This Annual Report on Form 10-K, as well as other written or oral communications made from time to time by us, contains forward-looking information within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements are statements other than statements of fact and tend to 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 this Annual Report on Form 10-K, as such factors may be updated from time to time in our filings with the SEC, including our Quarterly Reports on Form 10-Q. Our actual results may differ materially from those reflected in the forward-looking statements.
In addition to the risks described in the “Risk Factors” section of this Annual Report on Form 10-K and the other reports we file with the SEC, important factors to consider and evaluate with respect to such forward-looking statements include:
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
The management team of Customers consists of experienced banking executives led by its Chairman and Chief Executive Officer,CEO, Jay Sidhu, who joined Customers in June 2009. Mr. Sidhu brings over 40 years of banking experience, including 20 years as the Chief Executive OfficerCEO and Chairman of Sovereign Bancorp. In addition to Mr. Sidhu, a number of the members of the current management team have experience working together at Sovereign with Mr. Sidhu. Many other team members who have joined Customers' management team have significant experience helping build and lead other banking organizations. Combined, the Customers management team has significant experience in building a banking organization, completing and integrating mergers and acquisitions and developing valuable community and business relationships in its core markets. On July 1 2021, Richard Ehst retired as the President and Chief Executive Officer of Customers Bank after a 50-year banking career. Mr. Ehst also stepped down from his position as the President and Chief Operating Officer of Customers Bancorp. Upon Mr. Ehst's retirement, Samvir ("Sam") Sidhu was named as the President and Chief Executive Officer of Customers Bank and the President of Customers Bancorp. Mr. Sam Sidhu joined Customers in 2020 as the Vice Chair and Chief Operating Officer of Customers Bank and the Head of Corporate Development of Customers Bancorp. Mr. Sam Sidhu, son of Mr. Jay Sidhu, was the founder and chief executive of Megalith Financial Corp. LLC, a NYSE-listed financial technology-based special purpose acquisition company. Prior to launching Megalith Financial Corp. LLC, Mr. Sam Sidhu worked at Providence Equity Partners and at Goldman Sachs. Under Mr. Sam Sidhu’s leadership, Customers Bank partnered with several leading fintechs to establish a technology enabled hybrid banking model, allowing Customers to outperform larger lenders' efforts to support small businesses during the COVID-19 pandemic through the SBA's PPP loans.
Customers Bancorp was incorporated in Pennsylvania in April 2010 to facilitate a reorganization into a bank holding company structure pursuant to which Customersthe Bank became a wholly owned subsidiary of Customers Bancorp (the “Reorganization”) on September 17, 2011. Pursuant to the Reorganization, all of the issued and outstanding shares of Voting Common Stock and Class B Non-Voting Common Stock of Customers Bank were exchanged on a one-for-three basis for shares of Voting Common Stock and Class B Non-Voting Common Stock, respectively, of Customers Bancorp. Customers Bancorp’s corporate headquarters are located at 1015 Penn701 Reading Avenue, Wyomissing, Pennsylvania 19610.West Reading, PA 19611. The main telephone number is (610) 933-2000.
Customers looks to grow organically as well as through selective acquisitions in its current and prospective markets. Customers believes that there is significant opportunity to both enhance its presence in its current markets and enter new complementary markets that meet its objectives. Customers focuses on markets that it believes are characterized by some or all of the following:
Customers believes its target market has highly attractive demographic, economic and competitive dynamics that are consistent with its objectives and favorable to executing its organic core loan and deposit growth and acquisition strategies.
BankMobile Strategy. Customers' installment loan business is a national business in which Customers launched BankMobile as a key strategic initiative in January 2015, recognizingoriginates directly or purchases installment loans through arrangements with third-party fintech companies. Customers also has digital, online savings banking product that generates core deposits nationally. Through the installment loans and digital, online savings banking product, delivery flexibility demanded by the millennial generationCustomers earns interest and the low cost of the smartphone delivery channel. BankMobile refers to Customers' efforts to build a full-servicegenerates core deposits. The fintech-community bank that is accessible to its customers anywhere and anytime through the customer's smartphone or other web-enabled device. BankMobile provides a nationwide deposit-aggregation platform. BankMobile principally has a "business-to-business-to-consumer"hybrid business model enables Customers to earn interest income and focuses on the aggregation of low-cost deposits and currently offers no-fee banking, lines of credits to qualified customers, no overdraft fees, higher than average interest rates on savings and access to 55,000 ATMs (and if the customer makes a monthly direct deposit over 400,000 ATMs) across the U.S. Customers believes that consolidating BankMobile with the acquired Disbursement business uniquely positions BankMobile to service over 1 million students across America and to become the graduating students "bank for life" and service each graduate's financial needs throughout their life. Successful execution of the BankMobile strategy, including its consolidation with the Disbursement business through colleges and universities across America and similar white-label partnerships, greatly accelerates BankMobile's ability to achieve profitability. BankMobile's revenues are largely derived from interchange charges paid by the product selling vendor and user-based fees for specific activities (such as lost card replacement).generate core deposits.
