
Other non-interest-bearing liabilities | 110,090 |
| | | | | | 80,074 |
| | | | | | | | | | |
Total liabilities | 9,089,995 |
| | | | | | 9,572,199 |
| | | | | | | | | | |
Shareholders' equity | 977,382 |
| | | | | | 927,480 |
| | | | | | | | | | |
Total liabilities and shareholders' equity | $ | 10,067,377 |
| | | | | | $ | 10,499,679 |
| | | | | | | | | | |
Net interest income | | | 123,983 |
| | | | | | 132,353 |
| | | | $ | (3,247 | ) | | $ | (5,123 | ) | | $ | (8,370 | ) |
Tax-equivalent adjustment (5) | | | 364 |
| | | | | | 342 |
| | | | | | | | |
Net interest earnings | | | $ | 124,347 |
| | | | | | $ | 132,695 |
| | | | | | | | |
Interest spread | | | | | 2.49 | % | | | | | | 2.55 | % | | | | | | |
Net interest margin | | | | | 2.61 | % | | | | | | 2.64 | % | | | | | | |
Net interest margin tax equivalent (5) | | | | | 2.62 | % | | | | | | 2.64 | % | | | | | | |
| |
(1) | For presentation in this table, average balances and the corresponding average yields for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts. |
| |
(2) | Includes owner occupied commercial real estate loans. |
| |
(3) | Includes non-accrual loans, the effect of which is to reduce the yield earned on loans and leases, and deferred loan fees. |
| |
(4) | Total costs of deposits (including interest bearing and non-interest-bearing) were 1.80% and 1.26% for the six months ended June 30, 2019 and 2018, respectively. |
| |
(5) | Non-GAAP tax-equivalent basis, using an estimated marginal tax rate of 26% for both the six months ended June 30, 2019 and 2018, presented to approximate interest income as a taxable asset. Management uses non-GAAP measures to present historical periods comparable to the current period presentation. In addition, management believes the use of these non-GAAP measures provides additional clarity when assessing Customers’ financial results. These disclosures should not be viewed as substitutes for results determined to be in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other entities. |
Net interest income for the six months ended June 30, 2019 was $124.0 million, a decrease of $8.4 million, or 6.3%, from net interest margin (tax equivalent) narrowedincome of $132.4 million for the six months ended June 30, 2018. This decrease primarily resulted from a $0.5 billion reduction in average interest-earning assets and NIM narrowing by 16two basis points to 2.62% for second quarter 2018the six months ended June 30, 2019 compared to 2.78%2.64% for second quarter 2017.the six months ended June 30, 2018. The net interest margin (tax equivalent)NIM compression largely resulted from a 6160 basis point increase in the cost of interest-bearing deposits, reflecting higher interest rates offeredliabilities, partially offset by Customers on its money market deposit accounts and certificates of deposits in order to remain competitive and attract new and retain existing deposit customers, and a 5141 basis point increase in borrowing costs, reflecting higher short-term fundingthe yield of interest-earning assets. Given Federal Reserve interest rate hikes in 2018 and the associated increase in market interest rates, and a full-quarter effect of the $100 million 3.95% senior debt securities issued on June 30, 2017. The higher cost of funds was offset in part by a 38interest-bearing deposits increased 67 basis points to 2.19% and borrowings costs increased 73 basis points to 3.04%. The 456 basis point increase in the yield on interest-earning assets, primarily resulting fromother consumer loans principally reflects the purchase of other consumer loans totaling $447.0 million in the first half of 2019. The yield on commercial and industrial loans and leases increased yields on61 basis points given higher market interest rates.
Total loans increased $607.8 million, or 6.7%, to $9.7 billion at June 30, 2019 compared to the year-ago period. Commercial and industrial loans increased $376.6 million, or 21.5%, to $2.1 billion, commercial loans to mortgage companies increased $67.0 million, or 3.4%, to $2.1 billion; residential mortgages increased $160.3 million, or 32.4%, to $654.6 million; other consumer loans increased $549.0 million to $552.8 million; and commercial real estate non-owner-occupied loans increased $20.6 million, or 1.8%, to $1.2 billion. These increases were offset in part by the planned decrease in multi-family loans of $525.2 million, or 14.8%, to $3.0 billion.
Total deposits increased $889.8 million, or 12.2%, to $8.2 billion at June 30, 2019 compared to the year-ago period. Total demand deposits increased $591.8 million, or 34.5%, to $2.3 billion, certificates of deposit accounts increased $365.9 million, or 17.7%, to $2.4 billion, savings deposits increased $491.1 million to $529.5 million, and commercial and industrial loans, reflecting higher short-term interest rates and increased prepayment feesmoney market deposits decreased $559.0 million, or 16.1%, to $2.9 billion at June 30, 2019 compared to the year-ago period. In July 2018, Customers launched a new digital, on-line savings banking product with a goal of $1.0gathering retail deposits. As of June 30, 2019, this new product generated $479.2 million in second quarter 2018 comparedretail deposits.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for loan and lease losses increased $6.1 million to second quarter 2017.
Interest expense on borrowings increased $7.1$5.3 million for the three months ended June 30, 20182019, compared to a benefit of $0.8 million for the same period in 2018, reflecting Customers' initiatives to increase other consumer and commercial and industrial loans and leases. The provision for loan and lease losses for the three months ended June 30, 2017. This increase was2019 included $8.0 million for loan growth in the other consumer and commercial and industrial loan and lease portfolios, net of the multi-family loan run-off, and $0.1 million for impaired loan provisions, offset in part by a release of reserve of $2.9 million resulting from refinement in assumptions within the allowance for loan losses due to lower than expected credit losses than previously estimated, primarily driven by higher average balances of borrowings, which increased $0.8 billionin the residential mortgage loan portfolio. The provision for loan and lease losses for the three months ended June 30, 2018 compared to the three months ended June 30, 2017, primarily as a result of increases in the average balances of FHLB advances and senior note borrowings to fund the growth in interest-earning assets.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased by $1.3 million to a benefit of $0.8 million for the three months ended June 30, 2018, compared to expense of $0.5 million for the same period in 2017. The provision for loan losses in second quarter 2018 included a release of $0.8 million that resultedresulting from improvedcontinued strong asset quality and lower incurred losses than previously estimated and a release of $0.3 million for impaired loans, offset in part by provisions of $0.3 million of provision for loan and lease portfolio growth. Net charge-offs for the three months ended June 30, 2019 were $0.6 million, or 3 basis points of average loans and leases on an annualized basis, compared to net charge-offs of $0.4 million, or 2 basis points on an annualized basis for the three months ended June 30, 2018.
The provision for loan and lease losses increased $8.8 million to $10.1 million for the six months ended June 30, 2019, compared to $1.3 million for the same period in second quarter 20172018, reflecting Customers' initiatives to increase other consumer and commercial and industrial loans and leases. The provision for loan and lease losses for the six months ended June 30, 2019 included $12.2 million for growth in the other consumer and commercial and industrial loan and lease portfolios, net of the multi-family run-off, and $0.7 million for impaired loan provisions, offset in part by a release of $0.5reserve of $2.9 million resulting from refinement in assumptions within the allowance for loan losses due to lower than expected credit losses than previously estimated, primarily in the residential mortgage loan portfolio. The provision for loan and lease losses for the six months ended June 30, 2018 included provisions of $1.2 million for loan and lease portfolio growth and $1.1 million for impaired loan provisions, offset in part by a $0.9 million release resulting from improved asset quality and lower incurred losses than previously estimated, offset by $0.6estimated. Net charge-offs for the six months ended June 30, 2019 were $1.7 million, or 4 basis points of provision for impairedaverage loans and $0.4leases on an annualized basis, compared to net charge-offs of $1.1 million, of provisionor 2 basis points on an annualized basis for loan growth.the six months ended June 30, 2018.
For more information about the provision and allowance for loan lossesALLL and our loss experience, see “Credit Risk” and “Asset Quality” herein.
NON-INTEREST INCOME
The table below presents the components of non-interest income for the three and six months ended June 30, 20182019 and 2017.
2018.
| | | Three Months Ended June 30, | Three Months Ended June 30, | | QTD | | Six Months Ended June 30, | | YTD |
| 2018 | | 2017 | |
(amounts in thousands) | | | | |
(dollars in thousands) | | 2019 | | 2018 | | Change | | % Change | | 2019 | | 2018 | | Change | | % Change |
Interchange and card revenue | $ | 6,382 |
| | $ | 8,648 |
| $ | 6,760 |
| | $ | 6,382 |
| | $ | 378 |
| | 5.9 | % | | $ | 15,565 |
| | $ | 16,043 |
| | $ | (478 | ) | | (3.0 | )% |
Deposit fees | | 3,348 |
| | 1,632 |
| | 1,716 |
| | 105.1 | % | | 5,557 |
| | 3,724 |
| | 1,833 |
| | 49.2 | % |
Commercial lease income | | 2,730 |
| | 1,091 |
| | 1,639 |
| | 150.2 | % | | 5,131 |
| | 1,953 |
| | 3,178 |
| | 162.7 | % |
Bank-owned life insurance | | 1,836 |
| | 1,869 |
| | (33 | ) | | (1.8 | )% | | 3,653 |
| | 3,900 |
| | (247 | ) | | (6.3 | )% |
Mortgage warehouse transactional fees | 1,967 |
| | 2,523 |
| 1,681 |
| | 1,967 |
| | (286 | ) | | (14.5 | )% | | 2,995 |
| | 3,854 |
| | (859 | ) | | (22.3 | )% |
Bank-owned life insurance | 1,869 |
| | 2,258 |
| |
Deposit fees | 1,632 |
| | 2,133 |
| |
Gain on sale of SBA and other loans | 947 |
| | 573 |
| — |
| | 947 |
| | (947 | ) | | (100.0 | )% | | — |
| | 2,308 |
| | (2,308 | ) | | (100.0 | )% |
Mortgage banking income | 205 |
| | 291 |
| 250 |
| | 205 |
| | 45 |
| | 22.0 | % | | 417 |
| | 325 |
| | 92 |
| | 28.3 | % |
Gain on sale of investment securities | — |
| | 3,183 |
| |
Impairment loss on investment securities | — |
| | (2,882 | ) | |
Loss upon acquisition of interest-only GNMA securities | | (7,476 | ) | | — |
| | (7,476 | ) | | NM |
| | (7,476 | ) | | — |
| | (7,476 | ) | | NM |
|
Other | 3,125 |
| | 1,664 |
| 2,907 |
| | 2,034 |
| | 873 |
| | 42.9 | % | | 5,912 |
| | 4,930 |
| | 982 |
| | 19.9 | % |
Total non-interest income | $ | 16,127 |
| | $ | 18,391 |
| $ | 12,036 |
| | $ | 16,127 |
| | $ | (4,091 | ) | | (25.4 | )% | | $ | 31,754 |
| | $ | 37,037 |
| | $ | (5,283 | ) | | (14.3 | )% |
Non-interest income of $16.1Interchange and card revenue
The $0.4 million decreased $2.3 million, or 12.3%,increase in interchange and card revenue for the three months ended June 30, 2018 when2019 compared to non-interest income of $18.4the three months ended June 30, 2018 primarily resulted from higher negotiated fee sharing rates with the debit card processor.
The $0.5 million decrease in interchange and card revenue for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily resulted from lower activity volumes at the BankMobile segment.
Deposit fees
The $1.7 million increase in deposit fees for the three months ended June 30, 2017. Included within2019 compared to the three months ended June 30, 2018 primarily resulted from an increase in service charges on certain deposit accounts relating to a change in the fee structure at BankMobile.
The $1.8 million increase in deposit fees for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily resulted from an increase in service charges on certain deposit accounts relating to a change in the fee structure at BankMobile.
Commercial lease income
Commercial lease income represents income earned on commercial operating leases originated by Customers' Equipment Finance Group in which Customers is the lessor. The $1.6 million increase in commercial lease income for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 primarily resulted from the continued growth of Customers' equipment finance business.
The $3.2 million increase in commercial lease income for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily resulted from the continued growth of Customers' equipment finance business.
Mortgage warehouse transactional fees
The $0.3 million decrease in mortgage warehouse transactional fees for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 primarily resulted from an 11% decrease in the number of loans funded during the three months ended June 30, 2019 compared to the three months ended June 30, 2018, as higher interest rates reduced the volume of mortgage loan originations and refinancings.
The $0.9 million decrease in mortgage warehouse transactional fees for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily resulted from a 20% decrease in the number of loans funded during the six months ended June 30, 2019 compared to the six months ended June 30, 2018, as higher interest rates reduced the volume of mortgage loan originations and refinancings.
Gain on sale of SBA and other loans
The $0.9 million decrease in gains on sales of SBA and other loans for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 reflects a strategic shift to retain SBA loans on our balance sheet.
The $2.3 million decrease in gains on sales of SBA and other loans for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 reflects a strategic shift to retain SBA loans on our balance sheet.
Loss on acquisition of interest-only GNMA securities
The $7.5 million loss realized upon the acquisition of certain interest-only GNMA securities during the three months ended June 30, 2019 resulted from a mortgage warehouse customer that unexpectedly ceased operations in second quarter 2019. Customers took possession of the interest-only GNMA securities that served as the primary collateral for loans made to this mortgage warehouse customer. The shortfall in the fair value of the interest-only GNMA securities upon acquisition resulted in a write-down of $7.5 million in second quarter 2019. Customers views this as an isolated event that is not indicative of the overall credit quality of the mortgage warehouse portfolio. There are no other loans in the mortgage warehouse portfolio secured by interest-only securities.
Other non-interest income
The $0.9 million increase in other non-interest income for the three months ended June 30, 2018 was $1.2 million of debit and prepaid card interchange expense, which was recorded as a reduction to the gross amount of interchange and card revenue of $7.6 million as a result of the adoption of the new revenue recognition guidance as described in NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION on a modified retrospective basis. Prior to the adoption of the new revenue recognition guidance, these expenses were included within non-interest expense and reported as technology, communication and bank operations expense. For the three months ended June 30, 2017, debit and prepaid card interchange expense was $1.3 million. If the three months ended June 30, 2017 was presented on a consistent basis with the three months ended June 30, 2018, the reported amount of non-interest income of $18.4 million would have been $17.1 million and the gross interchange and card revenue of $8.6 million would have been presented net of the debit and prepaid card interchange expense of $1.3 million, or $7.4 million. When presented on a consistent basis, the $1.0 million decline in interchange and card revenue was largely the result of lower activity volumes in the BankMobile business segment. Other decreases in total non-interest income for the three months ended June 30, 20182019 compared to the three months ended June 30, 2017 included decreases2018 primarily resulted from increases in mortgage warehouse transactional fees and depositloan fees of $0.6$0.2 million and market-driven increases in interest rate swap and derivative-related income of $0.5 million.
The $1.0 million or 22.0% and 23.5%, respectively, primarily resulting from reduced transaction volumes. BankMobile continues to focus on implementing its "Customersincrease in other non-interest income for Life" model and decrease its reliance on Disbursement related deposits. For the threesix months ended June 30, 2017, Customers also realized $3.2 million of gains from2019 compared to the sale of investment securities. The decreases in non-interest income for the threesix months ended June 30, 2018 were partially offset by an increaseprimarily resulted from increases in loan fees of $0.5 million along with various increases in miscellaneous other non-interest income of $1.5 million, primarily from increased income on commercial operating leases of $1.1 million, and a decline in other-than temporary impairment losses from the $2.9 million recognized in second quarter 2017.amounts.
NON-INTEREST EXPENSE
The table below presents the components of non-interest expense for the three and six months ended June 30, 20182019 and 2017.2018.
| | | Three Months Ended June 30, | Three Months Ended June 30, | | QTD | | Six Months Ended June 30, | | YTD |
| 2018 | | 2017 | |
(amounts in thousands) | | | | |
(dollars in thousands) | | 2019 | | 2018 | | Change | | % Change | | 2019 | | 2018 | | Change | | % Change |
Salaries and employee benefits | $ | 27,748 |
| | $ | 23,651 |
| $ | 26,920 |
| | $ | 27,748 |
| | $ | (828 | ) | | (3.0 | )% | | $ | 52,743 |
| | $ | 52,673 |
| | $ | 70 |
| | 0.1 | % |
Technology, communication and bank operations | 11,322 |
| | 8,910 |
| |
Technology, communication, and bank operations | | 12,402 |
| | 11,322 |
| | 1,080 |
| | 9.5 | % | | 24,355 |
| | 21,266 |
| | 3,089 |
| | 14.5 | % |
Professional services | 3,811 |
| | 6,227 |
| 5,718 |
| | 3,811 |
| | 1,907 |
| | 50.0 | % | | 10,291 |
| | 9,820 |
| | 471 |
| | 4.8 | % |
Occupancy | 3,141 |
| | 2,657 |
| 3,064 |
| | 3,141 |
| | (77 | ) | | (2.5 | )% | | 5,967 |
| | 5,975 |
| | (8 | ) | | (0.1 | )% |
Commercial lease depreciation | | 2,252 |
| | 920 |
| | 1,332 |
| | 144.8 | % | | 4,174 |
| | 1,735 |
| | 2,439 |
| | 140.6 | % |
FDIC assessments, non-income taxes, and regulatory fees | 2,135 |
| | 2,416 |
| 2,157 |
| | 2,135 |
| | 22 |
| | 1.0 | % | | 4,145 |
| | 4,335 |
| | (190 | ) | | (4.4 | )% |
Provision for operating losses | 1,233 |
| | 1,746 |
| 2,446 |
| | 1,233 |
| | 1,213 |
| | 98.4 | % | | 4,225 |
| | 2,759 |
| | 1,466 |
| | 53.1 | % |
Advertising and promotion | | 1,360 |
| | 319 |
| | 1,041 |
| | 326.3 | % | | 2,169 |
| | 709 |
| | 1,460 |
| | 205.9 | % |
Merger and acquisition related expenses | 869 |
| | — |
| — |
| | 869 |
| | (869 | ) | | (100.0 | )% | | — |
| | 975 |
| | (975 | ) | | (100.0 | )% |
Loan workout | 648 |
| | 408 |
| 643 |
| | 648 |
| | (5 | ) | | (0.8 | )% | | 963 |
| | 1,307 |
| | (344 | ) | | (26.3 | )% |
Advertising and promotion | 319 |
| | 378 |
| |
Other real estate owned expenses | 58 |
| | 160 |
| |
Other real estate owned expenses (income) | | (14 | ) | | 58 |
| | (72 | ) | | (124.1 | )% | | 43 |
| | 98 |
| | (55 | ) | | (56.1 | )% |
Other | 2,466 |
| | 3,860 |
| 2,634 |
| | 1,546 |
| | 1,088 |
| | 70.4 | % | | 4,491 |
| | 4,379 |
| | 112 |
| | 2.6 | % |
Total non-interest expense | $ | 53,750 |
| | $ | 50,413 |
| $ | 59,582 |
| | $ | 53,750 |
| | $ | 5,832 |
| | 10.9 | % | | $ | 113,566 |
| | $ | 106,031 |
| | $ | 7,535 |
| | 7.1 | % |
Non-interest expense was $53.8Salaries and employee benefits
The $0.8 million decrease in salaries and employee benefits for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 primarily resulted from a reduction in incentive accruals given lower-than-expected overall performance, partially
offset by an increase in average full-time equivalent team members, annual merit increases, and severance payments related to a reduction of $3.3headcount, primarily in less profitable business lines.