•Attractive low-credit risk profile. Customers has sought to maintain high asset quality and moderate credit risk by using conservative underwriting standards, maintaining a diversified loan portfolio, and being selective with its consumer installment loans by focusing solely on prime borrowers (defined as borrowers with a FICO score of 660 or above at origination) combined with a risk-adjusted pricing model and early identification of potential problem assets. Customers has also formed a Special Assets Group ("SAG") to manage classified and non-performing assets.NPAs. As of December 31, 2017,2021, only $26.4$49.6 million, or 0.30%0.34%, of Customersthe Bank's total loan portfolio was non performing.
non-performing.
•Superior Community Banking Model. Customers expects to drive organic core loan and deposit growth by employing its Concierge Banking® and single-point-of-contact strategies, which provide specific relationship managers or private bankers for all customers, delivering an appointment banking approach available 12 hours a day, seven days a week. This allows Customers to provide services in a personalized, convenient and expeditious manner. This approach, coupled with superior technology, including remote account opening, remote deposit capture and mobile banking, and the first fee-free mobile digital bank, BankMobile, results in a competitive advantage over larger institutions, which management believes contributes to the profitability of its franchise and allows Customersthe Bank to generate core deposits. The “high-tech, high-touch,” model requires less staff and smaller branch locations to operate, thereby significantly reducing operating costs.
•Acquisition Expertise. The depth of Customers' management team and their experience working together and successfully completing acquisitions provides unique insight in identifying and analyzing potential markets and acquisition targets. The experience of Customers' team, which includes the acquisition and integration of over 35 institutions, as well as numerous asset and branch acquisitions, provides a substantial advantage in pursuing and consummating future acquisitions. Additionally, management believes Customers' strengths in structuring transactions to limit its risk, its experience in the financial reporting and regulatory process related to troubled bank acquisitions, and its ongoing risk management expertise, particularly in problem loan workouts, collectively enable it to capitalize on the potential of the franchises it acquires. With Customers' depth of operational experience in connection with completing merger and acquisition transactions, it expects to be able to integrate and reposition acquired franchises cost-efficiently with a minimum disruption to customer relationships.
Customers believes its ability to operate efficiently is enhanced by its centralized risk-management structure, its access to attractive labor and real estate costs in its markets, and an infrastructure that is unencumbered by legacy systems. Furthermore, Customers anticipates additional expense synergies from the integration of its acquisitions, which it believes will enhance its financial performance.
Segments
On January 4, 2021, Customers Bancorp completed the divestiture of BankMobile Technologies, Inc., a wholly-owned subsidiary of Customers Bank and a component of BankMobile, through a merger with Megalith Financial Acquisition Corp. In connection with the closing of the divestiture, MFAC changed its name to “BM Technologies, Inc.” All of BankMobile’s serviced deposits and loans including the related net interest income remained with Customers Bank after the completion of the divestiture. Beginning in thirdfirst quarter 2016, Customers revised its segment2021, BMT’s historical financial reportingresults for periods prior to reflect the mannerdivestiture are reflected in which its chief operating decision makers had begun allocating resourcesCustomers' consolidated financial statements as discontinued operations. Following the completion of the divestiture of BMT, BankMobile's serviced deposits and assessing performance subsequentloans and the related net interest income were combined with Customers' financial condition and results of operations as a single reportable segment. See "NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION" and "NOTE 3 – DISCONTINUED OPERATIONS" to Customers' acquisition of the Disbursement business from Higher One and the combination of that business with the BankMobile technology platform late in second quarter 2016.
Management has determined that Customers' operations consist of two reportable segments - Community 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. For more information on Customers' reportable operating segments, see NOTE 24 - BUSINESS SEGMENTS to the consolidatedaudited financial statements.
Products
Customers offers a broad range of traditional loan and deposit banking products and financial services, and non-traditional products and services through the successful Phase 1 launch of BankMobile in January 2015,such as CBIT, to its commercial and consumer customers. Customers offers an array of lending products to cater to its customers’ needs, including commercial mortgage warehouse loans, multi-family and commercial real estate loans, business banking, small business loans, equipment loans,financing, residential mortgage loans and other consumerinstallment loans. Customers also offers traditional deposit products, including commercial and consumer checking accounts, non-interest-bearing demand accounts, money market deposit accounts,MMDA, savings accounts, time deposit accounts and cash management services. Prior to January 2015, deposit products were available to customers only through branches of Customers Bank. With the successful launch of BankMobile, the acquisition of the Disbursement business from Higher One and the combination of that business with the BankMobile platform, Customers is able to provide fee-free banking to millennials, students, middle class American families and underserved consumers throughout the United States.