The $0.1 million or 6.6%increase in salaries and employee benefits for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily resulted from non-interestan increase in average full-time equivalent team members, annual merit increases, and severance payments related to a reduction of headcount, primarily in less profitable business lines, partially offset by decreases in incentive accruals given lower-than-expected overall performance.
Technology, communication, and bank operations
The $1.1 million increase in technology, communication, and bank operations expense of $50.4 million for the three months ended June 30, 2017. As described above, total2019 compared to the three months ended June 30, 2018 primarily resulted from continued investment to improve and maintain Customers' digital information technology infrastructure and support expanded products and services offered through its White Label partnership.
The $3.1 million increase in technology, communication, and bank operations expense for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily resulted from continued investment to improve and maintain Customers' digital information technology infrastructure and support expanded products and services offered through its White Label partnership.
Professional services
The $1.9 million increase in professional services for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 primarily resulted from consulting services associated with supporting our White Label partnership and other miscellaneous initiatives.
The $0.5 million increase in professional services for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily resulted from consulting services associated with supporting our White Label partnership.
Commercial lease depreciation
The $1.3 million increase in commercial lease depreciation for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 primarily resulted from the continued growth of the operating lease arrangements originated by Customers' Equipment Finance Group in which Customers is the lessor.
The $2.4 million increase in commercial lease depreciation for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily resulted from the continued growth of the operating lease arrangements originated by Customers' Equipment Finance Group in which Customers is the lessor.
Provision for operating losses
The provision for operating losses primarily consists of losses resulting from fraud or theft-based transactions that have generally been disputed by deposit account holders. The $1.2 million increase in provision for operating losses for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 primarily resulted from higher customer volumes from our White Label partnership.
The $1.5 million increase in provision for operating losses for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily resulted from higher customer volumes from our White Label partnership.
Advertising and promotion expenses
The $1.0 million increase in advertising and promotion expenses for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 primarily resulted from the promotion of Customers' digital banking products and service offerings available through our White Label partnership.
The $1.5 million increase in advertising and promotion for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily resulted from the promotion of Customers' digital banking products and service offerings available through our White Label partnership.
Merger and acquisition related expenses
The $0.9 million decrease in merger and acquisition related expenses for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 resulted from the spin-off and merger agreement between Customers and Flagship Community Bank, which was terminated in October 2018.
The $1.0 million decrease in merger and acquisition related expenses for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 resulted from the spin-off and merger agreement between Customers and Flagship Community Bank, which was terminated in October 2018.
Other non-interest expense
The $1.1 million increase in other non-interest expense for the three months ended June 30, 2018 excludes $1.2 million of debit and prepaid card interchange expense as a result of the adoption of the new revenue recognition guidance on January 1, 2018. If the three months ended June 30, 2017 was presented on a consistent basis with2019 compared to the three months ended June 30, 2018 the reported amount ofprimarily resulted from ongoing investment in our White Label partnership, partially offset by management's continued efforts to monitor and control expenses.
The $0.1 million increase in other non-interest expense of $50.4 million would have been $49.1 million and technology, communication, and bank operations expense of $8.9 million would have been $7.6 million.
Salaries and employee benefits, which represent the largest component of non-interest expense, increased $4.1 million, or 17.3%, to $27.7 million for the threesix months ended June 30, 2019 compared to the six months ended June 30, 2018 primarily resulted from $23.7 million for the three months ended June 30, 2017. The increase was primarily attributable to increases in compensation levels for existing team members, reflecting higher costs to maintain our workforce, and an increase in headcount as Customers continues to hire new team members in the markets it serves.
When presented on a consistent basis, technology, communication and bank operations expense increased $3.7 million, or 48.7%, to $11.3 million for the three months ended June 30, 2018 from $7.6 million for the three months ended June 30, 2017 given the continuedongoing investment in the BankMobile segment infrastructure and Customers' recent system conversion.
Merger and acquisition related expenses were $0.9 million for the three months ended June 30, 2018, compared to no similar expenses for the three months ended June 30, 2017. These charges include professional services expenses incurred in connection with the planned spin-off of the BankMobile business as well as a residual expense resulting from the 2016 acquisition of the Disbursements business.
These increases wereour White Label partnership, partially offset by a decrease in professional services expense of $2.4 million, or 38.8%, to $3.8 million for the three months ended June 30, 2018 from $6.2 million for the three months ended June 30, 2017. This decrease was primarily attributable to reductions in consulting, legal and other professional services as management continues itsmanagement's continued efforts to monitor and control expenses.
INCOME TAXES
IncomeThe table below presents income tax expense of $6.8 million decreased $5.5 million, or 44.7%, resulting in anand the effective tax rate of 22.4%for the three and six months ended June 30, 2019 and 2018. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | QTD | | Six Months Ended June 30, | | YTD |
(dollars in thousands) | 2019 | | 2018 | | Change | | % Change | | 2019 | | 2018 | | Change | | % Change |
Income before income tax expense | $ | 11,787 |
| | $ | 30,483 |
| | $ | (18,696 | ) | | (61.3 | )% | | $ | 32,058 |
| | $ | 62,026 |
| | $ | (29,968 | ) | | (48.3 | )% |
Income tax expense | $ | 2,491 |
| | $ | 6,820 |
| | $ | (4,329 | ) | | (63.5 | )% | | $ | 7,323 |
| | $ | 14,222 |
| | $ | (6,899 | ) | | (48.5 | )% |
Effective tax rate | 21.13 | % | | 22.37 | % | | | | | | 22.84 | % | | 22.93 | % | | | | |
The $4.3 million and $6.9 million decrease in income tax expense for the three and six months ended June 30, 2019, when compared to the same periods in the prior year, primarily resulted from lower pre-tax income. The decrease in the effective tax rate for the three months ended June 30, 2018 when compared to income tax expense of $12.3 million and an effective tax rate of 34.2% for the three months ended June 30, 2017. The decrease in income tax expense and effective rate was driven by the lower corporate tax rate as a result of the Tax Cuts and Jobs Act enacted in December 2017, as well as a decrease in pre-tax income of $5.6 million in the three months ended June 30, 20182019 compared to the three months ended June 30, 2017.2018 primarily resulted from a favorable return to provision adjustment recorded during the three months ended June 30, 2019.
PREFERRED STOCK DIVIDENDSINCOME TAXES
Preferred stock dividends were $3.6The table below presents income tax expense and the effective tax rate for the three and six months ended June 30, 2019 and 2018. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | QTD | | Six Months Ended June 30, | | YTD |
(dollars in thousands) | 2019 | | 2018 | | Change | | % Change | | 2019 | | 2018 | | Change | | % Change |
Income before income tax expense | $ | 11,787 |
| | $ | 30,483 |
| | $ | (18,696 | ) | | (61.3 | )% | | $ | 32,058 |
| | $ | 62,026 |
| | $ | (29,968 | ) | | (48.3 | )% |
Income tax expense | $ | 2,491 |
| | $ | 6,820 |
| | $ | (4,329 | ) | | (63.5 | )% | | $ | 7,323 |
| | $ | 14,222 |
| | $ | (6,899 | ) | | (48.5 | )% |
Effective tax rate | 21.13 | % | | 22.37 | % | | | | | | 22.84 | % | | 22.93 | % | | | | |
The $4.3 million and $6.9 million decrease in income tax expense for the three and six months ended June 30, 2019, when compared to the same periods in the prior year, primarily resulted from lower pre-tax income. The decrease in the effective tax rate for the three months ended June 30, 2018 and 2017, respectively. There were no changes2019 compared to the amount of preferred stock outstanding or the dividend rates from second quarter 2017 to second quarter 2018.
Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017
Net income available to common shareholders decreased $1.7 million, or 3.9%, to $40.6 million for the sixthree months ended June 30, 2018 when comparedprimarily resulted from a favorable return to net income available to common shareholders of $42.2 million forprovision adjustment recorded during the sixthree months ended June 30, 2017. The decreased net income available to common shareholders resulted primarily from an increase in non-interest expense of $6.3 million and a decrease in non-interest income of $4.1 million, offset in part by decreases in income tax expense of $5.1 million and the provision for loan losses of $2.3 million and an increase in net interest income of $1.3 million.2019.
Net interest income increased $1.3 million, or 1.0%, for the six months ended June 30, 2018 to $132.4 million when compared to net interest income of $131.0 million for the six months ended June 30, 2017. This increase resulted primarily from an increase in the average balance of loans of $0.5 billion and a 29 basis point increase in the yield on loans. These increases were offset in part by a 53 basis point increase in the cost of interest-bearing deposits and a 30 basis point increase in the cost of borrowings for the first six months of 2018 when compared to the first six months of 2017.
The provision for loan losses decreased $2.3 million to $1.3 million for the six months ended June 30, 2018 when compared to the provision for loan losses of $3.6 million for the same period in 2017. The provision for loan losses of $1.3 million included $1.2 million for loan portfolio growth and $1.1 million for impaired loans, offset in part by a $0.9 million release that resulted from improved asset quality and lower incurred losses than previously estimated.
Non-interest income decreased $4.1 million during the six months ended June 30, 2018 to $37.0 million, compared to $41.1 million for the six months ended June 30, 2017. Included within non-interest income for the six months ended June 30, 2018 was $2.7 million of debit and prepaid card interchange expense, which was recorded as a reduction to the gross amount of interchange and card revenue of $18.8 million as a result of the adoption of the new revenue recognition guidance as described in NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION on a modified retrospective basis. Prior to the adoption of the new revenue recognition guidance, these expenses were included within non-interest expense and reported as technology, communication and bank operations expense. For the six months ended June 30, 2017, debit and prepaid card interchange expense was $3.2 million. If the six months ended June 30, 2017 was presented on a consistent basis with the six months ended June 30, 2018, the reported amount of non-interest income of $41.1 million would have been $38.0 million and the gross interchange and card revenue of $22.2 million would have been presented net of the debit and prepaid card interchange expense of $3.2 million, or $19.0 million. When presented on a consistent basis, the $3.0 million decline in interchange and card revenue was largely the result of lower activity volumes in the BankMobile business segment. Deposit fees of $3.7 million for the six months ended June 30, 2018 decreased $1.5 million compared to $5.3 million for the six months ended June 30, 2017, mostly driven by lower activity volumes in the BankMobile business segment. There was also a decrease of $3.2 million in gains realized from the sale of investment securities for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. These decreases in non-interest income were offset in part by an increase in other non-interest income of $2.5 million, primarily driven by increased income on commercial operating leases, and a decline in other-than-temporary impairment losses from the $4.6 million recognized during the six months ended June 30, 2017.
Non-interest expense increased $6.3 million, or 6.3%, for the six months ended June 30, 2018 to $106.0 million when compared to non-interest expense of $99.8 million for the six months ended June 30, 2017. The increase was mostly driven by increases in salaries and employee benefits of $7.9 million resulting from salary increases to existing team members as well as an increase in headcount as Customers continues to hire new team members in the markets that it serves. Total non-interest expense for the six months ended June 30, 2018 excludes $2.7 million of debit and prepaid card interchange expense as a result of the adoption of the new revenue recognition guidance on January 1, 2018. If the six months ended June 30, 2017 was presented on a consistent basis with the six months ended June 30, 2018, the reported amount of non-interest expense of $99.8 million would have been $96.6 million and technology, communication, and bank operations expense of $18.8 million would have been $15.7 million. When presented on a consistent basis, technology, communication and bank operations expense increased $5.6 million, or 35.7%, to $21.3 million for the six months ended June 30, 2018 from $15.7 million for the six months ended June 30, 2017 given the continued investment in the BankMobile segment infrastructure and Customers' recent system conversion. Merger and acquisition related expenses were $1.0 million for the six months ended June 30, 2018, compared to no similar expenses for the six months ended June 30, 2017. These expenses include professional services expenses incurred in connection with the planned spin-off of the BankMobile business as well as a residual expense resulting from the 2016 acquisition of the Disbursements business. These increases in non-interest expense were partially offset by a
decrease in professional services expense of $3.9 million, primarily attributable to reductions in consulting, legal and other professional services as management continues its efforts to monitor and control expenses.
Income tax expense decreased $5.1 million for the six months ended June 30, 2018 to $14.2 million when compared to income tax expense of $19.3 million for the same period in 2017. The decrease in income tax expense was driven primarily by a decrease in pre-tax income of $6.8 million in the first six months of 2018, as well as a lower federal income tax rate resulting from the Tax Cut and Jobs Act of 2017. Customers' effective tax rate decreased to 22.9% for the six months ended June 30, 2018, compared to 28.1% for the same period in 2017. Income tax expense for the six months ended June 30, 2017 included the recognition of a tax benefit of $4.6 million for the development of tax strategies that would have allowed for the recognition of the tax benefit from losses that had been recorded for impairment charges on the Religare equity securities.
Preferred stock dividends were $7.2 million for the six months ended June 30, 2018 and 2017, respectively.
NET INTEREST INCOME
Net interest income (the difference between the interest earned on loans, investments and interest-earning deposits with banks, and interest paid on deposits, borrowed funds and subordinated debt) is the primary source of Customers' earnings.
The following table summarizes Customers' net interest income and related interest spread and net interest margin for the periods indicated. |
| | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 |
| Average Balance | | Interest Income or Expense | | Average Yield or Cost (%) | | Average Balance | | Interest Income or Expense | | Average Yield or Cost (%) |
(amounts in thousands) | | | | | | | | | | | |
Assets | | | | | | | | | | | |
Interest-earning deposits | $ | 186,470 |
| | $ | 1,533 |
| | 1.66 | % | | $ | 350,693 |
| | $ | 1,523 |
| | 0.88 | % |
Investment securities (1) | 1,150,064 |
| | 18,437 |
| | 3.21 | % | | 948,657 |
| | 13,710 |
| | 2.91 | % |
Loans: | | | | | | | | | | | |
Commercial loans to mortgage companies | 1,676,601 |
| | 40,021 |
| | 4.81 | % | | 1,622,182 |
| | 32,761 |
| | 4.07 | % |
Multi-family loans | 3,599,593 |
| | 67,958 |
| | 3.81 | % | | 3,423,449 |
| | 63,270 |
| | 3.73 | % |
Commercial and industrial loans (2) | 1,683,566 |
| | 37,990 |
| | 4.55 | % | | 1,378,085 |
| | 28,241 |
| | 4.13 | % |
Non-owner occupied commercial real estate | 1,275,404 |
| | 25,243 |
| | 3.99 | % | | 1,288,610 |
| | 24,948 |
| | 3.90 | % |
All other loans | 406,519 |
| | 9,959 |
| | 4.94 | % | | 479,242 |
| | 10,747 |
| | 4.52 | % |
Total loans (3) | 8,641,683 |
| | 181,171 |
| | 4.23 | % | | 8,191,568 |
| | 159,967 |
| | 3.94 | % |
Other interest-earning assets | 128,396 |
| | 3,463 |
| | 5.44 | % | | 91,026 |
| | 1,746 |
| | 3.87 | % |
Total interest earning assets | 10,106,613 |
| | 204,604 |
| | 4.08 | % | | 9,581,944 |
| | 176,946 |
| | 3.72 | % |
Non-interest-earning assets | 393,066 |
| | | | | | 356,311 |
| | | | |
Total assets | $ | 10,499,679 |
| | | | | | $ | 9,938,255 |
| | | | |
Liabilities | | | | | | | | | | | |
Interest checking accounts | $ | 526,995 |
| | 3,615 |
| | 1.38 | % | | $ | 332,673 |
| | 1,131 |
| | 0.69 | % |
Money market deposit accounts | 3,356,717 |
| | 24,914 |
| | 1.50 | % | | 3,306,988 |
| | 14,595 |
| | 0.89 | % |
Other savings accounts | 37,138 |
| | 50 |
| | 0.27 | % | | 42,383 |
| | 58 |
| | 0.28 | % |
Certificates of deposit | 1,916,421 |
| | 15,396 |
| | 1.62 | % | | 2,555,488 |
| | 14,767 |
| | 1.17 | % |
Total interest-bearing deposits | 5,837,271 |
| | 43,975 |
| | 1.52 | % | | 6,237,532 |
| | 30,551 |
| | 0.99 | % |
Borrowings | 2,461,085 |
| | 28,276 |
| | 2.31 | % | | 1,543,154 |
| | 15,371 |
| | 2.01 | % |
Total interest-bearing liabilities | 8,298,356 |
| | 72,251 |
| | 1.75 | % | | 7,780,686 |
| | 45,922 |
| | 1.19 | % |
Non-interest-bearing deposits | 1,193,769 |
| | | | | | 1,198,355 |
| | | | |
Total deposits and borrowings | 9,492,125 |
| | | | 1.53 | % | | 8,979,041 |
| | | | 1.03 | % |
Other non-interest-bearing liabilities | 80,074 |
| | | | | | 75,876 |
| | | | |
Total liabilities | 9,572,199 |
| | | | | | 9,054,917 |
| | | | |
Shareholders’ Equity | 927,480 |
| | | | | | 883,338 |
| | | | |
Total liabilities and shareholders’ equity | $ | 10,499,679 |
| | | | | | $ | 9,938,255 |
| | | | |
Net interest income | | | 132,353 |
| | | | | | 131,024 |
| | |
Tax-equivalent adjustment (4) | | | 342 |
| | | | | | 197 |
| | |
Net interest earnings | | | $ | 132,695 |
| | | | | | $ | 131,221 |
| | |
Interest spread | | | | | 2.55 | % | | | | | | 2.69 | % |
Net interest margin | | | | | 2.64 | % | | | | | | 2.75 | % |
Net interest margin tax equivalent (4) | | | | | 2.64 | % | | | | | | 2.76 | % |
| |
(1) | For presentation in this table, average balances and the corresponding average yields for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts. |
| |
(2) | Includes owner occupied commercial real estate loans. |
| |
(3) | Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees. |
| |
(4) | Non-GAAP tax-equivalent basis, using an estimated marginal tax rate of 26% for the six months ended June 30, 2018 and 35% for the six months ended June 30, 2017 presented to approximate interest income as a taxable asset. Management uses non-GAAP measures to present historical periods comparable to the current period presentation. In addition, management believes the use of these non-GAAP measures provides additional clarity when assessing Customers’ financial results. These disclosures should not be viewed as substitutes for results determined to be in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other entities. |
The following table presents the dollar amount of changes in interest income and interest expense for the major categories of interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.