BankMobile is focused on providing quality low-cost deposit products and related services to its customers, such as no-or-low-fee checking, no overdraft charges, photo bill pay, no opening balance requirements, instant virtual debit cards and similar customer friendly technology enabled services. Customers can also obtain cash free of any fees from over 55,000 ATMs in the United States. BankMobile looks to develop its capabilities to deliver retail loan products, such as automobile loans, credit cards and personal loans, to its customers, either as a referral or direct lender, as its technological capabilities develop.
Lending Activities
Customers Bank focuses its lending efforts on the following lending areas:
•Commercial Lending – Customers' focus is on Business Bankingbusiness banking (i.e., commercial and industrial lending), including Smallsmall and Middle Market Business Bankingmiddle market business banking (including Small Business Administration ("SBA")SBA and PPP loans), Multi-Familycommercial loans to mortgage companies, multi-family and Commercial Real Estate Lending,commercial real estate lending, commercial equipment financing and Commercial Loans to Mortgage Companiesspecialty lending, and
•Consumer Lending – local-market mortgage and home equity lending.lending and the origination and purchase of installment loans through arrangements with third-party fintech companies and other market place lenders.
Commercial Lending
Customers' commercial lending activities are divided into five distinctsix groups: Business Banking,Banking; Small and Middle Market Business Banking,Banking; Specialty Banking; Multi-Family and Commercial Real Estate Lending,Lending; Mortgage Banking to Mortgage CompaniesLending; and Equipment Finance.SBA Lending. This grouping is designed to allow for greater resource deployment, higher standards of risk management, strongstronger asset quality, lower interest-rate risk and higher productivity levels. To further build its franchise and support the growth of its commercial lending initiatives, Customers added three new verticals during 2021 within its Specialty Banking business which included fund finance, technology and venture capital banking and financial institutions group. These three new verticals provide financing to the private equity industry and cash management services to the alternative investment industry. Prior to adding these new verticals, its Specialty Banking business included equipment finance, healthcare lending, lender finance and real estate specialty finance. Customers also launched a pilot digital small balance 7(a) lending within its existing SBA Lending business during 2021.
The commercial lending group, focusesincluding commercial and industrial loans, owner occupied commercial real estate loans and specialty lending, focus on companies with annual revenues ranging from $1.0 millionbuilding business relationships that provide a complete offering of financial services customized to $100.0 million, that typically have credit requirements between $0.5 millionthe present and $10.0 million.future needs of each business customer.
The small and middle market business banking platform originates loans, including SBA loans, through the branch network sales force and a team of dedicated small business relationship managers. The support administration of thethis platform for this lending activity is centralized, including technology, risk management, product management, marketing, performance tracking and overall strategic planning.strategy. Credit and sales training has been established for theCustomers' sales force, ensuring that Customersit has small business banking 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.
The goal of Customers' multi-family and commercial real estate lending group is to buildmanage a portfolio of high-quality multi-family and commercial real estate loans within itsCustomers' covered markets while cross-selling its other products and services. This business lineThese lending activities primarily focuses ontarget the refinancing existingof loans with other banks using conservative underwriting standards.standards and provide purchase money for new acquisitions by borrowers. The primary collateral for these loans is a first-lien mortgage on the commercial real estate or multi-family property, plus an assignment of all leases related to such property. DuringCustomers had been deemphasizing its multi-family lending activities and focusing on growing relationship-based commercial real estate and commercial and industrial lending activities in the years ended December 31, 2017past few years. However, in late 2021, Customers began to increase its multi-family lending and 2016, Customers originatedcurrently plans to expand the multi-family lending in future periods to approximately $1.2billion and $0.9 billion, respectively,15% of multi-family loans.its total loan portfolio.
The goal of commercial loans to mortgage companies is to provide liquidity to mortgage companies. The loans are predominately short-term facilities used by mortgage companies to fund their pipelines from closing of individual mortgage loans until their sale into the secondary market. Most of the individual mortgage loans that collateralize our commercial loans to mortgage companies are insured or guaranteed by the U.S. Government through one of its programs, such as FHA, VA, or they are conventional loans eligible for sale to Fannie Mae and Freddie Mac. Customers is currently expanding its product offerings to mortgage companies to meet a wider array of business needs. During the years ended December 31, 20172021 and 2016,2020, Customers Bank funded $30.1$55.0 billion and $36.1$60.9 billion of mortgage loans, respectively, to mortgage originators via warehouse facilities. The commercial loans to mortgage companies are reported as loans receivable, mortgage warehouse, at fair value on the consolidated balance sheet.
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 December 31, 20172021 and 2016,2020, Customers had $152.5$378.7 million and $89.4$288.4 million, respectively, of equipment finance loans outstanding. As of December 31, 20172021 and 2016,2020, Customers had $26.6$146.5 million and $10.3$108.0 million of equipment finance leases, respectively. As of December 31, 2017,2021 and 2020, Customers had $22.2$117.4 million and $102.9 million, respectively, of operating leases entered into under this program. Customers had not entered into similar operating lease arrangements in 2016.program, net of accumulated depreciation of $40.7 million and $28.9 million, respectively.
As of December 31, 20172021 and 2016,2020, Customers Bank had $8.4$12.4 billion and $8.0$14.2 billion, respectively, in commercial loans outstanding, composing approximately 96.2%85.3% and 96.4%89.8%, respectively, of its total loan portfolio, which includes loans held for sale.sale and loans receivable, mortgage warehouse, at fair value and loans receivable, PPP. During the years ended December 31, 20172021 and 2016,2020, the Bank originated $1.4$2.7 billion and $0.8$2.6 billion, respectively, of commercial loans, exclusive of multi-family loan originations, and loans to mortgage originators via warehouse facilities.facilities, and PPP loans.
Paycheck Protection Program
On March 27, 2020, the CARES Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act includes the SBA's PPP, a nearly $350 billion program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks. These loans are intended to guarantee an eight-week or 24-week period of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills. On December 27, 2020, the CAA was signed into law, which provides $284 billion in additional funding for the SBA's PPP for small businesses affected by the COVID-19 pandemic. The CAA provides small businesses who received an initial PPP loan and experienced a 25% reduction in gross receipts to request a second PPP loan of up to $2.0 million. On January 11, 2021, the SBA reopened the PPP program to small business and non-profit organizations that did not receive a loan through the initial PPP phase. On March 11, 2021, the American Rescue Plan Act of 2021 was enacted expanding eligibility for first and second round of PPP loans and revising the exclusions from payroll costs for purposes of loan forgiveness. The PPP ended on May 31, 2021. As of December 31, 2021, Customers has helped thousands of small businesses by funding over $10 billion in PPP loans directly or through partnerships, including $1.5 billion in PPP loans that Customers purchased in 2021. Customers had $3.3 billion of PPP loans outstanding as of December 31, 2021, which are fully guaranteed by the SBA, provided that the SBA's eligibility criteria are met and earn a fixed interest rate of 1.00%.
Consumer Lending
Customers provides home equity and residential mortgage loans to customers. Underwriting standards for 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. These areas also support Customers' commitment to lower-and-moderate-income families in its market area. Customers plans to expand its product offerings in real estate secured consumer lending.
Beginning in 2013, Customers Bank has launched a community outreach program in Philadelphia to encourage a higher percentage offinance homeownership in urban communities. As part of this program, Customers offersis 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 at 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' CRA assessment areas.
Customers also originates and purchases installment loans through arrangements with third-party fintech companies. Customers performs extensive due-diligence procedures on existing and potential fintech partners and only originates and purchases loans that meet its defined credit parameters, which includes but is not limited to minimum FICO scores and debt to income ratios. As part of its due-diligence process, Customers reviews loan level data, historical performance of the asset and distribution of credit and loss information. Customers does not originate or purchase loans that are considered sub-prime at the time of origination, which Customers considers to be those with FICO scores below 660.
As of December 31, 20172021 and 2016, the2020, Customers had $329.8 million$2.1 billion and $299.4 million,$1.6 billion, respectively, in consumer loans outstanding, comprising 3.8%14.7% and 3.6%10.3%, respectively, of Customers' total loan portfolio, which includes loans held for sale.portfolio. During the years ended December 31, 20172021 and 2016,2020, Customers originated $50.0purchased $371.0 million and $59.3$270.2 million of consumer loans, respectively.
Private Banking
Beginning in 2013, Customers introducedhas a Private Banking model for its commercial clients in the major markets within its geographic footprint. This unique model provides unparalleled service to customers through an in-market team of experienced private bankers. Acting as a single-point-of-contact for all the banking needs of Customers’ commercial clients, these private bankers deliver the whole bank – not only to its clients, but to their families, their management teams and their employees, as well. With a world-class suite of sophisticated cash management products, these private bankers deliver on Customers' “high-tech, high-touch” strategy and provide real value to its mid-market commercial clients.
Customers opened its first private banking representative office in Manhattan in second quarter 2013, and eventually, all of its markets will be served by private bankers.
Deposit Products and Other Funding Sources
Customers offers a variety of deposit products to its customers, including checking accounts, savings accounts, money market deposit accountsMMDA and other deposit accounts, including fixed-rate, fixed-maturity retail time deposits ranging in terms from 30 days to five years, individual retirement accounts, and non-retail time deposits consisting of jumbo certificates greater than or equal to $100,000. Customers also focuses on niche businesses as a source of lower-cost core deposits, including property management and mortgage banking businesses, title and escrow funds, health savings accounts, and Section 1031 of the IRS exchange deposits. Using its "high tech, high touch supported by high techtouch" model, Customers has experienced strong growth in core deposits in all of its markets.deposits. Customers also utilizes wholesale deposit products, money market accounts and certificates of depositdeposits obtained through listing services and borrowings from the FRB and FHLB as a sourcessource of funding.