|
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2018 vs. 2017 |
| Increase (Decrease) due to Change in | | |
| Rate | | Volume | | Total |
(amounts in thousands) | | | | | |
Interest income | | | | | |
Interest-earning deposits | $ | 942 |
| | $ | (932 | ) | | $ | 10 |
|
Investment securities | 1,606 |
| | 3,121 |
| | 4,727 |
|
Loans: | | | | | |
Commercial loans to mortgage companies | 6,130 |
| | 1,130 |
| | 7,260 |
|
Multi-family loans | 1,383 |
| | 3,305 |
| | 4,688 |
|
Commercial and industrial loans, including owner occupied commercial real estate | 3,054 |
| | 6,695 |
| | 9,749 |
|
Non-owner occupied commercial real estate | 552 |
| | (257 | ) | | 295 |
|
All other loans | 935 |
| | (1,723 | ) | | (788 | ) |
Total loans | 12,054 |
| | 9,150 |
| | 21,204 |
|
Other interest-earning assets | 855 |
| | 862 |
| | 1,717 |
|
Total interest income | 15,457 |
| | 12,201 |
| | 27,658 |
|
Interest expense | | | | | |
Interest checking accounts | 1,578 |
| | 906 |
| | 2,484 |
|
Money market deposit accounts | 10,096 |
| | 223 |
| | 10,319 |
|
Other savings accounts | (1 | ) | | (7 | ) | | (8 | ) |
Certificates of deposit | 4,884 |
| | (4,255 | ) | | 629 |
|
Total interest-bearing deposits | 16,557 |
| | (3,133 | ) | | 13,424 |
|
Borrowings | 2,649 |
| | 10,256 |
| | 12,905 |
|
Total interest expense | 19,206 |
| | 7,123 |
| | 26,329 |
|
Net interest income | $ | (3,749 | ) | | $ | 5,078 |
| | $ | 1,329 |
|
Net interest income for the six months ended June 30, 2018 was $132.4 million, an increase of $1.3 million, or 1.0%, when compared to net interest income of $131.0 million for the six months ended June 30, 2017. This increase was primarily driven by increased average loan and security balances of $0.7 billion and higher yields on commercial loans to mortgage companies.
Net interest margin (tax equivalent) narrowed by 12 basis points to 2.64% for the six months ended June 30, 2018, compared to 2.76% for the six months ended June 30, 2017. The net interest margin compression largely resulted from a 53 basis point increase in the cost of interest-bearing deposits, reflecting higher interest rates offered by Customers on its money market deposit accounts and certificates of deposits in order to remain competitive and attract new and retain existing deposit customers. The higher cost of funds was offset in part by a 36 basis point increase in the yield on interest-earning assets, primarily due to an increase in the yield on commercial loans to mortgage companies, reflecting higher short-term interest rates.
Interest expense on total interest-bearing deposits increased $13.4 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. This increase primarily resulted from the aforementioned increase in rates offered on money market deposit accounts and certificates of deposit.
Interest expense on borrowings increased $12.9 million for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. This increase was driven by increased volume as average borrowings increased by $917.9 million when compared to average borrowings for the six months ended June 30, 2017, mostly due to higher average outstanding balances of short-term FHLB advances and senior note borrowings to fund the growth in interest-earning assets.
PROVISION FOR LOAN LOSSES
The provision for loan losses decreased by $2.3 million to $1.3 million for the six months ended June 30, 2018, compared to $3.6 million for the same period in 2017. The provision for loan losses for the six months ended June 30, 2018 included $1.2 million for loan portfolio growth, $1.1 million for impaired loans, offset in part by a release of $0.9 million resulting from improved asset quality and lower incurred losses than previously estimated. The provision for loan losses for the six months ended June 30, 2017 included $3.1 million for impaired loans and $0.9 million for loan portfolio growth, offset in part by a release of $0.5 million resulting from improved asset quality and lower incurred losses than previously estimated.
For more information about the provision and allowance for loan losses and our loss experience, see “Credit Risk” and “Asset Quality” herein.
NON-INTEREST INCOME
The table below presents the components of non-interest income for the six months ended June 30, 2018 and 2017.
|
| | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 |
(amounts in thousands) | | | |
Interchange and card revenue | $ | 16,043 |
| | $ | 22,158 |
|
Bank-owned life insurance | 3,900 |
| | 3,624 |
|
Mortgage warehouse transactional fees | 3,854 |
| | 4,743 |
|
Deposit fees | 3,724 |
| | 5,260 |
|
Gain on sale of SBA and other loans | 2,308 |
| | 1,901 |
|
Mortgage banking income | 325 |
| | 446 |
|
Gain on sale of investment securities | — |
| | 3,183 |
|
Impairment loss on investment securities | — |
| | (4,585 | ) |
Other | 6,883 |
| | 4,414 |
|
Total non-interest income | $ | 37,037 |
| | $ | 41,144 |
|
Non-interest income decreased $4.1 million during the six months ended June 30, 2018 to $37.0 million, compared to $41.1 million for the six months ended June 30, 2017. Included within non-interest income for the six months ended June 30, 2018 was $2.7 million of debit and prepaid card interchange expense, which was recorded as a reduction to the gross amount of interchange and card revenue of $18.8 million as a result of the adoption of the new revenue recognition guidance as described in NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION on a modified retrospective basis. Prior to the adoption of the new revenue recognition guidance, these expenses were included within non-interest expense and reported as technology, communication and bank operations expense. For the six months ended June 30, 2017, debit and prepaid card interchange expense was $3.2 million. If the six months ended June 30, 2017 was presented on a consistent basis with the six months ended June 30, 2018, the reported amount of non-interest income of $41.1 million would have been $38.0 million and the gross interchange and card revenue of $22.2 million would have been presented net of the debit and prepaid card interchange expense of $3.2 million, or $19.0 million. When presented on a consistent basis, the $3.0 million decline in interchange and card revenue was largely the result of lower activity volumes in the BankMobile business segment. Deposit fees of $3.7 million for the six months ended June 30, 2018 decreased $1.5 million compared to $5.3 million for the six months ended June 30, 2017, mostly driven by lower activity volumes in the BankMobile business segment. There was also a decrease of $3.2 million in gains realized from the sale of investment securities for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. These decreases in non-interest income were offset in part by an increase in other non-interest income of $2.5 million, primarily driven by increased income on commercial operating leases, and a decline in other-than-temporary impairment losses from the $4.6 million recognized during the six months ended June 30, 2017 for the decline in market value of the Religare equity securities.
NON-INTEREST EXPENSE
The table below presents the components of non-interest expense for the six months ended June 30, 2018 and 2017.
|
| | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 |
(amounts in thousands) | | | |
Salaries and employee benefits | $ | 52,673 |
| | $ | 44,763 |
|
Technology, communication and bank operations | 21,266 |
| | 18,827 |
|
Professional services | 9,820 |
| | 13,739 |
|
Occupancy | 5,975 |
| | 5,371 |
|
FDIC assessments, non-income taxes, and regulatory fees | 4,335 |
| | 4,141 |
|
Provision for operating losses | 2,759 |
| | 3,392 |
|
Loan workout | 1,307 |
| | 929 |
|
Merger and acquisition related expenses | 975 |
| | — |
|
Advertising and promotion | 709 |
| | 704 |
|
Other real estate owned expenses | 98 |
| | 105 |
|
Other | 6,114 |
| | 7,807 |
|
Total non-interest expense | $ | 106,031 |
| | $ | 99,778 |
|
Non-interest expense was $106.0 million for the six months ended June 30, 2018, an increase of $6.3 million from non-interest expense of $99.8 million for the six months ended June 30, 2017. As described above, total non-interest expense for the six months ended June 30, 2018 excludes $2.7 million of debit and prepaid card interchange expense as a result of the adoption of the new revenue recognition guidance on January 1, 2018. If the six months ended June 30, 2017 was presented on a consistent basis with the six months ended June 30, 2018, the reported amount of non-interest expense of $99.8 million would have been $96.6 million and technology, communication, and bank operations expense of $18.8 million would have been $15.7 million.
Salaries and employee benefits, which represent the largest component of non-interest expense, increased $7.9 million, or 17.7%, to $52.7 million for the six months ended June 30, 2018, reflecting salary increases for existing team members and increased headcount as Customers continues to hire new team members in the markets it serves.
When presented on a consistent basis, technology, communication and bank operations expense increased $5.6 million, or 35.7%, to $21.3 million for the six months ended June 30, 2018 from $15.7 million for the six months ended June 30, 2017 given the continued investment in the BankMobile segment infrastructure and Customers' recent system conversion.
Merger and acquisition related expenses were $1.0 million for the six months ended June 30, 2018, compared to no similar expenses for the six months ended June 30, 2017. These expenses include professional services expenses incurred in connection with the planned spin-off of the BankMobile business as well as a residual expense resulting from the 2016 acquisition of the Disbursements business.
Occupancy expense increased $0.6 million, or 11.2%, to $6.0 million for the six months ended June 30, 2018 from $5.4 million for the six months ended June 30, 2017 as Customers expanded into different geographical markets.
Professional services expense decreased by $3.9 million, or 28.5%, to $9.8 million for the six months ended June 30, 2018 from $13.7 million for the six months ended June 30, 2017. This decrease was primarily driven by a reduction in expenses for consulting, legal, and other professional fees as management continues its efforts to monitor and control expenses.
Provision for operating losses decreased by $0.6 million, or 18.7%, to $2.8 million for the six months ended June 30, 2018 from $3.4 million for the six months ended June 30, 2017. The provision for operating losses represents Customers' estimated liability for losses resulting from fraud or theft-based transactions that have generally been disputed by deposit account holders mainly from its BankMobile Disbursements business but where such disputes have not been resolved as of the end of the reporting period. The reserve is based on historical rates of loss on such transactions.
INCOME TAXES
IncomeThe table below presents income tax expense decreased $5.1 millionand the effective tax rate for the three and six months ended June 30, 2018 to $14.22019 and 2018. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | QTD | | Six Months Ended June 30, | | YTD |
(dollars in thousands) | 2019 | | 2018 | | Change | | % Change | | 2019 | | 2018 | | Change | | % Change |
Income before income tax expense | $ | 11,787 |
| | $ | 30,483 |
| | $ | (18,696 | ) | | (61.3 | )% | | $ | 32,058 |
| | $ | 62,026 |
| | $ | (29,968 | ) | | (48.3 | )% |
Income tax expense | $ | 2,491 |
| | $ | 6,820 |
| | $ | (4,329 | ) | | (63.5 | )% | | $ | 7,323 |
| | $ | 14,222 |
| | $ | (6,899 | ) | | (48.5 | )% |
Effective tax rate | 21.13 | % | | 22.37 | % | | | | | | 22.84 | % | | 22.93 | % | | | | |
The $4.3 million when compared to income tax expense of $19.3and $6.9 million for the same period in 2017. The decrease in income tax expense was driven primarily by a decrease in pre-tax income of $6.8 million infor the first six months of 2018. Customers' effective tax rate decreased to 22.9% for thethree and six months ended June 30, 2018,2019, when compared to 28.1% for the same periodperiods in 2017.the prior year, primarily resulted from lower pre-tax income. The decrease in the effective tax rate wasfor the three months ended June 30, 2019 compared to the three months ended June 30, 2018 primarily driven by lower federal income tax tax rates followingresulted from a favorable return to provision adjustment recorded during the enactment ofthree months ended June 30, 2019.
PREFERRED STOCK DIVIDENDS
Preferred stock dividends were $3.6 million and $7.2 million for the Tax Cutsthree and Jobs Act in December 2017 and a lower taxable income for the six months ended June 30, 2018 compared to the same period in 2017. In the six months ended June 30, 2017, there was a recognition of a tax benefit of $4.6 million for the development of tax strategies that would have allowed for the recognition of the tax benefit from losses that had been recorded for impairment charges on the Religare equity securities.
PREFERRED STOCK DIVIDENDS
Preferred stock dividends were $7.2 million for the six months ended June 30, 20182019 and June 30, 2017,2018, respectively. There were no changes to the amount of preferred stock outstanding or the dividend rates forfrom second quarter 2018 to second quarter 2019 or from the first six months ofin 2018 compared to the first six months of 2017.
in 2019.
Financial Condition
General
Customers' total assets were $11.1$11.2 billion at June 30, 2018.2019. This represented a $1.3 billion or 12.7%, increase from total assets of $9.8 billion at December 31, 2017. At December 31, 2017, Customers had strategically reduced total assets to under $10 billion to improve capital ratios and to continue to maintain its small issuer status under the Durbin Amendment to maximize interchange revenue until July 1, 2019. The change in Customers' financial position at June 30, 2018 compared to December 31, 2017 occurred primarily as a result of an increase in total investment securities of $0.7 billion, or 146.3%, to $1.2 billion at June 30, 2018 compared to $0.5 billion at December 31, 2017, primarily driven by growth in agency-guaranteed mortgage-backed securities and corporate bonds.2018. The increase in total assets was also attributable to an increaseprimarily resulted from increases in total loans outstanding, includingreceivable, mortgage warehouse, at fair value of $596.1 million, loans held for sale,and leases receivable of $405.8$576.0 million, or 4.7%, since December 31, 2017, primarily driven by growth in commercial and industrial loans (including owner occupied commercial real estate loans)investment securities of $172.5 million, commercial loans to mortgage banking business of $142.7$43.3 million, and consumer loanscash and cash equivalents of $253.8 million. These increases were offset in part by a decrease in multi-family loans of $103.8$33.7 million.
Total liabilities were $10.2 billion at June 30, 2018.2019. This represented a $1.2$1.3 billion or 13.9%, increase from $8.9 billion at December 31, 2017.2018. The increase in total liabilities primarily resulted primarily from FHLB borrowings, which increased by $0.8 billion, or 48.3%, to $2.4 billion at June 30, 2018 from $1.6 billion at December 31, 2017, andincreases in total deposits which increased $495.8of $1.0 billion and federal funds purchased of $219.0 million, or 7.3%, to $7.3 billion at June 30, 2018 from $6.8 billion at December 31, 2017. These increases werepartially offset in part by a decreasereduction in Federal funds purchasedother borrowings of $50.0 million, or 32.3%, to $105.0 million at June 30, 2018 from $155.0 million at December 31, 2017.$24.8 million.
The following table presents certain key condensed balance sheet data as of June 30, 20182019 and December 31, 2017:2018:
| | | June 30, 2018 | | December 31, 2017 | |
| | | | |
(amounts in thousands) | | | | |
(dollars in thousands) | | June 30, 2019 | | December 31, 2018 | | Change | | % Change |
Cash and cash equivalents | $ | 251,726 |
| | $ | 146,323 |
| $ | 95,795 |
| | $ | 62,135 |
| | $ | 33,660 |
| | 54.2 | % |
Investment securities, at fair value | 1,161,000 |
| | 471,371 |
| 708,359 |
| | 665,012 |
| | 43,347 |
| | 6.5 | % |
Loans held for sale (includes $1,043 and $1,886, respectively, at fair value) - as restated | 1,043 |
| | 146,077 |
| |
Loans receivable, mortgage warehouse, at fair value - as restated | 1,930,738 |
| | 1,793,408 |
| |
Loans receivable | 7,181,726 |
| | 6,768,258 |
| |
Allowance for loan losses | (38,288 | ) | | (38,015 | ) | |
Loans held for sale | | 5,697 |
| | 1,507 |
| | 4,190 |
| | 278.0 | % |
Loans receivable, mortgage warehouse, at fair value | | 2,001,540 |
| | 1,405,420 |
| | 596,120 |
| | 42.4 | % |
Loans and leases receivable | | 7,714,106 |
| | 7,138,074 |
| | 576,032 |
| | 8.1 | % |
Allowance for loan and lease losses | | (48,388 | ) | | (39,972 | ) | | (8,416 | ) | | 21.1 | % |
Total assets | 11,092,846 |
| | 9,839,555 |
| 11,182,427 |
| | 9,833,425 |
| | 1,349,002 |
| | 13.7 | % |
Total deposits | 7,295,954 |
| | 6,800,142 |
| 8,185,777 |
| | 7,142,236 |
| | 1,043,541 |
| | 14.6 | % |
Federal funds purchased | 105,000 |
| | 155,000 |
| 406,000 |
| | 187,000 |
| | 219,000 |
| | 117.1 | % |
FHLB advances | 2,389,797 |
| | 1,611,860 |
| 1,262,100 |
| | 1,248,070 |
| | 14,030 |
| | 1.1 | % |
Other borrowings | 186,888 |
| | 186,497 |
| 99,055 |
| | 123,871 |
| | (24,816 | ) | | (20.0 | )% |
Subordinated debt | 108,929 |
| | 108,880 |
| 109,026 |
| | 108,977 |
| | 49 |
| | — | % |
Total liabilities | 10,156,619 |
| | 8,918,591 |
| 10,191,022 |
| | 8,876,609 |
| | 1,314,413 |
| | 14.8 | % |
Total shareholders’ equity | 936,227 |
| | 920,964 |
| 991,405 |
| | 956,816 |
| | 34,589 |
| | 3.6 | % |
Total liabilities and shareholders’ equity | 11,092,846 |
| | 9,839,555 |
| $ | 11,182,427 |
| | $ | 9,833,425 |
| | $ | 1,349,002 |
| | 13.7 | % |
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks and interest-earning deposits. Cash and due from banks consists mainly of vault cash and cash items in the process of collection. These balances totaled $23.0Cash and due from banks were $24.8 million and $17.7 million at June 30, 2018. This represented a $2.6 million increase from $20.4 million at2019 and December 31, 2017. These2018, respectively. Cash and due from banks balances vary from day to day, primarily due to variations in customers’ depositsdeposit activities with Customers.the Bank.
Interest-earning deposits consist of cash deposited at other banks, primarily the Federal Reserve Bank of Philadelphia.FRB. Interest-earning deposits were $228.8$71.0 million and $125.9$44.4 million at June 30, 20182019 and December 31, 2017,2018, respectively. ThisThe balance of interest-earning deposits varies from day to day, depending on several factors, such as fluctuations in customers' deposits with Customers, payment of checks drawn on customers' accounts and strategic investment decisions made to maximize Customers' net interest income, while effectively managing interest-rate risk and liquidity. Customers targeted a lower cash balance at December 31, 2017 consistent with its objectives of reducing total assets below $10 billion at December 31, 2017.
In connection with the June 2016 acquisition of the Disbursement business from Higher One, as of June 30, 2018 and December 31, 2017, Customers had $5 million in an escrow account restricted in use with a third party to be paid to Higher One upon the second anniversary of the transaction closing, or at a later date as otherwise agreed to by both parties. Also, in connection with the planned spin-off and merger, Customers had $1.0 million in an escrow account with a third party that is reserved for payment to Flagship Community Bank in the event the amended and restated agreement with Flagship is terminated for reasons described in the agreement. See NOTE 2 - SPIN-OFF AND MERGER for additional details related to this escrow account. In connection with the purchase of certain university relationships in January 2018, Customers placed $1.5 million in an escrow account with a third party that is reserved for payment to a third party by December 31, 2018.
Investment Securities
The investment securities portfolio is an important source of interest income and liquidity. It consists of mortgage-backed securities (guaranteed by an agency of the United States government), corporate debtsecurities, interest-only GNMA securities, and marketable equity securities. In addition to generating revenue, the investment portfolio is maintained to manage interest-rate risk, provide liquidity, provideserve as collateral for other borrowings, and diversify the credit risk of interest-earning assets. The portfolio is structured to optimize net interest income, given changes in the economic environment, liquidity position and balance sheet mix.
At June 30, 2018,2019, investment securities were $1.2 billion,totaled $708.4 million compared to $0.5 billion$665.0 million at December 31, 2017, an increase of $0.7 billion.2018. The increase wasin investment securities primarily resulted from a market-driven recovery in the result of purchasesfair value of agency-guaranteed mortgage-backed securities and corporate securities and from obtaining ownership of certain interest-only GNMA securities with a fair value of $17.2 million on June 28, 2019. These securities served as the primary collateral for loans made to one commercial mortgage warehouse customer. These securities will be reported at fair value with fair value changes recorded directly in earnings based on a fair value option election.
securities totaling $763.2 million during the six months ended June 30, 2018, offset in part by maturities, calls and principal repayments in the amount of $26.2 million during the six months ended June 30, 2018.
For financial reporting purposes, available-for-sale debt securities are carried at fair value. Unrealized gains and losses on available-for-sale debt securities are included in other comprehensive incomeOCI and reported as a separate component of shareholders’ equity, net of the related tax effect. Beginning January 1, 2018, changesChanges in the fair value of marketable equity securities previously classified as available for sale will beand securities reported at fair value based on a fair value option election are recorded in earningsnon-interest income in the period in which they occur and will no longer be deferred in accumulated other comprehensive income. Amounts previously recorded to accumulated other comprehensive income were reclassified to retained earnings on January 1, 2018. See NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION for additional details related to the adoption of ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities.
occur.
LOANS AND LEASES
Existing lending relationships are primarily with small and middle market businesses and individual consumers primarily in Southeastern Pennsylvania (Bucks, Berks, Chester, Philadelphia and Delaware Counties); Rye Brook, New York (Westchester County);
Hamilton, New Jersey (Mercer County); Boston, Massachusetts; Providence, Rhode Island; Portsmouth, New Hampshire (Rockingham County); Manhattan and Melville, New York; Washington, D.C.; and Chicago, Illinois. The portfolio of loans to mortgage banking businesses is nationwide. The loan portfolio consists primarily of loans to support mortgage banking companies’ funding needs, multi-family/commercial real estate and commercial and industrial loans. Customers continues to focus on small and middle market business loans to grow its commercial lending efforts, particularly its commercial and industrial loan and lease portfolio and its specialty mortgage warehouse lending business, and has recently announced plans to increase its entry into non-QM residential mortgage lending.other consumer lending activities by approximately $750 million over the prior year. In addition, Customers has been deemphasizing its multi-family business, with plans to run-off approximately $1 billion or more in the second half of 2019, and has significantly limited originations of loans yielding less than 5%5.25% in order to reduce net interest margin compression.
Commercial Lending
Customers' commercial lending is divided into five groups: Business Banking, Small and Middle Market Business Banking, Multi-Family and Commercial Real Estate Lending, Mortgage Banking Lending, and Equipment Finance. This grouping is designed to allow for greater resource deployment, higher standards of risk management, strong asset quality, lower interest- rateinterest-rate risk and higher productivity levels.
The commercial lending group focuses primarily on companies with annual revenues ranging from $1 million to $100 million, which typically have credit requirements between $0.5 million and $10 million.
As of June 30, 2019, Customers had $8.4 billion in commercial loans outstanding, totaling approximately 86.8% of its total loan and lease portfolio, which includes loans held for sale and loans receivable, mortgage warehouse, at fair value, compared to commercial loans outstanding of $7.8 billion, comprising approximately 91.6% of its total loan and lease portfolio, at December 31, 2018.
The small and middle market business banking platform originates loans, including Small Business AdministrationSBA loans, through the branch network sales force and a team of dedicated relationship managers. The support administration of this platform is centralized, including risk management, product management, marketing, performance tracking and overall strategy. Credit and sales training has been established for Customers' sales force, ensuring that it has small business experts in place providing appropriate financial solutions to the small business owners in its communities. A division approach focuses on industries that offer high asset quality and are deposit rich to drive profitability.
In 2009, Customers launched itsCustomers' lending to mortgage banking businesses products, whichbusiness primarily provides financing to mortgage bankers for residential mortgage originations from loan closing until sale in the secondary market. Many providers of liquidity in this segment exited the business in 2009 during a period of market turmoil. Customers saw an opportunity to provide liquidity to this business segment at attractive spreads. There was also the opportunity to attract escrow deposits and tospreads, generate fee income in this business. The goal of the mortgage banking business lending group is to originate loans that provide liquidity to mortgage banking companies. These loans are primarily used by mortgage companies to fund their pipelines from closing of individual mortgage loans until their sale into the secondary market.and attract escrow deposits. The underlying residential loans are taken as collateral for Customers' commercial loans to the mortgage companies. As of June 30, 20182019 and December 31, 2017,2018, commercial loans to mortgage banking businesses totaled $1.9$2.0 billion and $1.8$1.4 billion, respectively, and are reported as loans receivable, mortgage warehouse, at fair value on the consolidated balance sheets.sheet.
The goal ofCustomers intends to continue to deemphasize its lower-yielding multi-family loan portfolio, and invest in higher-yielding commercial and industrial and other consumer loan portfolios with the multi-family run-off. Customers' multi-family lending group iscontinues to buildfocus on retaining a portfolio of high-quality multi-family loans within Customers' covered markets while cross sellingcross-selling other products and services. These lending activities primarily target the refinancing of loans with other banks using conservative underwriting standards and provide purchase money for new acquisitions by borrowers. The primary collateral for these loans is a first lien mortgage on the multi-family property, plus an assignment of all
leases related to such property. As of June 30, 2018,2019, Customers had multi-family loans of $3.5$3.0 billion outstanding, comprising approximately 38.9%31.0% of the total loan and lease portfolio, compared to $3.6$3.3 billion, or approximately 41.9%38.4% of the total loan and lease portfolio, at December 31, 2017.2018.
The equipment finance group offers equipment financing and leasing products and services for a broad range of asset classes. It services vendors, dealers, independent finance companies, bank-owned leasing companies and strategic direct customers in the plastics, packaging, machine tool, construction, transportation and franchise markets. As of June 30, 20182019 and December 31, 2017,2018, Customers had $167.2$227.8 million and $152.5$172.9 million, respectively, of equipment finance loans outstanding. As of June 30, 20182019 and December 31, 2017,2018, Customers had $35.1$64.5 million and $26.6$54.5 million of equipment finance leases, respectively. As of June 30, 20182019 and December 31, 2017,2018, Customers had $26.5$62.0 million and $21.7$54.5 million, respectively, of operating leases entered into under this program, net of accumulated depreciation of $2.3$9.0 million and $0.5$4.8 million, respectively.
As of June 30, 2018, Customers had $8.5 billion in commercial loans outstanding, totaling approximately 93.6% of its total loan portfolio, which includes loans held for sale, compared to commercial loans outstanding of $8.4 billion, comprising approximately 96.2% of its loan portfolio, at December 31, 2017.
Consumer Lending
Customers provides unsecured consumer loans, residential mortgage, and home equity and residential mortgage loans to customers. Underwriting standards for homeThe other consumer loan portfolio consists largely of third-party originated unsecured consumer loans. None of the loans are considered sub-prime. Customers considers sub-prime borrowers to be those with FICO scores below 660. Customers has been selective in the consumer loans it has been
purchasing. Home equity lending are conservative and lending is offered to solidify customer relationships and grow relationship revenues in the long term. This lending is important in Customers' efforts to grow total relationship revenues for its consumer households. As of June 30, 2018,2019, Customers had $583.5 million$1.3 billion in consumer loans outstanding, or 6.4%13.2% of the total loan and lease portfolio, compared to $329.8$721.8 million, or 3.8%8.4% of the total loan and lease portfolio, as of December 31, 2017. In second quarter 2018,2018. Customers purchased $277.4$385.7 million and $447.0 million of thirty-year fixed-rateother consumer loans through arrangements with third party fintech companies during the three and six months ended June 30, 2019, respectively. Customers purchased $40.6 million and $108.5 million of residential mortgage loans from Third Federal Savings & Loan. Customers plans to expand its product offerings in real estate secured consumer lending in 2018third party financial institutions during the three and has announced its entry into the non-QM residential mortgage market.
Customers has launched a community outreach program in Philadelphia to finance homeownership in urban communities. As part of this program, Customers is offering an “Affordable Mortgage Product." This community outreach program is penetrating the underserved population, especially in low and moderate income neighborhoods. As part of this commitment, a loan production office was opened in Progress Plaza, 1501 North Broad Street, Philadelphia, PA. The program includes homebuyer seminars that prepare potential homebuyers for homeownership by teaching money management and budgeting skills, including the financial responsibilities that come with having a mortgage and owning a home. The “Affordable Mortgage Product” is offered throughout Customers' assessment areas.six months ended June 30, 2019, respectively.
Loans Held for Sale
The composition of loans held for sale as of June 30, 20182019 and December 31, 20172018 was as follows:
|
| | | | | | | |
| June 30, | | December 31, |
| 2018 | | 2017 |
(amounts in thousands) | (As Restated) | | (As Restated) |
Commercial loans: | | | |
Multi-family loans at lower of cost or fair value | $ | — |
| | $ | 144,191 |
|
Total commercial loans held for sale | — |
| | 144,191 |
|
Consumer loans: | | | |
Residential mortgage loans, at fair value | 1,043 |
| | 1,886 |
|
Loans held for sale | $ | 1,043 |
| | $ | 146,077 |
|
|
| | | | | | | |
(amounts in thousands) | June 30, 2019 | | December 31, 2018 |
Mortgage loans: | | | |
Residential mortgage loans, at fair value | $ | 4,372 |
| | $ | 1,507 |
|
Residential reverse mortgage loans – lower of cost or market | 1,325 |
| | — |
|
Loans held for sale | $ | 5,697 |
| | $ | 1,507 |
|
At June 30, 2018,2019, loans held for sale totaled $1.0$5.7 million, or 0.01%0.06% of the total loan and lease portfolio, and $146.1$1.5 million, or 1.7%0.02% of the total loan and lease portfolio, at December 31, 2017.2018. Loans held for sale are carried on the balance sheet at either fair value (due to the election of the fair value option) or at the lower of cost or fair value. An allowance for loan lossesALLL is not recorded on loans that are classified as held for sale.
Total Loans and Leases Receivable
LoansThe composition of total loans and leases receivable (excluding loans held for salesale) was as follows:
|
| | | | | | | |
(amounts in thousands) | June 30, 2019 | | December 31, 2018 |
Loans receivable, mortgage warehouse, at fair value | $ | 2,001,540 |
| | $ | 1,405,420 |
|
Loans receivable: | | | |
Commercial: | | | |
Multi-family | 3,017,531 |
| | 3,285,297 |
|
Commercial and industrial (including owner occupied commercial real estate) | 2,184,556 |
| | 1,951,277 |
|
Commercial real estate non-owner occupied | 1,176,575 |
| | 1,125,106 |
|
Construction | 59,811 |
| | 56,491 |
|
Total commercial loans and leases receivable | 6,438,473 |
| | 6,418,171 |
|
Consumer: | | | |
Residential real estate | 648,860 |
| | 566,561 |
|
Manufactured housing | 75,597 |
| | 79,731 |
|
Other consumer | 552,839 |
| | 74,035 |
|
Total consumer loans receivable | 1,277,296 |
| | 720,327 |
|
Loans and leases receivable | 7,715,769 |
| | 7,138,498 |
|
Deferred (fees) costs and unamortized (discounts) premiums, net | (1,663 | ) | | (424 | ) |
Allowance for loan and lease losses | (48,388 | ) | | (39,972 | ) |
Total loans and leases receivable, net of allowance for loan and lease losses | $ | 9,667,258 |
| | $ | 8,503,522 |
|
Customers' total loans and leases receivable portfolio includes loans receivable which are reported at fair value based on an election made to account for these loans at their fair value and loans and leases receivable which are primarily reported at their outstanding unpaid principal balance, net of charge-offs, deferred costs and fees, and unamortized premiums and discounts and are evaluated for impairment.
Loans receivable, mortgage warehouse, at fair value
The mortgage warehouse product line primarily provides financing to mortgage companies nationwide from the time of origination of the underlying mortgage loans until the mortgage loans are sold into the secondary market. As a mortgage warehouse lender, Customers provides a form of financing to mortgage bankers by purchasing for resale the underlying residential mortgages on a short-term basis under a master repurchase agreement. These loans are reported as loans receivable, mortgage warehouse, at fair value on the consolidated balance sheets. Because these loans are reported at their fair value), net of thevalue, they do not have an allowance for loan and lease losses increasedand are therefore excluded from allowance for loan and lease losses related disclosures. At June 30, 2019, all of Customers' commercial mortgage warehouse loans were current in terms of payment.