These funding sources offer attractive funding costs in comparison to traditional sources of funding given the current interest-rate environment.
In October 2021, Customers Bank launched CBIT on the TassatPay blockchain-based instant B2B payments platform, which serves a growing array of B2B clients who want the benefit of instant payments: including key over-the-counter desks, exchanges, liquidity providers, market makers, funds, and B2B verticals such as trading operations, real estate, manufacturing, and logistics. CBIT may only be created by, transferred to and redeemed by commercial customers of Customers Bank on the instant B2B payments platform by maintaining U.S. dollars in non-interest bearing deposits at Customers Bank. CBIT is not listed or traded on any digital currency exchange. As of December 31, 2021, Customers Bank held $1.9 billion of deposits from new customers participating in CBIT.
Financial Products and Services
In addition to traditional banking activities, Customers provides other financial services to its customers, including: mobile phone banking, internet banking, wire transfers, electronic bill payment, lock box services, remote deposit capture services, courier services, merchant processing services, cash vault, controlled disbursements, positive pay and cash management services (including account reconciliation, collections and sweep accounts). In January 2015, Customers successfully launched BankMobile, America's first mobile platform based full-service consumer bank. In June 2016, Customers acquired the Disbursement businessBusiness of Higher One and subsequently combined that business with the BankMobile platform. The Disbursement business assistsBusiness assisted higher educational institutions in their distributions of Title IV monies to students. In combining the businesses, BankMobile serviced 1.1over 2 million active deposit accounts at December 31, 2017. BankMobile has opened around 536,000 new checking accounts2020. On January 4, 2021, Customers completed the divestiture of BMT, including the Disbursement Business, to MFAC. In connection with the divestiture, Customers also entered into various agreements with BM Technologies, including a transition services agreement, software license agreement, deposit servicing agreement, non-competition agreement and converted over 374,000 checking accountsloan agreement for periods ranging from one to BankMobile, since June 16, 2016.
ten years. The deposit service agreement is scheduled to expire on December 31, 2022 and will not be renewed. As of December 31, 2021, Customers held $1.8 billion of deposits serviced by BM Technologies, which are expected to leave Customers Bank by December 31, 2022.
Competition
Customers competes with other financial institutions for deposit and loan business. Competitors include other commercial banks, savings banks, savings and loan associations, insurance companies, securities brokerage firms, credit unions, finance companies, fintech companies, mutual funds, money market funds and certain government agencies. Financial institutions compete principally on the quality of the services rendered, interest rates offered on deposit products, interest rates charged on loans, fees and service charges, the convenience of banking office locations and hours of operation and, in the consideration of larger commercial borrowers, lending limits.
Many competitors are significantly larger than Customers and have significantly greater financial resources, personnel and locations from which to conduct business. In addition, Customers is subject to regulation, while certain of its competitors are not. Non-regulated companies face relatively few barriers to entry into the financial services industry. Customers' larger competitors enjoy greater name recognition and greater resources to finance wide ranging advertising campaigns. Customers competes for business principally on the basis of high-quality, personal service to customers, customer access to Customers' decision makers and competitive interest and fee structure. Customers also strives to provide maximum convenience of access to services by employing innovative delivery vehicles such as internet and digital banking, and the convenience of Concierge Banking® and our single-point-of-contact business model.
Customers' current market is primarily served by large national and regional banks, with a few larger institutions capturing more than 50% of the deposit market share. Customers' large competitors primarily utilize expensive, branch-based models to sell products to consumers and small businesses, which requires Customers' larger competitors to price their products with wider margins and charge more fees to justify their higher expense base. While maintaining physical branch locations remains an important component of Customers' strategy, Customers utilizes an operating model with fewer and less expensive locations, thereby lowering overhead costs and allowing for greater pricing flexibility.
In October 2021, Customers Bank launched CBIT on the TassatPay blockchain-based instant B2B payments platform, which serves a growing array of B2B clients who want the benefit of instant payments: including key over-the-counter desks, exchanges, liquidity providers, market makers, funds, and B2B verticals such as trading operations, real estate, manufacturing, and logistics. CBIT may only be created by, transferred to and redeemed by commercial customers of Customers Bank on the instant B2B payments platform by maintaining U.S. dollars in non-interest bearing deposits at Customers Bank. CBIT is not listed or traded on any digital currency exchange. If a competitor or another third party were to launch an alternative to CBIT (such as Federal Reserve's recently announced plan to develop a virtual real time payment system for banks which is expected to be available as early as 2023,) we could lose non-interest bearing deposits. Even if we are otherwise able to grow and maintain our non-interest bearing deposit base, our deposit balances may still decrease if our digital currency customers are offered more attractive returns from our competitors. There may be competitive pressures to pay higher interest rates on deposits to our digital currency customers, which could increase funding costs and compress net interest margins. Further, new technologies, such as the blockchain and tokenized payment technologies used by CBIT, could require us
to spend more to modify or adapt our products to attract and retain clients or to match products and services offered by our competitors, including fintech companies.