Customers is subject to the risks associated with such lending, including, but not limited to, the risks of fraud, bankruptcy and default of the mortgage banker or of the underlying residential borrower, any of which could result in credit losses. Customers' mortgage warehouse lending team members monitor these mortgage originators by $413.2 millionobtaining financial and other relevant information to $7.1reduce these risks during the lending period. Loans receivable, mortgage warehouse, at fair value totaled $2.0 billion and $1.4 billion at June 30, 2018 from $6.7 billion at December 31, 2017. Total loans receivable as of June 30, 20182019 and December 31, 2017 consisted of the following:
|
| | | | | | | |
| June 30, | | December 31, |
| 2018 | | 2017 |
(amounts in thousands) | (As Restated) | | (As Restated) |
Loans receivable, mortgage warehouse, at fair value | $ | 1,930,738 |
| | $ | 1,793,408 |
|
Loans receivable: | | | |
Commercial: | | | |
Multi-family | $ | 3,542,770 |
| | $ | 3,502,381 |
|
Commercial and industrial (including owner occupied commercial real estate) | 1,811,751 |
| | 1,633,818 |
|
Commercial real estate non-owner occupied | 1,155,998 |
| | 1,218,719 |
|
Construction | 88,141 |
| | 85,393 |
|
Total commercial loans receivable | 6,598,660 |
| | 6,440,311 |
|
Consumer: | | | |
Residential real estate | 493,222 |
| | 234,090 |
|
Manufactured housing | 85,328 |
| | 90,227 |
|
Other | 3,874 |
| | 3,547 |
|
Total consumer loans receivable | 582,424 |
| | 327,864 |
|
Loans receivable | 7,181,084 |
| | 6,768,175 |
|
Deferred costs and unamortized premiums, net | 642 |
| | 83 |
|
Allowance for loan losses | (38,288 | ) | | (38,015 | ) |
Total loans receivable, net of allowance for loan losses | $ | 9,074,176 |
| | $ | 8,523,651 |
|
2018, respectively.Credit Risk
Customers manages credit risk by maintaining diversification in its loan and lease portfolio, establishing and enforcing prudent underwriting standards and collection efforts, and continuous and periodic loan and lease classification reviews. Management also considers the effect of credit risk on financial performance by reviewing quarterly and maintaining an adequate allowance for loan losses.ALLL. Credit losses are chargedcharged-off when they are identified, and provisions are added when it is estimated that a loss has occurred, to the allowance for loan lossesALLL at least quarterly. The allowance for loan lossesALLL is estimated at least quarterly.
The provision for loan and lease losses was $(0.8)$5.3 million and $0.5a benefit of $0.8 million for the three months ended June 30, 20182019 and 2017,2018, respectively, and $1.3$10.1 million and $3.6$1.3 million for the six months ended June 30, 20182019 and 2017, respectively.2018. The allowance for loan lossesALLL maintained for loans and leases receivable (excluding loans held for sale and loans receivable, mortgage warehouse, at fair value) was $38.3$48.4 million, or 0.53%0.63% of loans and leases receivable, at June 30, 20182019 and $38.0$40.0 million, or 0.56% of loans and leases receivable, at December 31, 2017.2018. Net charge-offs were $0.4$0.6 million for the three months ended June 30, 2018, a decrease2019, an increase of $1.5$0.2 million compared to the same period in 2017.2018. The decreaseincrease in net charge-offs period over period was mainly driven by a decreasehigher net charge-offs in charge-off activitiesthe other consumer loan portfolio, partially offset by lower net charge-offs in the commercial and industrial loan portfolio and an increase in recoveries in the commercial real estate owner occupied and construction loan portfolios. Net charge-offs were $1.1$1.7 million for the six months ended June 30, 2018, a decrease2019, an increase of $1.4$0.6 million compared to the same period in 2017.2018. The decreaseincrease in net charge-offs period over period was mainly driven by decreaseshigher net charge-offs in charge-off activities related tothe other consumer and multi-family loan portfolios, partially offset by lower net charge-offs in the commercial and industrial loan portfolio and the commercial real estate non-owner occupied loan portfolio, partially offset by an increase in charge-off activities in the commercial real estate owner occupied portfolio and in the other consumer loan portfolio.portfolios.
The table below presents changes in the Bank’s allowance for loan lossesALLL for the periods indicated.
Analysis of the Allowance for Loan and Lease Losses
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | | | | | | | |
| 2018 | | 2017 | | 2018 | | 2017 | Three Months Ended June 30, | | Six Months Ended June 30, |
(amounts in thousands) | | | | | | | | 2019 | | 2018 | | 2019 | | 2018 |
Balance at the beginning of the period | $ | 39,499 |
| | $ | 39,883 |
| | $ | 38,015 |
| | $ | 37,315 |
| $ | 43,679 |
| | $ | 39,499 |
| | $ | 39,972 |
| | $ | 38,015 |
|
Loan charge-offs (1) | | | | | | | | |
Loan and lease charge-offs (1) | | | | | | | | |
Multi-family | | — |
| | — |
| | 541 |
| | — |
|
Commercial and industrial | 174 |
| | 1,849 |
| | 224 |
| | 2,047 |
| 183 |
| | 174 |
| | 183 |
| | 224 |
|
Commercial real estate owner occupied | 483 |
| | — |
| | 501 |
| | — |
| 66 |
| | 483 |
| | 74 |
| | 501 |
|
Commercial real estate non-owner occupied | — |
| | 4 |
| | — |
| | 408 |
| |
Residential real estate | 42 |
| | 69 |
| | 407 |
| | 290 |
| 69 |
| | 42 |
| | 109 |
| | 407 |
|
Other consumer | 462 |
| | 226 |
| | 718 |
| | 246 |
| 932 |
| | 462 |
| | 1,687 |
| | 718 |
|
Total Charge-offs | 1,161 |
| | 2,148 |
| | 1,850 |
| | 2,991 |
| 1,250 |
| | 1,161 |
| | 2,594 |
| | 1,850 |
|
Loan recoveries (1) | | | | | | | | |
Loan and lease recoveries (1) | | | | | | | | |
Multi-family | | 7 |
| | — |
| | 7 |
| | — |
|
Commercial and industrial | 140 |
| | 68 |
| | 175 |
| | 283 |
| 338 |
| | 140 |
| | 457 |
| | 175 |
|
Commercial real estate owner occupied | 326 |
| | 9 |
| | 326 |
| | 9 |
| 97 |
| | 326 |
| | 225 |
| | 326 |
|
Construction | 209 |
| | 49 |
| | 220 |
| | 130 |
| 114 |
| | 209 |
| | 120 |
| | 220 |
|
Residential real estate | 56 |
| | 6 |
| | 63 |
| | 27 |
| 8 |
| | 56 |
| | 15 |
| | 63 |
|
Other consumer | 3 |
| | 56 |
| | 6 |
| | 100 |
| 49 |
| | 3 |
| | 73 |
| | 6 |
|
Total Recoveries | 734 |
| | 188 |
| | 790 |
| | 549 |
| 613 |
| | 734 |
| | 897 |
| | 790 |
|
Total net charge-offs | 427 |
| | 1,960 |
| | 1,060 |
| | 2,442 |
| 637 |
| | 427 |
| | 1,697 |
| | 1,060 |
|
Provision for loan losses | (784 | ) | | 535 |
| | 1,333 |
| | 3,585 |
| |
Provision for loan and lease losses | | 5,346 |
| | (784 | ) | | 10,113 |
| | 1,333 |
|
Balance at the end of the period | $ | 38,288 |
| | $ | 38,458 |
| | $ | 38,288 |
| | $ | 38,458 |
| $ | 48,388 |
| | $ | 38,288 |
| | $ | 48,388 |
| | $ | 38,288 |
|
| |
(1) | Charge-offs and recoveries on purchased-credit-impairedPCI loans that are accounted for in pools are recognized on a net basis when the pool matures. |
The allowance for loan lossesALLL is based on a quarterly evaluation of the loan and lease portfolio and is maintained at a level that management considers adequate to absorb probable losses incurred as of the balance sheet date. All commercial loans, with the exception of commercial mortgage warehouse loans, which are reported at fair value, are assigned internal credit-risk ratings, based upon an assessment of the borrower, the structure of the transaction and the available collateral and/or guarantees. All loans and leases are monitored regularly by the responsible officer, and the risk ratings are adjusted when considered appropriate. The risk assessment allows management to identify problem loans and leases timely. Management considers a variety of factors and recognizes the inherent risk of loss that always exists in the lending process. Management uses a disciplined methodology to estimate an appropriate level of allowance for loan losses.ALLL. Refer to Critical Accounting Policies herein and NOTE 42 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION to Customers' audited financial statements in its 20172018 Form 10-K/A10-K for further discussion on management's methodology for estimating the allowance for loan losses.ALLL.
Approximately 83%79% of Customers' commercial real estate, commercial and residential construction, consumer residential and commercial and industrial loan types have real estate as collateral (collectively, “the real estate portfolio”). Customers' lien position on the real estate collateral will vary on a loan-by-loan basis and will change as a result of changes, primarily in the valueform of the collateral.a first lien position. Current appraisals providing current value estimates of the property are received when Customers' credit group determines that the facts and circumstances have significantly changed since the date of the last appraisal, including that real estate values have deteriorated. The credit committee and loan officers review loans that are 15 or more days delinquent and all non-accrual loans on a periodic basis. In addition, loans where the loan officers have identified a “borrower of interest” are discussed to determine if additional analysis is necessary to apply the risk-rating criteria properly. The risk ratings for the real estate loan portfolio are determined based upon the current information available, including but not limited to discussions with the borrower, updated financial information, economic conditions within the geographic area and other factors that may affect the cash flow of the loan. If a loan is individually evaluated for impairment, the collateral value or discounted cash flow analysis is generally used to determine the estimated fair value of the underlying collateral, net of estimated selling costs, and compared to the outstanding loan balance to determine the amount of reserve necessary, if any. Appraisals used in this evaluation process are typically less than two years aged. For loans where real estate is not the primary source of collateral, updated financial information is obtained, including accounts receivable and inventory aging reports and relevant supplemental financial data to estimate the fair value of the loan, net of estimated selling costs, and compared to the outstanding loan balance to estimate the required reserve.
These impairment measurements are inherently subjective as they require material estimates, including, among others, estimates of property values in appraisals, the amounts and timing of expected future cash flows on individual loans, and general considerations for historical loss experience, economic conditions, uncertainties in estimating losses and inherent risks in the various credit portfolios, all of which require judgment and may be susceptible to significant change over time and as a result of changing economic conditions or other factors. Pursuant to ASC 310-10-35 Loan Impairment and ASC 310-40 Troubled Debt Restructurings by Creditors, impaired loans, consisting primarily of non-accrual and restructured loans, are considered in the methodology for determining the allowance for loan losses.ALLL. Impaired loans are generally evaluated based on the expected future cash flows or the fair value of the underlying collateral (less estimated costs to sell) if principal repayment is expected to come from the sale or operation of such collateral.
Asset Quality
Customers divides its loan portfolio into two categories to analyze and understand loan activity and performance: loans that were originated and loans that were acquired. Customers further segments the originatedloan and acquired loan categorieslease receivables by loan product or other characteristic generally defining a shared characteristic with other loans in the same group. Customers' originated loans were subject to the current underwriting standards that were put in place in 2009. Management believes this segmentation better reflects the risk in the portfolio and the various types of reserves that are available to absorb loan losses that may emerge in future periods. Credit losses from originated loans and leases are absorbed by the allowance for loan losses.ALLL. Credit losses from acquired loans are absorbed by the allowance for loan losses,ALLL, nonaccretable difference fair value marks and cash reserves. As described below, the allowance for loan losses is intended to absorb only those losses estimated to have been incurred after acquisition, whereas the fair value mark and cash reserves absorb losses estimated to have been embedded in the acquired loans at acquisition. The schedule that follows includes both loans held for sale and loans held for investment.
Asset Quality at June 30, 20182019
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loan Type | Total Loans | | Current | | 30-89 Days Past Due | | 90 Days or More Past Due and Accruing | | Non- accrual/ NPL (a) | | OREO (b) | | NPA (a)+(b) | | NPL to Loan Type (%) | | NPA to Loans + OREO (%) |
(amounts in thousands) | | | |
Originated Loans | | | | | | | | | | | | | | | | | |
Multi-Family | $ | 3,540,261 |
| | $ | 3,538,918 |
| | $ | — |
| | $ | — |
| | $ | 1,343 |
| | $ | — |
| | $ | 1,343 |
| | 0.04 | % | | 0.04 | % |
Commercial & Industrial (1) | 1,728,577 |
| | 1,713,369 |
| | 1,087 |
| | — |
| | 14,121 |
| | 667 |
| | 14,788 |
| | 0.82 | % | | 0.86 | % |
Commercial Real Estate Non-Owner Occupied | 1,140,483 |
| | 1,138,133 |
| | — |
| | — |
| | 2,350 |
| | — |
| | 2,350 |
| | 0.21 | % | | 0.21 | % |
Residential | 106,076 |
| | 103,426 |
| | 748 |
| | — |
| | 1,902 |
| | 57 |
| | 1,959 |
| | 1.79 | % | | 1.85 | % |
Construction | 88,141 |
| | 88,141 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — | % | | — | % |
Other consumer | 1,752 |
| | 1,716 |
| | 36 |
| | — |
| | — |
| | — |
| | — |
| | — | % | | — | % |
Total Originated Loans (2) | 6,605,290 |
| | 6,583,703 |
| | 1,871 |
| | — |
| | 19,716 |
| | 724 |
| | 20,440 |
| | 0.30 | % | | 0.31 | % |
Loans Acquired | | | | | | | | | | | | | | | | | |
Bank Acquisitions | 136,070 |
| | 130,316 |
| | 1,015 |
| | 475 |
| | 4,264 |
| | 704 |
| | 4,968 |
| | 3.13 | % | | 3.63 | % |
Loan Purchases | 439,724 |
| | 430,415 |
| | 3,517 |
| | 3,777 |
| | 2,015 |
| | 277 |
| | 2,292 |
| | 0.46 | % | | 0.52 | % |
Total Loans Acquired | 575,794 |
| | 560,731 |
| | 4,532 |
| | 4,252 |
| | 6,279 |
| | 981 |
| | 7,260 |
| | 1.09 | % | | 1.26 | % |
Deferred costs and unamortized premiums, net | 642 |
| | 642 |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
|
| |
|
|
Loans Receivable | 7,181,726 |
| | 7,145,076 |
| | 6,403 |
| | 4,252 |
| | 25,995 |
| | 1,705 |
| | 27,700 |
| | 0.36 | % | | 0.39 | % |
Loans Receivable, Mortgage Warehouse, at Fair Value - As Restated | 1,930,738 |
| | 1,930,738 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | | | |
Total Loans Held for Sale - As Restated | 1,043 |
| | 1,043 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | | |
|
|
Total Portfolio | $ | 9,113,507 |
| | $ | 9,076,857 |
| | $ | 6,403 |
| | $ | 4,252 |
| | $ | 25,995 |
| | $ | 1,705 |
| | $ | 27,700 |
| | 0.29 | % | | 0.30 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | Total Loans | | Current | | 30-89 Days Past Due | | 90 Days or More Past Due and Accruing | | Non-accrual/NPL (a) | | OREO (b) | | NPA (a)+(b) | | NPL to Loan Type (%) | | NPA to Loans + OREO (%) |
Loan Type | | | | | | | | | | | | | | | | | |
Multi-family | $ | 3,017,531 |
| | $ | 3,017,531 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | — | % | | — | % |
Commercial & Industrial (1) | 2,184,556 |
| | 2,176,475 |
| | 1,428 |
| | 326 |
| | 6,327 |
| | 708 |
| | 7,035 |
| | 0.29 | % | | 0.32 | % |
Commercial Real Estate Non-Owner Occupied | 1,176,575 |
| | 1,176,198 |
| | 283 |
| | — |
| | 94 |
| | — |
| | 94 |
| | 0.01 | % | | 0.01 | % |
Construction | 59,811 |
| | 59,811 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — | % | | — | % |
Total commercial loans and leases receivable | 6,438,473 |
| | 6,430,015 |
| | 1,711 |
| | 326 |
| | 6,421 |
| | 708 |
| | 7,129 |
| | 0.10 | % | | 0.11 | % |
Residential | 648,860 |
| | 641,065 |
| | 2,660 |
| | 52 |
| | 5,083 |
| | 78 |
| | 5,161 |
| | 0.78 | % | | 0.80 | % |
Manufactured housing | 75,597 |
| | 67,390 |
| | 3,937 |
| | 2,700 |
| | 1,570 |
| | 290 |
| | 1,860 |
| | 2.08 | % | | 2.45 | % |
Other consumer | 552,839 |
| | 550,964 |
| | 1,496 |
| | 20 |
| | 359 |
| | — |
| | 359 |
| | 0.06 | % | | 0.06 | % |
Total consumer loans receivable | 1,277,296 |
| | 1,259,419 |
| | 8,093 |
| | 2,772 |
| | 7,012 |
| | 368 |
| | 7,380 |
| | 0.55 | % | | 0.58 | % |