ESG
ESG considerations are integrated across our business and incorporated into the policies and principles that govern how we operate. We continuously seek to address some of the practical challenges in balancing short term and long term business trade offs to ensure that our stakeholders and shareholders prosper together. Our approach to ESG management includes promoting sound corporate governance, effective risk management and controls, investing in our team members and cultivating a diverse and inclusive workforce and flexible work environment, supporting and strengthening the communities in which we live, work and serve, and operating our business in a way that demonstrates our dedication to environmental sustainability. Giving back and leading with dignity are the cornerstones of our culture and identity. Our ESG program is managed by a dedicated management ESG committee, which reports to and is subject to the oversight of the ESG Committee of Customers' Board of Directors.
Human Capital
Customers' vision is to be recognized as an outstanding financial services company creating distinct experiences for its customers, team members, shareholders, and communities. Attracting, retaining and developing qualified team members and providing them with a distinct team member experience is key to providing a distinct client experience and is an important contributor to Customers' success.
Team Member Profile
The following table describes the composition of Customers' workforce on December 31, 2021 and 2020:
| | | | | | | | | | | | | | |
| | December 31, |
| Team Members | | 2021 | | 2020 |
| | | | |
| Full-time Team Members | | 636 | | | 567 | |
| Part-time Team Members | | 5 | | | 6 | |
| Total Team Members | | 641 | | | 573 | |
| | | | |
| Women | | 54 | % | | 54 | % |
| Minorities | | 19 | % | | 17 | % |
| | | | |
On January 4, 2021, Customers completed the divestiture of BMT, and approximately 257 team members in the BankMobile competesbusiness segment became employees of BM Technologies. The workforce headcount above as of December 31, 2021 and 2020 does not include BM Technologies employees.
Talent Acquisition
Customers' demand for depositqualified candidates grows as Customers’ business grows. We recruit nationally and are currently located across 24 states. Customers strives to build a talent pool that manages our business strategies which includes digitization and technology advancement that differentiates Customers from its competitors. Customers attracts talented individuals with a combination of competitive pay and benefits.
Learning and Professional Development
Customers' performance management program is an interactive practice that engages team members through performance reviews, goal setting and managers providing on-going feedback to their team members. Customers offers a variety of programs to help team members learn new skills, establish and meet personalized development goals, take on new roles and become better leaders. In addition, we developed a career mapping process for several business areas that identified the Leadership Competencies and KSAs (Knowledge, Skills and Abilities) needed to advance and support an increasingly digital strategy with an emphasis on EQ (Emotional intelligence) and AQ (Adaptability).
To support team member learning, Customers’ CUBI University allows all team members to participate in this self-paced educational platform that ties our culture to our values on EQ, AQ, and IQ. Customers focuses on continuous improvement by empowering team members to upskill, reskill, and grow professionally through online learning courses, TED talks, podcasts and digital learning events and recommended articles. In 2021, a yearlong digital campaign on Leadership Competency was launched offering accessible and relevant learning opportunities, monthly, centered around our core principles and behaviors that match to our culture and strategy. In addition, in support our team members educational goals, Customers provides tuition assistance to team members pursuing higher education.
With regard to financial knowledge and development, Customers offered workshops with Fidelity to all team members to not only enhance financial knowledge but to better prepare our team members to meet their savings goals and achieve financial wellness. Topics covered included budgeting, managing for unexpected expenses, maximizing social security, saving for retirement, preserving your savings, preparing for healthcare in retirement and more.
Throughout 2021, all team members were also invited to attend an interactive development and training program facilitated by Luther Wright, Jr. titled “Leading Inclusively in Divisive Times.” This training was designed for all team members, regardless of title or position, to become better leaders and to help the teams they lead, maximize their potential. The focus was on the team member’s role in fostering a workplace culture where everyone, regardless of who they are, felt like they belong and can be successful. In addition, participants learned the importance of inclusive leadership traits and principles, how to become aware of unconscious bias and how to overcome unconscious bias.
Team Member Engagement
The year was devoted to understanding and supporting the impact of the COVID-19 virus. Customers recognizes that team members who are involved in, enthusiastic about and committed to their work and workplace contribute meaningfully to the success of the company. Early in 2021, Customers solicits team member feedback through a confidential, company-wide survey on working remotely, technology resources availability, and feedback on preparation for the return to the workplace initiative launched in September 2021. Over 78% of our team members participated, with the majority of team members reporting feeling they were prepared to support their customers during COVID. The results of this survey were reviewed with traditional bank branchesthe executive management team and were used to update team member programs, initiatives, and communications. Customers has a number of other engagement initiatives, including quarterly town hall meetings with Customers' Chief Executive Officer and other senior leaders. In addition, we revamped our onboarding program in response to the newly remote workforce and better aligned onboarding with our business strategy and culture.