Deferred (fees) costs and unamortized (discounts) premiums, net | (1,663 | ) | | (1,663 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | | | |
Loans and Leases Receivable | 7,714,106 |
| | 7,687,771 |
| | 9,804 |
| | 3,098 |
| | 13,433 |
| | 1,076 |
| | 14,509 |
| | 0.17 | % | | 0.19 | % |
Loans Receivable, Mortgage Warehouse, at Fair Value | 2,001,540 |
| | 2,001,540 |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
|
| |
|
|
Total Loans Held for Sale | 5,697 |
| | 4,372 |
| | — |
| | — |
| | 1,325 |
| | — |
| | 1,325 |
| | 23.26 | % | | 23.26 | % |
Total Portfolio | $ | 9,721,343 |
| | $ | 9,693,683 |
| | $ | 9,804 |
| | $ | 3,098 |
| | $ | 14,758 |
| | $ | 1,076 |
| | $ | 15,834 |
| | 0.15 | % | | 0.16 | % |
| |
(1) | Commercial & industrial loans, including owner occupied commercial real estate loans. |
| |
(2) | Does not include loans receivable, mortgage warehouse, at fair value. |
Asset Quality at June 30, 20182019 (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Loan Type | Total Loans | | NPL | | ALL | | Cash Reserve | | Total Credit Reserves | | Reserves to Loans (%) | | Reserves to NPLs (%) |
(amounts in thousands) | |
Originated Loans | | | | | | | | | | | | | |
Multi-Family | $ | 3,540,261 |
| | $ | 1,343 |
| | $ | 12,072 |
| | $ | — |
| | $ | 12,072 |
| | 0.34 | % | | 898.88 | % |
Commercial & Industrial (1) | 1,728,577 |
| | 14,121 |
| | 14,643 |
| | — |
| | 14,643 |
| | 0.85 | % | | 103.70 | % |
Commercial Real Estate Non-Owner Occupied | 1,140,483 |
| | 2,350 |
| | 4,260 |
| | — |
| | 4,260 |
| | 0.37 | % | | 181.28 | % |
Residential | 106,076 |
| | 1,902 |
| | 2,047 |
| | — |
| | 2,047 |
| | 1.93 | % | | 107.62 | % |
Construction | 88,141 |
| | — |
| | 992 |
| | — |
| | 992 |
| | 1.13 | % | | — | % |
Other consumer | 1,752 |
| | — |
| | 131 |
| | — |
| | 131 |
| | 7.48 | % | | — | % |
Total Originated Loans (2) | 6,605,290 |
| | 19,716 |
| | 34,145 |
| | — |
| | 34,145 |
| | 0.52 | % | | 173.18 | % |
Loans Acquired | | | | | | | | | | | | | |
Bank Acquisitions | 136,070 |
| | 4,264 |
| | 3,990 |
| | — |
| | 3,990 |
| | 2.93 | % | | 93.57 | % |
Loan Purchases | 439,724 |
| | 2,015 |
| | 153 |
| | 510 |
| | 663 |
| | 0.15 | % | | 32.90 | % |
Total Loans Acquired | 575,794 |
| | 6,279 |
| | 4,143 |
| | 510 |
| | 4,653 |
| | 0.81 | % | | 74.10 | % |
Deferred costs and unamortized premiums, net | 642 |
| | — |
| | — |
| | — |
| | — |
| |
|
| |
|
|
Loans Receivable | 7,181,726 |
| | 25,995 |
| | 38,288 |
| | 510 |
| | 38,798 |
| | 0.54 | % | | 149.25 | % |
Loans Receivable, Mortgage Warehouse, at Fair Value - As Restated | 1,930,738 |
| | — |
| | — |
| | — |
| | — |
| | | | |
Total Loans Held for Sale - As Restated | 1,043 |
| | — |
| | — |
| | — |
| | — |
| |
|
| |
|
|
Total Portfolio | $ | 9,113,507 |
| | $ | 25,995 |
| | $ | 38,288 |
| | $ | 510 |
| | $ | 38,798 |
| | 0.43 | % | | 149.25 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | Total Loans | | Non-accrual / NPL | | ALLL | | Cash Reserve | | Total Credit Reserves | | Reserves to Loans (%) | | Reserves to NPLs (%) |
Loan Type | |
Multi-family | $ | 3,017,531 |
| | $ | — |
| | $ | 9,926 |
| | $ | — |
| | $ | 9,926 |
| | 0.33 | % | | — | % |
Commercial & Industrial (1) | 2,184,556 |
| | 6,327 |
| | 17,096 |
| | — |
| | 17,096 |
| | 0.78 | % | | 270.21 | % |
Commercial Real Estate Non-Owner Occupied | 1,176,575 |
| | 94 |
| | 6,159 |
| | — |
| | 6,159 |
| | 0.52 | % | | 6552.13 | % |
Construction | 59,811 |
| | — |
| | 649 |
| | — |
| | 649 |
| | 1.09 | % | | — | % |
Total commercial loans and leases receivable | 6,438,473 |
| | 6,421 |
| | 33,830 |
| | — |
| | 33,830 |
| | 0.53 | % | | 526.86 | % |
Residential | 648,860 |
| | 5,083 |
| | 4,168 |
| | — |
| | 4,168 |
| | 0.64 | % | | 82.00 | % |
Manufactured housing | 75,597 |
| | 1,570 |
| | 123 |
| | 366 |
| | 489 |
| | 0.65 | % | | 31.15 | % |
Other consumer | 552,839 |
| | 359 |
| | 10,267 |
| | — |
| | 10,267 |
| | 1.86 | % | | 2859.89 | % |
Total consumer loans receivable | 1,277,296 |
| | 7,012 |
| | 14,558 |
| | 366 |
| | 14,924 |
| | 1.17 | % | | 212.84 | % |
Deferred (fees) costs and unamortized (discounts) premiums, net | (1,663 | ) | | — |
| | — |
| | — |
| | — |
| |
|
| |
|
|
Loans and Leases Receivable | 7,714,106 |
| | 13,433 |
| | 48,388 |
| | 366 |
| | 48,754 |
| | 0.63 | % | | 362.94 | % |
Loans Receivable, Mortgage Warehouse, at Fair Value | 2,001,540 |
| | — |
| | — |
| | — |
| | — |
| |
|
| |
|
|
Total Loans Held for Sale | 5,697 |
| | 1,325 |
| | — |
| | — |
| | — |
| | — | % | | — | % |
Total Portfolio | $ | 9,721,343 |
| | $ | 14,758 |
| | $ | 48,388 |
| | $ | 366 |
| | $ | 48,754 |
| | 0.50 | % | | 330.36 | % |
| |
(1) | Commercial & industrial loans, including owner occupied commercial real estate loans. |
| |
(2) | Does not include loans receivable, mortgage warehouse, at fair value. |
Originated Loans
Post 2009 originated loans (excluding loans held for saleThe total loan and loans receivable, mortgage warehouse, at fair value) totaled $6.6lease portfolio was $9.7 billion at June 30, 2018,2019 compared to $6.4$8.5 billion at December 31, 2017. The management team adopted new underwriting standards that management believes better limits risks of loss in 20092018 and has worked to maintain these standards. Only $19.7$14.8 million, or 0.30%0.15% of post 2009 originated loans and leases were non-performing at June 30, 2018,2019 compared to $20.0$27.5 million, or 0.32% of post 2009 originated loans or 0.31% of post 2009 originated loans,and leases at December 31, 2017.2018. The post 2009 originated loans wereloan and lease portfolio was supported by an allowance for loan lossescredit reserves of $34.1$48.8 million (0.52%(330.36% of post 2009 originated loans)NPLs and $33.30.50% of total loans and leases) and $40.5 million (0.52%(147.16% of post 2009 originated loans)NPLs and 0.47% of total loans and leases), respectively, at June 30, 20182019 and December 31, 2017. Total 2009 and prior loans ("legacy loans") were $22.5 million and $25.6 million at June 30, 2018, and December 31, 2017, respectively.
Loans Acquired
At June 30, 2018, total acquired loans were$575.8 million, or 8.0% of loans receivable, compared to $328.8 million, or 4.9% of loans receivable, at December 31, 2017. Non-performing acquired loans totaled$6.3 million and $6.4 million at June 30, 2018 and December 31, 2017, respectively. When loans are acquired, they are recorded on the balance sheet at fair value. Acquired loans include purchased portfolios, FDIC failed-bank acquisitions, and unassisted acquisitions. Of the manufactured housing loans purchased from Tammac prior to 2012, $49.4million were supported by a $0.5 million cash reserve at June 30, 2018, compared to $51.9 million supported by a cash reserve of $0.6 million at December 31, 2017. The cash reserve was created as part of the purchase transaction to absorb losses and is maintained in a demand deposit account at the Bank. All current losses and delinquent interest are absorbed by this reserve and any recoveries of those losses, as well as the proceeds from the sale of the repossessed properties securing the loans, are placed back into the reserve. For the manufactured housing loans purchased in 2012, Tammac has an obligation to pay the Bank the full payoff amount of the defaulted loan, including any principal, unpaid interest, or advances on the loans, once the borrower vacates the property. At June 30, 2018, $29.2 million of these loans were outstanding, compared to $31.4 million at December 31, 2017.
The price paid for acquired loans considered management’s judgment as to the credit and interest rate risk inherent in the portfolio at the time of purchase. Every quarter, management reassesses the risk and adjusts the cash flow forecast to incorporate changes in the credit outlook. Generally, a decrease in forecasted cash flows for a purchased loan will result in a provision for loan losses, and absent charge-offs, an increase in the allowance for loan losses. Acquired loans have a significantly higher percentage of non-performing loans than loans originated after September 2009. Management acquired these loans with the expectation that non-performing loan levels would be elevated, and therefore incorporated that expectation
into the price paid. Customers has assigned these loans to its Special Assets Group, a team that focuses on workouts for these acquired non-performing assets. Total acquired loans were supported by reserves (allowance for loan losses and cash reserves) of $4.7 million (0.81% of total acquired loans) and $5.4 million (1.64% of total acquired loans) at June 30, 2018 and December 31, 2017, respectively.
DEPOSITS
Customers offers a variety of deposit accounts, including checking, savings, money market deposit accounts (“MMDA”)MMDA, and time deposits. Deposits are primarily obtained from Customers' geographic service area and nationwide through branchless digital banking, our White Label relationship, deposit brokers, listing services and other relationships.
The components of deposits were as follows at the dates indicated:
|
| | | | | | | | | | | | | | |
(dollars in thousands) | June 30, 2019 | | December 31, 2018 | | Change | | % Change |
Demand, non-interest bearing | $ | 1,380,698 |
| | $ | 1,122,171 |
| | $ | 258,527 |
| | 23.0 | % |
Demand, interest bearing | 925,180 |
| | 803,948 |
| | 121,232 |
| | 15.1 | % |
Savings, including MMDA | 3,441,798 |
| | 3,481,936 |
| | (40,138 | ) | | (1.2 | )% |
Transaction deposits | 5,747,676 |
| | 5,408,055 |
| | 339,621 |
| | 6.3 | % |
Time, $100,000 and over | 1,156,485 |
| | 792,370 |
| | 364,115 |
| | 46.0 | % |
Time, other | 1,281,616 |
| | 941,811 |
| | 339,805 |
| | 36.1 | % |
Total deposits | $ | 8,185,777 |
| | $ | 7,142,236 |
| | $ | 1,043,541 |
| | 14.6 | % |
Total deposits were $7.3$8.2 billion at June 30, 2018,2019, an increase of $0.5$1.0 billion, or 7.3%14.6%, from $6.8$7.1 billion at December 31, 2017.2018. Transaction deposits increased by $0.3 billion,$339.6 million, or 6.7%6.3%, to $5.2$5.7 billion at June 30, 2018,2019, from $4.9$5.4 billion at December 31, 2017, with2018. This increase primarily resulted from Customers' initiative to improve its net interest margin by expanding its sources of lower-cost funding. These efforts led to increases in non-interest bearing deposits increasing by $38.6 million. Interest-bearing demand deposits of $258.5 million, and interest bearing demand deposits of $121.2 million. These increases were $0.6offset by a decrease in savings, including MMDA of $40.1 million, or 1.2%, to $3.4 billion at June 30, 2018, an increase of $99.5 million, or 19.0%,2019, from $0.5$3.5 billion at December 31, 2017. Savings, including MMDA, totaled $3.52018. Time deposits increased $703.9 million, or 40.6%, to $2.4 billion at June 30, 2018, an increase of $191.2 million, or 5.8%,2019, from $3.3$1.7 billion at December 31, 2017. This increase was primarily attributed to an increase in money market deposit accounts. Total time deposits were $2.1 billion at June 30, 2018, an increase of $166.5 million, or 8.7%, from $1.9 billion at December 31, 2017. 2018.
At June 30, 2018,2019, the Bank had $1.6$1.9 billion in state and municipal deposits to which it had pledged $1.9 billion of available borrowing capacity through the FHLB to the depositor through a letter of credit arrangement. At June 30, 2018, the balance of state and municipal deposits was $1.5 billion.
The components of deposits were as follows at the dates indicated:
|
| | | | | | | |
| June 30, 2018 | | December 31, 2017 |
(amounts in thousands) | | | |
Demand, non-interest bearing | $ | 1,090,744 |
| | $ | 1,052,115 |
|
Demand, interest bearing | 623,343 |
| | 523,848 |
|
Savings, including MMDA | 3,509,706 |
| | 3,318,486 |
|
Time, $100,000 and over | 1,055,341 |
| | 1,284,855 |
|
Time, other | 1,016,820 |
| | 620,838 |
|
Total deposits | $ | 7,295,954 |
| | $ | 6,800,142 |
|
BORROWINGS
Borrowed funds from various sources are generally used to supplement deposit growth and meet other operating needs. Customers' borrowings generally include short-term and long-term advances from the FHLB, federal funds purchased, senior unsecured notes and subordinated debt. Subordinated debt is also considered as Tier 2 capital for certain regulatory calculations. As of June 30, 20182019 and December 31, 2017,2018, total outstanding borrowings were $2.8$1.9 billion and $2.1$1.7 billion, respectively, which represented an increase of $0.7 billion,$208.3 million, or 35.3%12.5%. ThisIn June 2019, $25.0 million of senior notes bearing an annual interest rate of 4.625%, which were originally issued in June 2014 by the Bancorp, matured and were repaid in full.
SHAREHOLDERS' EQUITY
The components of shareholder's equity were as follows at the dates indicated:
|
| | | | | | | | | | | | | | |
(dollars in thousands) | June 30, 2019 | | December 31, 2018 | | Change | | % Change |
Preferred stock | $ | 217,471 |
| | $ | 217,471 |
| | $ | — |
| | — | % |
Common stock | 32,483 |
| | 32,252 |
| | 231 |
| | 0.7 | % |
Additional paid in capital | 439,067 |
| | 434,314 |
| | 4,753 |
| | 1.1 | % |
Retained earnings | 334,157 |
| | 316,651 |
| | 17,506 |
| | 5.5 | % |
Accumulated other comprehensive loss, net | (9,993 | ) | | (22,663 | ) | | 12,670 |
| | (55.9 | )% |
Treasury stock | (21,780 | ) | | (21,209 | ) | | (571 | ) | | 2.7 | % |
Total shareholders' equity | $ | 991,405 |
| | $ | 956,816 |
| | $ | 34,589 |
| | 3.6 | % |
Shareholders’ equity increased $34.6 million, or 3.6%, to $991.4 million at June 30, 2019 when compared to shareholders' equity of $956.8 million at December 31, 2018. The increase was primarily resulted from net income of $24.7 million for the resultsix months ended June 30, 2019, a reduction in accumulated other comprehensive loss, net of $12.7 million, and increases of $4.8 million in additional paid in capital and $0.2 million in common stock, partially offset by preferred stock dividends of $7.2 million for the six months ended June 30, 2019 and repurchases of shares of Customers' common stock totaling $0.6 million. The reduction in accumulated other comprehensive loss, net primarily resulted from an increase in investmentsthe fair value of available-for-sale debt securities, partially offset by a decline in the fair value of cash flow hedges, both due to the decline in market interest rates during the year. The increases in additional paid in capital and loans receivable increasingcommon stock resulted primarily from the needissuance of common stock under share-based compensation arrangements for short-term borrowings.the six months ended June 30, 2019.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity for a financial institution is a measure of that institution’s ability to meet depositors’ needs for funds, to satisfy or fund loan and lease commitments, and for other operating purposes. Ensuring adequate liquidity is an objective of the asset/liability management process. Customers coordinates its management of liquidity with its interest rate sensitivity and capital position, and strives to maintain a strong liquidity position.
Customers' investment portfolio provides periodic cash flows through regular maturities and amortization and can be used as collateral to secure additional liquidity funding. As of June 30, 2018 and December 31, 2017, Customers had unpledged marketable investments of $476.0 million and $454.4 million, respectively. Customers' principal sources of funds are deposits, borrowings, principal and interest payments on loans and leases, other funds from operations, and proceeds from common and preferred stock issuances. Borrowing arrangements are maintained with the Federal Home Loan BankFHLB and the Federal Reserve Bank of PhiladelphiaFRB to meet short-term liquidity needs. Longer-term borrowing arrangements are also maintained with the Federal
Home Loan Bank.FHLB. As of June 30, 2018,2019, Customers' borrowing capacity with the Federal Home Loan BankFHLB was $4.9$4.2 billion, of which $2.4$1.3 billion was utilized in borrowings and $1.6$2.0 billion of available capacity was utilized to collateralize state and municipal deposits. As of December 31, 2017,2018, Customers' borrowing capacity with the Federal Home Loan BankFHLB was $4.3$4.1 billion, of which $1.6$1.2 billion was utilized in borrowings and $1.8$1.7 billion of available capacity was utilized to collateralize state and municipal deposits. As of June 30, 20182019 and December 31, 2017,2018, Customers' borrowing capacity with the Federal Reserve Bank of PhiladelphiaFRB was $136.9$129.7 million and $142.5$102.5 million, respectively.
Net
The table below summarizes Customers' cash flows for the six months ended June 30, 2019 and 2018:
|
| | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
(amounts in thousands) | 2019 | | 2018 | | Change | | % Change |
Net cash provided by (used in) operating activities | $ | 3,129 |
| | $ | 65,471 |
| | $ | (62,342 | ) | | (95.2 | )% |
Net cash provided by (used in) investing activities | (1,213,324 | ) | | (1,179,191 | ) | | (34,133 | ) | | 2.9 | % |
Net cash provided by (used in) financing activities | 1,243,855 |
| | 1,219,123 |
| | 24,732 |
| | 2.0 | % |
Net increase (decrease) in cash and cash equivalents | $ | 33,660 |
| | $ | 105,403 |
| | $ | (71,743 | ) | | (68.1 | )% |
Cash flows provided by (used in) operating activities
Cash provided by operating activities wereof $3.1 million for the six months ended June 30, 2019 primarily resulted from net income of $24.7 million, non-cash operating adjustments of $25.2 million, and an increase of $16.5 million in accrued interest payable and other liabilities, partially offset by an increase of $63.3 million in accrued interest receivable and other assets. Cash provided by operating activities of $65.5 million duringfor the six months ended June 30, 2018 compared toprimarily resulted in net cashincome of $47.8 million and non-cash operating adjustments.
Cash flows provided by operating(used in) investing activities
Cash used in investing activities of $12.3 million during$1.2 billion for the six months ended June 30, 2017.
Net cash flows used in investing activities were $1.2 billion during the six months ended June 30, 2018, compared to2019 primarily resulted from net cash flows used in investing activitiesoriginations of $1.3 billion during the six months ended June 30, 2017.mortgage warehouse loans of $622.4 million and purchases of loans of $555.6 million.
Cash used in investing activities consisted of the following:
The origination of mortgage warehouse loans totaled $14.3 billion during the six months ended June 30, 2018, compared to $14.7 billion during the six months ended June 30, 2017.
Purchases of investment securities available for sale totaled $763.2 million during the six months ended June 30, 2018, compared to $644.0 million during the six months ended June 30, 2017.
Cash flows used to fund new loans held for investment totaled $18.7 million and $572.3 million during the six months ended June 30, 2018 and 2017, respectively.
Cash flows used to purchase loans totaled $278.5 million and $262.6 million during the six months ended June 30, 2018 and 2017, respectively.
Purchases of bank owned life insurance policies were $50.0 million during the six months ended June 30, 2017. There were no such purchases of bank owned life insurance policies during the six months ended June 30, 2018.
Net purchases of FHLB, Federal Reserve Bank and other restricted stock totaled $30.1 million and $61.3 million during the six months ended June 30, 2018 and 2017, respectively.
Purchases of leased assets under operating leases were $6.5 million during the six months ended June 30, 2018. There were no such purchases of leased assets under operating leases during the six months ended June 30, 2017.
Cash provided by investing activities consisted of the following:
Proceeds from repayments of mortgage warehouse loans totaled $14.1$1.2 billion for the six months ended June 30, 2018 compared to $14.7primarily resulted from purchases of investment securities available for sale of $763.2 million, purchases of loans of $278.5 million, and net originations of mortgage warehouse loans of $137.3 million.
Cash flows provided by (used in) financing activities
Cash provided by financing activities of $1.2 billion for the six months ended June 30, 2017.
Proceeds2019 primarily resulted from maturities, callsincreases in deposits of $1.0 billion, proceeds from long-term FHLB borrowings of $350.0 million, and principalfederal funds purchased of $219.0 million, partially offset by repayments of securities available for sale totaled $26.2short-term borrowed funds from the FHLB of $336.0 million, repayments of long-term debt of $25.0 million, and preferred stock dividends paid of $7.2 million.
Cash provided by financing activities of $1.2 billion for the six months ended June 30, 2018 compared to $22.8 million for the six months ended June 30, 2017.
Proceedsprimarily resulted from sales of investment securities available for sale amounted to $116.0 million during the six months ended June 30, 2017. There were no such sales of investments securities during the six months ended June 30, 2018.
Proceeds from the sale of loans held for investment totaled $29.0 million during the six months ended June 30, 2018, compared to $112.9 million during the six months ended June 30, 2017.
Net cash flows provided by financing activities were $1.2 billion during the six months ended June 30, 2018, compared to $1.5 billion for the six months ended June 30, 2017. During the six months ended June 30, 2018, a net increaseincreases in short-term borrowed funds from the FHLB provided net cash flows of $777.9 million, and an increase in deposits provided net cash flows of $495.8 million. These cash flow increases weremillion, partially offset by a net cash flow usage in federal funds purchased of $50.0 million, and preferred stock dividends paid of $7.2 million. During the six months ended June 30, 2017, a net increase in short-term borrowed funds from the FHLB provided net cash flows of $1.1 billion, a net increase in deposits provided net cash flows of $171.6 million, proceeds from the issuance of five-year senior notes provided $98.6 million, and a net increase in federal funds purchased provided net cash flows of $67.0 million, partially offset by the payment of preferred stock dividends of $7.2 million. These financing activities provided sufficient cash flows to support Customers' investing and operating activities.
On July 31, 2018, the 6.375% senior notes with an aggregate principal amount of $63.3 million issued by Customers Bancorp in July 2013 matured. Customers had sufficient funds accumulated at the Bancorp to make payment to the debtholders upon maturity of the senior notes. Overall, based on our core deposit base and available sources of borrowed funds, management believes that Customers has adequate resources to meet its short-term and long-term cash requirements for the foreseeable future.
CAPITAL ADEQUACY AND SHAREHOLDERS' EQUITY
Shareholders’ equity increased $15.3 million to $936.2 million at June 30, 2018 when compared to shareholders' equity of $921.0 million at December 31, 2017, an increase of 1.7% . The primary components of the net increase were as follows:
net income of $47.8 million for the six months ended June 30, 2018;
share-based compensation expense of $3.7 million for the six months ended June 30, 2018; and
issuance of common stock under share-based compensation arrangements of $3.2 million for the six months ended June 30, 2018.
The increases were offset in part by:
other comprehensive loss of $32.3 million for the six months ended June 30, 2018, arising primarily from unrealized fair value losses recognized on available-for-sale debt securities; and
preferred stock dividends of $7.2 million for the six months ended June 30, 2018.
The Bank and Customers Bancorp are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on Customers' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank and Bancorp must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items, as calculated under the regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Bancorp to maintain minimum amounts and ratios (set forth in the following table) of common equity Tier 1, Tier 1, and total capital to risk-weighted assets, and Tier 1 capital to average assets (as defined in the regulations). At June 30, 20182019 and December 31, 2017,2018, the Bank and the Bancorp met all capital adequacy requirements to which they were subject.
Generally, to comply with the regulatory definition of adequately capitalized, or well capitalized, respectively, or to comply with the Basel III capital requirements, an institution must at least maintain the common equity Tier 1, Tier 1, and total risk-based capital ratios and the Tier 1 leverage ratio in excess of the related minimum ratios set forth in the following table:
| | | | | | | Minimum Capital Levels to be Classified as: | | | | | Minimum Capital Levels to be Classified as: |
| Actual | | Adequately Capitalized | | Well Capitalized | | Basel III Compliant | Actual | | Adequately Capitalized | | Well Capitalized | | Basel III Compliant |
(amounts in thousands) | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | |
As of June 30, 2018: | | | | | | | | | | | | | | | | |
(dollars in thousands) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
As of June 30, 2019: | | | | | | | | | | | | | | | | |
Common equity Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 735,609 |
| | 8.611 | % | | $ | 384,418 |
| | 4.500 | % | | N/A |
| | N/A |
| | $ | 544,591 |
| | 6.375 | % | $ | 768,335 |
| | 8.041 | % | | $ | 429,991 |
| | 4.500 | % | | N/A |
| | N/A |
| | $ | 668,874 |
| | 7.000 | % |
Customers Bank | $ | 1,054,613 |
| | 12.351 | % | | $ | 384,232 |
| | 4.500 | % | | $ | 555,002 |
| | 6.500 | % | | $ | 544,329 |
| | 6.375 | % | $ | 1,068,554 |
| | 11.190 | % | | $ | 429,727 |
| | 4.500 | % | | $ | 620,717 |
| | 6.500 | % | | $ | 668,465 |
| | 7.000 | % |
Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 953,025 |
| | 11.156 | % | | $ | 512,557 |
| | 6.000 | % | | N/A |
| | N/A |
| | $ | 672,731 |
| | 7.875 | % | $ | 985,784 |
| | 10.317 | % | | $ | 573,321 |
| | 6.000 | % | | N/A |
| | N/A |
| | $ | 812,205 |
| | 8.500 | % |
Customers Bank | $ | 1,054,613 |
| | 12.351 | % | | $ | 512,309 |
| | 6.000 | % | | $ | 683,079 |
| | 8.000 | % | | $ | 672,406 |
| | 7.875 | % | $ | 1,068,554 |
| | 11.190 | % | | $ | 572,970 |
| | 6.000 | % | | $ | 763,960 |
| | 8.000 | % | | $ | 811,707 |
| | 8.500 | % |
Total capital (to risk-weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 1,072,072 |
| | 12.550 | % | | $ | 683,409 |
| | 8.000 | % | | N/A |
| | N/A |
| | $ | 843,583 |
| | 9.875 | % | $ | 1,123,602 |
| | 11.759 | % | | $ | 764,428 |
| | 8.000 | % | | N/A |
| | N/A |
| | $ | 1,003,312 |
| | 10.500 | % |
Customers Bank | $ | 1,202,070 |
| | 14.078 | % | | $ | 683,079 |
| | 8.000 | % | | $ | 853,849 |
| | 10.000 | % | | $ | 843,176 |
| | 9.875 | % | $ | 1,226,248 |
| | 12.841 | % | | $ | 763,960 |
| | 8.000 | % | | $ | 954,950 |
| | 10.000 | % | | $ | 1,002,697 |
| | 10.500 | % |
Tier 1 capital (to average assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 953,025 |
| | 8.866 | % | | $ | 429,963 |
| | 4.000 | % | | N/A |
| | N/A |
| | $ | 429,963 |
| | 4.000 | % | $ | 985,784 |
| | 9.511 | % | | $ | 414,576 |
| | 4.000 | % | | N/A |
| | N/A |
| | $ | 414,576 |
| | 4.000 | % |
Customers Bank | $ | 1,054,613 |
| | 9.822 | % | | $ | 429,471 |
| | 4.000 | % | | $ | 536,839 |
| | 5.000 | % | | $ | 429,471 |
| | 4.000 | % | $ | 1,068,554 |
| | 10.318 | % | | $ | 414,241 |
| | 4.000 | % | | $ | 517,801 |
| | 5.000 | % | | $ | 414,241 |
| | 4.000 | % |
As of December 31, 2017: | | | | | | | | | | | | | | | | |
As of December 31, 2018: | | | | | | | | | | | | | | | | |
Common equity Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 689,494 |
| | 8.805 | % | | $ | 352,368 |
| | 4.500 | % | | N/A |
| | N/A |
| | $ | 450,248 |
| | 5.750 | % | $ | 745,795 |
| | 8.964 | % | | $ | 374,388 |
| | 4.500 | % | | N/A |
| | N/A |
| | $ | 530,384 |
| | 6.375 | % |
Customers Bank | $ | 1,023,564 |
| | 13.081 | % | | $ | 352,122 |
| | 4.500 | % | | $ | 508,621 |
| | 6.500 | % | | $ | 449,934 |
| | 5.750 | % | $ | 1,066,121 |
| | 12.822 | % | | $ | 374,160 |
| | 4.500 | % | | $ | 540,453 |
| | 6.500 | % | | $ | 530,059 |
| | 6.375 | % |
Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 906,963 |
| | 11.583 | % | | $ | 469,824 |
| | 6.000 | % | | N/A |
| | N/A |
| | $ | 567,704 |
| | 7.250 | % | $ | 963,266 |
| | 11.578 | % | | $ | 499,185 |
| | 6.000 | % | | N/A |
| | N/A |
| | $ | 655,180 |
| | 7.875 | % |
Customers Bank | $ | 1,023,564 |
| | 13.081 | % | | $ | 469,496 |
| | 6.000 | % | | $ | 625,994 |
| | 8.000 | % | | $ | 567,307 |
| | 7.250 | % | $ | 1,066,121 |
| | 12.822 | % | | $ | 498,879 |
| | 6.000 | % | | $ | 665,173 |
| | 8.000 | % | | $ | 654,779 |
| | 7.875 | % |
Total capital (to risk-weighted assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 1,021,601 |
| | 13.047 | % | | $ | 626,432 |
| | 8.000 | % | | N/A |
| | N/A |
| | $ | 724,313 |
| | 9.250 | % | $ | 1,081,962 |
| | 13.005 | % | | $ | 665,580 |
| | 8.000 | % | | N/A |
| | N/A |
| | $ | 821,575 |
| | 9.875 | % |
Customers Bank | $ | 1,170,666 |
| | 14.961 | % | | $ | 625,994 |
| | 8.000 | % | | $ | 782,493 |
| | 10.000 | % | | $ | 723,806 |
| | 9.250 | % | $ | 1,215,522 |
| | 14.619 | % | | $ | 665,173 |
| | 8.000 | % | | $ | 831,466 |
| | 10.000 | % | | $ | 821,072 |
| | 9.875 | % |
Tier 1 capital (to average assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 906,963 |
| | 8.937 | % | | $ | 405,949 |
| | 4.000 | % | | N/A |
| | N/A |
| | $ | 405,949 |
| | 4.000 | % | $ | 963,266 |
| | 9.665 | % | | $ | 398,668 |
| | 4.000 | % | | N/A |
| | N/A |
| | $ | 398,668 |
| | 4.000 | % |
Customers Bank | $ | 1,023,564 |
| | 10.092 | % | | $ | 405,701 |
| | 4.000 | % | | $ | 507,126 |
| | 5.000 | % | | $ | 405,701 |
| | 4.000 | % | $ | 1,066,121 |
| | 10.699 | % | | $ | 398,570 |
| | 4.000 | % | | $ | 498,212 |
| | 5.000 | % | | $ | 398,570 |
| | 4.000 | % |
The capital ratios above reflect the capital requirements under "Basel III" adopted effective during first quarter 2015 and the capital conservation buffer effectivephased in beginning January 1, 2016. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers. As of June 30, 2018,2019, the Bank and Customers Bancorp were in compliance with the Basel III requirements. See "NOTE 98 - REGULATORY CAPITAL" to Customers' unaudited financial statements for additional discussion regarding regulatory capital requirements.
OFF-BALANCE SHEET ARRANGEMENTS
Customers is involved with financial instruments and other commitments with off-balance sheet risks. Financial instruments with off-balance sheet risks are incurred in the normal course of business to meet the financing needs of the Bank's customers. These financial instruments include commitments to extend credit, including unused portions of lines of credit, and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the balance sheets.sheet.
With commitments to extend credit, exposuresexposure to credit loss in the event of non-performance by the other party to the financial instrument is represented by the contractual amount of those instruments. The same credit policies are used in making commitments and
conditional obligations as for on-balance sheet instruments. Because they involve credit risk similar to extending a loan or lease, commitments to extend credit are subject to the Bank’s credit policy and other underwriting standards.
As of June 30, 20182019 and December 31, 2017,2018, the following off-balance sheet commitments, financial instruments and other arrangements were outstanding:
| | | June 30, 2018 | | December 31, 2017 | | | | | |
(amounts in thousands) | | June 30, 2019 | | December 31, 2018 |
Commitments to fund loans | $ | 346,648 |
| | $ | 333,874 |
| |
Commitments to fund loans and leases | | $ | 324,543 |
| | $ | 345,608 |
|
Unfunded commitments to fund mortgage warehouse loans | 1,268,637 |
| | 1,567,139 |
| 1,297,406 |
| | 1,537,900 |
|
Unfunded commitments under lines of credit | 759,100 |
| | 485,345 |
| |
Unfunded commitments under lines of credit and credit card | | 949,557 |
| | 867,131 |
|
Letters of credit | 38,718 |
| | 39,890 |
| 44,880 |
| | 55,659 |
|
Other unused commitments | 6,319 |
| | 6,679 |
| 4,372 |
| | 4,822 |
|
Commitments to fund loans and leases, unfunded commitments to fund mortgage warehouse loans, unfunded commitments under lines of credit, and letters of credit, and credit cards are agreements to extend credit to or for the benefit of a customer in the ordinary course of the Bank's business.
Commitments to fund loans and leases and unfunded commitments under lines of credit may be obligations of the Bank as long as there is no violation of any condition established in the contract. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if the Bank deems it necessary upon extension of credit, is based upon management’s credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.
Mortgage warehouse loan commitments are agreements to fund the pipelines of mortgage banking businesses from closing of individual mortgage loans until their sale into the secondary market. Most of the individual mortgage loans are insured or guaranteed by the U.S. government through one of its programs such as FHA, VA, or are conventional loans eligible for sale to Fannie Mae and Freddie Mac. These commitments generally fluctuate monthly based on changes in interest rates, refinance activity, new home sales and laws and regulation.
Outstanding letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Letters of credit may obligate the Bank to fund draws under those letters of credit whether or not a customer continues to meet the conditions of the extension of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan and lease facilities to customers.
Effect of Government Monetary Policies
Our earnings are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. An important function of the Federal Reserve Board is to regulate the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities and changes in reserve requirements against member bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans and leases, investments, and deposits, and their use may also affect rates charged on loans and leases or paid for deposits.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity
The largest component of Customers' net income is net interest income, and the majority of its financial instruments are interest rate sensitive assets and liabilities with various term structures and maturities. One of the primary objectives of management is to optimize net interest income while minimizing interest rate risk. Interest rate risk is derived from timing differences in the repricing of assets and liabilities, loan prepayments, deposit withdrawals and differences in lending and funding rates. Customers' asset/liability committee actively seeks to monitor and control the mix of interest rate sensitive assets and interest rate sensitive liabilities.
Customers uses two complementary methods to analyze and measure interest rate sensitivity as part of the overall management of interest rate risk; they are income simulation modeling and estimates of EVE. The combination of these two methods provides a reasonably comprehensive summary of the levels of interest rate risk of Customers' exposure to time factors and changes in interest rate environments.