For the third year in a row, Customers Bank was named as one of the Healthiest Employers in 2021 by the Philadelphia Business Journal and received first place for medium size companies. Customers strives to create a culture of wellness by engaging and positively impacting each team member. Our robust wellness program offers a variety of challenges, workshops, webinars, and health coaching sessions. The program focuses on team member overall well-being: physical, mental, emotional, and financial. The wellness program has a multi-tiered reward system where wellness points are awarded to team members for their participation. We also utilize software, Officevibe, to survey our team members on a periodic basis on subject matters relating to their work environment, managers, work life balance and overall engagement. Additionally, in order to further team member engagement and increase knowledge of our benefit offerings, we added a user-friendly educational tool to support our annual benefits enrollment. In 2021, to further team member engagement and morale, we began the implementation of a combined state of the art HR, payroll and financial management system expected to launch in the third quarter of 2022, that maywill allow for faster execution and improved system performance.
Other team member initiatives include:
•Day of Learning in which team members are granted up to 8 hours paid time off to participate in a course, seminar, or class in education.
•Team Member Referral Program is a strategy and initiative that monetarily rewards team members for successfully referring highly qualified candidates for open positions.
•Matching Gift Program recognizes the need for individual and corporate support of charitable organizations and, for this reason Customers will match the financial contributions of active team members up to $500 annually.
•Community Service Day in which team members can earn up to 8 hours paid time off for participating in a qualifying event of community service.
•Customers Bank continues to encourage team members to support the United Way and their unique approach to support communities and their significant gifts – the company continued to match donations dollar for dollar. Team members who contributed at a certain level were eligible for additional paid time off.
•Customers sponsors an Adopt a day blood drive through Miller-Keystone blood center several times a year. This allows more flexibility for team members to sign up and donate the “Gift of Life”. In addition, for participating, team members are awarded with two hours of additional community service paid time off and earn wellness points toward the wellness program.
•Financial First Responders Day, which was an additional floating holiday provided to team members for going above and beyond in support of the PPP program. Team members were also issued a gift card to utilize during their time off.
Our voluntary turnover remains below 11% for the third year in a row.
Benefits
Customers continues to provide free of charge access to Health Advocate, which can assist with services ranging from health care and insurance-related issues to providing one-on-one support for improving health and well-being. In addition to providing access to registered nurses, medical directors and benefits and claims specialists, team members also have access to Health Advocate's Employee Assistance Program ("EAP"). The EAP provides confidential counseling, legal, financial and referral services. EAP participants are entitled to three face-to-face consultations free of charge.
In 2021, Customers enhanced several of the benefits offerings to include Care@work by Care.com. Team members have access to a physical presence near the universitypremium membership for ongoing care for their families. In addition, they have access to resources that included nannies, senior caregivers, transportation assistance, tutors, summer camps, special needs caregivers and college campuses it serves, large national banks,more. Customers also enhanced its Teladoc benefit to include HealthiestYou which includes general medical visits at no cost to team members, along with no cost dermatological visits, mental health visits, as well as smaller regional orexpert second opinions and neck and back care.
Diversity
As part of Customers Bank’s commitment to advance diversity and inclusion in the workplace, the Equity Diversity & Inclusion For You ("EDIFY") team provides spotlights on diverse cultures, communities, and perspectives in their EDIFY Newsletters. Our EDIFY team holds company-wide meetings to listen to the thoughts and feelings of our team members, as well as focus groups and forums. In addition, Customers is a proud member of CEO Action for Diversity & Inclusion, the largest CEO-driven business commitment to advance diversity and inclusion in the workplace. We believe team member engagement plays a vital role in creating a culture in which diversity and inclusion can thrive by promoting a sense of belonging.
Management and Succession Planning
Customers is focused on facilitating internal succession by fostering internal mobility, enhancing its talent pool through professional development programs, and structuring its training program to teach skills for 21st century banking.
We have a structured leadership competency measurement program which was rolled out to the entire company with training opportunities included in the rollout. We continue to identify additional potential successors to the current leadership team high potential individuals, all of whom have been invited to join a special leadership development program.
COVID-19 Response
As the threat of COVID-19 continued into 2021, we launched a strategy that encouraged but did not mandate vaccinations in anticipation of a return to the workplace. Customers continued with the established Coronavirus Assistance hotline for team members to call if they needed assistance where team members volunteered to run errands for fellow team members.
In addition, we continued to enhance team members use of collaborative technology through training and learning programs including weekly digital Lunch and Learn programs, open to all team members. Additional efforts included requiring team members to read and acknowledge a COVID Code of Commitment, during the Delta variant outbreak.