Income simulation modeling is used to measure interest rate sensitivity and manage interest rate risk. Income simulation considers not only the impact of changing market interest rates upon forecasted net interest income but also other factors such as yield-curve relationships, the volume and mix of assets and liabilities, customer preferences and general market conditions.
Through the use of income simulation modeling, Customers has estimated the net interest income for the periods ending June 30, 2020 and December 31, 2019, based upon the assets, liabilities and off-balance sheet financial instruments in existence at June 30, 2019 and December 31, 2018. Customers has also estimated changes to that estimated net interest income based upon interest rates rising or falling immediately (“rate shocks”). For upward rate shocks modeling a rising rate environment, current market interest rates were increased immediately by 100, 200, and 300 basis points. For downward rate shocks modeling a falling rate environment, current market rates were only decreased immediately by 100 and 200 basis points due to the limitations of the current low interest rate environment that renders the Down 300 rate shocks impractical. The downward rate shocks modeled will be revisited in the future if necessary and will be contingent upon additional Federal Reserve interest rate hikes. The following table reflects the estimated percentage change in estimated net interest income for the periods ending June 30, 2020 and December 31, 2019, resulting from changes in interest rates.
Net change in net interest income
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| % Change |
Rate Shocks | June 30, 2020 | | December 31, 2019 |
Up 3% | (1.0)% | | (15.7)% |
Up 2% | (0.1)% | | (9.8)% |
Up 1% | 0.2% | | (4.5)% |
Down 1% | (0.6)% | | 3.9% |
Down 2% | (1.9)% | | 6.7% |
The net changes in net interest income in all scenarios are within Customers Bank's interest rate risk policy guidelines.
EVE estimates the discounted present value of asset and liability cash flows. Discount rates are based upon market prices for comparable assets and liabilities. Upward and downward rate shocks are used to measure volatility of EVE in relation to a constant rate environment. For upward rate shocks modeling a rising rate environment, current market interest rates were increased immediately by 100, 200, and 300 basis points. For downward rate shocks modeling a falling rate environment, current market rates were decreased immediately by 100 and 200 basis points due to the limitations of the current low interest rate environment that renders the Down 300 rate shocks impractical. The downward rate shocks modeled will be revisited in the future if necessary and will be contingent upon additional Federal Reserve interest rate hikes. This method of measurement primarily evaluates the longer term repricing risks and options in Customers Bank’s balance sheet. The following table reflects the estimated EVE at risk and the ratio of EVE to EVE adjusted assets at June 30, 2019 and December 31, 2018, resulting from shocks to interest rates.
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| From base |
Rate Shocks | June 30, 2019 | | December 31, 2018 |
Up 3% | (12.5)% | | (22.8)% |
Up 2% | (6.2)% | | (13.3)% |
Up 1% | (1.9)% | | (5.7)% |
Down 1% | 0.4% | | 3.8% |
Down 2% | 0.2% | | 6.5% |
The net changes in EVE in all scenarios are within Customers Bank's interest rate risk policy guidelines.
Management believes that the assumptions and combination of methods utilized in evaluating estimated net interest income are reasonable. However, the interest rate sensitivity of our assets, liabilities and off-balance sheet financial instruments, as well as the estimated effect of changes in interest rates on estimated net interest income, could vary substantially if different assumptions are used or actual experience differs from the assumptions used in the model.
Item 4. Controls and Procedures
(a) Management's Evaluation of Disclosure Controls and Procedures. Customers Bancorp maintains disclosure controls and procedures designed to ensure that information required to be disclosed in its periodic filings underAs of the Exchange Act is accumulated and communicated to its management on a timely basis to allow decisions regarding required disclosure.end of the period covered by this report, Customers Bancorp carried out an evaluation, under the supervision and with the participation of Customers Bancorp’s management, including Customers Bancorp’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Customers Bancorp’s disclosure controls and procedures as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e) as of June 30, 2018. In connection with. Based upon the restatement discussed in the Explanatory Note to this Quarterly Report on Form 10-Q/A and in Note 3 to the consolidated financial statements, under the supervision and with the participation ofevaluation, the Chief Executive Officer and Chief Financial Officer management re-evaluatedconcluded that Customers Bancorp’s disclosure controls and procedures as of June 30, 2018. During its re-evaluation, management identified a material weakness in internal control over financial reporting that resulted in the incorrect classification of cash flows used in and provided by Customers' commercial mortgage warehouse lending activities between operating and investing activities on the consolidated statements of cash flows because the related loan balances were incorrectly classified as held for sale instead of held for investment on the consolidated balance sheets. Solely as a result of this material weakness, Customers Bancorp concluded that its disclosure controls and procedures were not effective as of June 30, 2018.2019.
Remediation Plan. Customers Bancorp conducted a comprehensive analysis of the classifications of cash flows within its consolidated statements of cash flows and established new accounting policies and disclosure control procedures for the classification and reporting of its commercial mortgage warehouse lending transactions on the consolidated balance sheets and statements of cash flows. Management expects these efforts to remediate the identified material weakness and strengthen internal control over financial reporting. As management continues to evaluate and work to enhance internal control over financial reporting, it may determine that additional measures are required to address control deficiencies, strengthen internal control over financial reporting, or it may determine to modify the remediation plan described above.
(b)Changes in Internal Control Over Financial Reporting. Reporting. During the quarter ended June 30, 2018,2019, there have been no changes in Customers Bancorp’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Customers Bancorp’s internal control over financial reporting. However, as described above, management did implement changes in internal control over financial reporting during fourth quarter 2018 designed to remediate a material weakness related to the classification and reporting of its commercial mortgage warehouse lending transactions on its consolidated balance sheets and statements of cash flows.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
For information on Customers' legal proceedings, refer to “NOTE 13 – LOSS CONTINGENCIES” to the consolidated financial statements.
Item 1A. Risk Factors - As Amended
In addition to the other information set forth in this amended Quarterly Report, you should carefully consider the factors discussed in “Risk Factors” included within the Original2018 Form 10-K Filing.10-K. There are no material changes from the risk factors included within the Original2018 Form 10-K Filing, other than the risks described below.10-K. The risks described within the Original2018 Form 10-K Filing and below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial also may materially adversely affect our business, financial condition and/or operating results. See “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Note Regarding Forward-Looking Statements.”
The Federal Reserve may concludeItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
On November 26, 2013, the Bancorp's board of directors authorized a stock repurchase plan in which the Bancorp could acquire up to 5% of its current outstanding shares not to exceed a 20% premium over the then current book value. On December 11, 2018, the Bancorp's board of directors amended the terms of the 2013 stock repurchase plan to adjust the repurchase terms and book value measurement date such that followingCustomers was authorized to purchase shares of common stock at prices not to exceed the Mergerbook value per share of Flagship Community BankCustomers' common stock measured as of September 30, 2018. Customers repurchased all remaining authorized shares pursuant to this program in January 2019. Accordingly, there were no common shares repurchased during second quarter 2019. Dividends on Common Stock
Customers Bancorp historically has not paid any cash dividends on its shares of common stock and does not expect to do so in the BankMobile business, if completed priorforeseeable future.
Any future determination relating to December 31, 2018,our dividend policy will be an affiliatemade at the discretion of Customers Bancorp’s board of directors and will depend on a number of factors, including earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, ability to service any equity or debt obligations senior to our common stock, including obligations to pay dividends to the holders of Customers Bancorp's issued and outstanding shares of preferred stock and other factors deemed relevant by the Board of Directors.
In addition, as a bank holding company, Customers Bancorp asis subject to general regulatory restrictions on the payment of December 31, 2018 for purposes of applyingcash dividends. Federal bank regulatory agencies have the small issuer exemption containedauthority to prohibit bank holding companies from engaging in unsafe or unsound practices in conducting their business, which, depending on the Durbin Amendment. Failurefinancial condition and liquidity of the combinedholding company at the time, could include the payment of dividends. Further, various federal and state statutory provisions limit the amount of dividends that bank subsidiaries can pay to qualifytheir parent holding company without regulatory approval. Generally, subsidiaries are prohibited from paying dividends when doing so would cause them to fall below the regulatory minimum capital levels, and limits exist on paying dividends in excess of net income for the Durbin Amendment small issuer exemption would result in a material reduction in interchange revenue and may adversely impactspecified periods.
Beginning January 1, 2015, the ability to attract or retain certain white label partners.
The Federal Reserve has indicated that following the acquisition of the BankMobile business by Flagship in the Merger, the combined company may be considered an affiliate of Customers Bancorp for purposes of calculating the applicability of the Federal Reserve Act Sections 23A and 23B, Regulation W, Regulation EE,pay dividends and the Durbin Amendment by the factamounts that Customers Bancorp's shareholderscan be paid will hold approximately 51% of the stock of the combined company after giving effectbe limited to the Distribution andextent the Merger. UnlessBank's capital ratios do not exceed the combined company can reasonably demonstrate that,minimum required levels plus 250 basis points, as a result of shareholder turnover from regular market trading, the shareholders of Customers Bancorp receiving Flagship sharesthese requirements were phased in the Merger may control 24.9% or less of the combined company's common shares on a combined basis as of December 31, 2018, and that other subjective elements of Customers Bancorp's control or significant influence over the post-Merger company are not present, the Federal Reserve may determine that the combined company and Customers Bancorp are affiliates for purposes of the Federal Reserve Act Section 23A and 23B, Regulation W, Regulation EE, and the Durbin Amendment. None of Customers Bancorp, Customers Bank, Flagship Community Bank, or any affiliate thereof, nor anyone acting on their behalf, intends to take any action or engage in any efforts to cause, encourage or otherwise influence any Customers Bancorp shareholders who receive shares of Flagship Community Bank (if the spin-off and merger is completed) to sell or otherwise dispose of their shares. The determination that the combined company and Customers Bancorp are affiliates for purposes of the Durbin Amendment would require the combined company and Customers Bancorp to combine the combined company's and Customers Bancorp's assets for the purpose of calculating the $10 billion asset threshold in determining whether the combined company qualifies for the small debit card issuer exemption to the Durbin Amendment. If the combined company is not able to qualify for the small debit card issuer exemption to the Durbin Amendment, the BankMobile/Flagship company would face a material loss of interchange revenue, and may adversely impact the combined company's ability to attract or retain other white label partners. While management believes it can successfully demonstrate that, as a result of shareholder turnover from regular market trading, the ownership of Flagship by holders of Customers Bancorp common stock receiving Flagship common stock in the Merger will decline to 24.9% or less through natural turnover of common stock ownership within three to four months after the transactions are completed, and that other qualitative conditions that could lead to a separate qualitative determination of control or significant influence are not present, a failure to qualify for the small debit card issuer exemption in the Durbin Amendment at December 31, 2018 would materially and adversely affect the combined company's revenues, ongoing business and ability to achieve BankMobile/Flagship’s future business plans. Furthermore, if BankMobile/Flagship does not qualify for the small debit card issuer exemption as of December 31, 2018, the combined company may not be able to qualify for the small debit card issuer exemption until at least the next measurement date, December 31, 2019, and may not be able to reinstitute the combined company's interchange fee levels until at least January 1, 2020.2019.
We are dependent upon maintaining an effective system of internal controls to provide reasonable assurance that transactions and activities are conducted in accordance with established policies and procedures and are captured and reported in the financial statements. Failure to comply with the system of internal controls may result in events or losses which could adversely affect our operations, net income, financial condition, reputation and compliance with laws and regulations.Item 3. Defaults Upon Senior Securities
None.
Our system of internal controls, including internal controls over financial reporting, is an important element of our risk-management framework. Management regularly reviews and seeks to improve our internal controls, including annual review of key policies and procedures and annual review and testing of key internal controls over financial reporting. Any system of internal controls, however well designed and operated, is based in part on certain assumptions and expectations of employeeItem 4. Mine Safety Disclosures
Not applicable.
conduct and can only provide reasonable, not absolute, assurance that the objectives of the internal control structure are met. Any failure or circumvention of our controls and procedures, or failure to comply with regulations related to controls and procedures, could have a material adverse effect on our operations, net income, financial condition, reputation and compliance with laws and regulations.
Item 5. Other Information
As previously disclosed, in November 2018, Customers determined that its previously issued consolidated financial statements as of and for the years ended December 31, 2017, 2016 and 2015, the related report of BDO USA, LLP ("BDO") included in the Original 2017 Form 10-K, and interim consolidated financial statements as of and for the three months ended March 31, 2018 and 2017 and the three and six months ended June 30, 2018 and 2017 (collectively, the "Affected Periods"), should no longer be relied upon because of misclassifications of cash flow activities associated with Customers' commercial mortgage warehouse lending activities between operating and investing activities on its consolidated statements of cash flows because the related loan balances were incorrectly classified as held for sale rather than held for investment on its consolidated balance sheets. These misclassifications had no effect on total cash balances, total loans, the allowance for loan losses, total assets, total capital, regulatory capital ratios, net interest income, net interest margin, net income to shareholders, basic or diluted earnings per share, return on average assets, return on average equity, the efficiency ratio, asset quality ratios or any other key performance metric, including non-GAAP performance metrics, that Customers routinely discusses with analysts and investors. Customers is filing an amended Annual Report on Form 10-K/A for the fiscal year ended December 31, 2017 and amended Quarterly Reports on Form 10-Q/A for the three months ended March 31, 2018 and the three and six months ended June 30, 2018 to present the restated financial statements and related disclosures.
In connection with the restatement, management has determined that a material weakness existed in internal control over financial reporting solely with respect to the misclassification of cash flows associated with Customers' commercial mortgage warehouse lending activities between operating and investing activities on its consolidated statements of cash flows because the related loan balances were incorrectly classified as held for sale rather than held for investment. As a result of the material weakness, BDO's report on Customers' internal control over financial reporting as of December 31, 2017 should no longer be relied upon.
Customers conducted a comprehensive analysis of the classifications of cash flows within its consolidated statements of cash flows and established new accounting policies and disclosure control procedures for the classification and reporting of its mortgage warehouse lending transactions on the consolidated balance sheet and statements of cash flows. Management expects these efforts to remediate the identified material weakness and strengthen internal control over financial reporting. As management continues to evaluate and work to enhance internal control over financial reporting, it may determine that additional measures are required to address control deficiencies, strengthen internal control over financial reporting, or it may determine to modify the remediation plan described above. If Customers' remediation efforts do not operate effectively or if it is unsuccessful in implementing or following its remediation efforts, this may result in untimely or inaccurate reporting of Customers' financial results.
None.
Item 6. Exhibits
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Exhibit No. | | Description |
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| | Indenture, dated as of July 30, 2013, by and between Customers Bancorp, Inc., as Issuer, and Wilmington Trust, National Association, as Trustee, incorporated by reference to Exhibit 4.1 to the Customers Bancorp Form 8-K filed with the SEC on July 31, 2013 |
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| | First Supplemental Indenture, dated as of July 30, 2013, by and between Customers Bancorp, Inc., as Issuer, and Wilmington Trust, National Association, as Trustee, incorporated by reference to Exhibit 4.2 to the Customers Bancorp Form 8-K filed with the SEC on July 31, 2013 |
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| | Second Supplemental Indenture, dated as of June 30, 2017, by and between Customers Bancorp, Inc, as Issuer, and Wilmington Trust, National Association, As Trustee, incorporated by reference to Exhibit 4.1 to the Customers Bancorp Form 8-K filed with the SEC on June 30, 2017 |
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101 | | The Exhibits filed as part of this report are as follows: |
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101.INS | | XBRL Instance Document.Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document |
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101.SCH | | XBRL Taxonomy Extension Schema Document. |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF | | XBRL Taxonomy Extension Definitions Linkbase Document. |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
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101.DEF | | XBRL Taxonomy Extension Definitions Linkbase Document. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this amended report to be signed on its behalf by the undersigned thereunto duly authorized.
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| Customers Bancorp, Inc. |
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November 30, 2018August 8, 2019 | By: | | /s/ Jay S. Sidhu |
| Name: | | Jay S. Sidhu |
| Title: | | Chairman and Chief Executive Officer (Principal Executive Officer) |
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November 30, 2018August 8, 2019 | By: | | /s/ Carla A. Leibold |
| Name: | | Carla A. Leibold |
| Title: | | Chief Financial Officer and Treasurer (Principal Financial Officer) |
Exhibit Index
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Exhibit No. | | Description |
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| | Indenture, dated as of July 30, 2013, by and between Customers Bancorp, Inc., as Issuer, and Wilmington Trust, National Association, as Trustee, incorporated by reference to Exhibit 4.1 to the Customers Bancorp Form 8-K filed with the SEC on July 31, 2013 |
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| | First Supplemental Indenture, dated as of July 30, 2013, by and between Customers Bancorp, Inc., as Issuer, and Wilmington Trust, National Association, as Trustee, incorporated by reference to Exhibit 4.2 to the Customers Bancorp Form 8-K filed with the SEC on July 31, 2013 |
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| | Second Supplemental Indenture, dated as of June 30, 2017, by and between Customers Bancorp, Inc, as Issuer, and Wilmington Trust, National Association, As Trustee, incorporated by reference to Exhibit 4.1 to the Customers Bancorp Form 8-K filed with the SEC on June 30, 2017 |
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101 | | The Exhibits filed as part of this report are as follows: |
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101.INS | | XBRL Instance Document.Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document |
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101.SCH | | XBRL Taxonomy Extension Schema Document. |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF | | XBRL Taxonomy Extension Definitions Linkbase Document. |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
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101.DEF | | XBRL Taxonomy Extension Definitions Linkbase Document. |