At the start of 2021, Customers remained in phase 1 of its roadmap, under which the branch network continued to operate with appointment-only lobby access and staffing levels at non-branch facilities were capped at 25% of normal occupancy. In June 2021, the branches resumed normal operations and in September 2021 non-branch facilities adopted a hybrid model with the goal of more team members in the office while adhering our safety protocols and required federal, state and local banks,mandates and guidance. Customers COVID-19 Task Force continues to meet regularly and within ongoing monitoring of federal, state, and local public health communications about COVID-19 regulations, guidance, and recommendations as well as asses our policies and practices to ensure adherence as well as team member safety. Strict adherence to the New York City mandate passed late 2021 has been followed.
In order to protect the health of its customers and team members, and to comply with other student and disbursement businesses, both banks and prepaid card providers, and with local and national loan providers. Banks providing student disbursement services include PNC, Wells Fargo Bank, and U.S. Bank. BankMobile is developing strategies to white label deposit products to commercial entities, again competing with traditional bank deposit product branch delivery channels.
Employees
As of December 31, 2017,applicable government directives, Customers had 765 full-time equivalentmodified its business practices, including directing team members including approximately 230to work remotely insofar as it is possible and implementing its business continuity plans and protocols to the extent necessary. Since that time, Customers has launched the “Return to Workplace” initiative, and communicated a goal of having more team members dedicatedreturn to the BankMobile business segment.workplace. In that communication, Customers announced the following steps along with a continuing commitment to remain empathetic and cognizant of balancing company principles, customer support, team member support and remaining vigilant on tracking and preventing COVID-19 exposures to protect our team members and customers. Customers implemented a “ hybrid model” encouraging and tracking the movement of more team members returning to the office, released a communication requiring all team members to read, sign and acknowledge a Code of Commitment to reveal exposures to COVID-19, thereby allowing Customers to manage the possible impact with 100 percent participation of our team members. Customers has started tracking vaccination rates and less than 10 percent of our team members are not vaccinated or not planning to be vaccinated.
Available Information
Customers Bancorp’s internet website address is www.customersbank.com. Information on Customers Bancorp’s website is not part of this Annual Report on Form 10-K. Investors can obtain copies of Customers Bancorp’s annual reportAnnual Report on Form 10-K, quarterly reportsQuarterly Reports on Form 10-Q, current reportsCurrent Reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, on Customers Bancorp’s website (accessible under “About Us” – “Investor Relations” – “SEC Filings”) as soon as reasonably practicable after Customers Bancorp has filed such materials with, or furnished them to, the Securities and Exchange Commission (“SEC”).SEC. Customers Bancorp will also furnish a paper copy of such filings free of charge upon request. Investors can also read and copy any materials filed by Customers Bancorp with the SEC at the SEC’s Public Reference Room which is located at 100 F Street, NE, Washington, DC 20549. Information about the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. Customers Bancorp’s filings can also be accessed at the SEC’s internet website: www.sec.gov.
Customers Bancorp has adopted a Code of Ethics and Business Conduct that applies to its directors and officers (including its principal executive officer, principal financial officer and principal accounting officer), which is available at www.customersbank.com/investor-relations/governance-documents. In addition, any future waivers from a provision of the Code of Ethics and Business Conduct will be posted at this internet address.
SUPERVISION AND REGULATION
GENERAL
Customers Bancorp is subject to extensive regulation, examination and supervision by the Pennsylvania Department of Banking and Securities and, as a member of the Federal Reserve System, by the Federal Reserve Board. Federal and state banking laws and regulations govern, among other things, the scope of a bank’s business, the investments a bank may make, the reserves against deposits a bank must maintain, terms of deposit accounts, loans a bank makes, the interest rates it charges and collateral it takes, the activities of a bank with respect to mergers and consolidations and the establishment of branches.
PENNSYLVANIA BANKING LAWS
Pennsylvania banks that are Federal Reserve members may establish new branch offices only after approval by the Pennsylvania Department of Banking The following discussion summarizes certain laws, regulations and Securitiespolicies to which Customers Bancorp and the Board of GovernorsBank are subject. It does not address all applicable laws, regulations and policies that affect us currently or might affect us in the future. This discussion is qualified in its entirety by reference to the full texts of the Federal Reserve System (the “Federal Reserve Board”). Approval by these regulators can belaws, regulations and policies described.
Customers Bank has assets in excess of $10 billion, and accordingly, is subject to a variety of factors, including the conveniencesupervision, examination and needsenforcement jurisdiction of the community, whetherCFPB and is subject to higher FDIC premium assessments applicable to institutions with assets exceeding $10 billion in assets. As a public company, we also file reports with the institution is sufficiently capitalizedSEC and are subject to its regulatory authority, as well managed, issuesas the disclosure and regulatory requirements of safetythe Securities Act, as amended, and soundness, the institution’s record of meeting the credit needs of its community, whether there are significant supervisory concernsExchange Act, as amended, with respect to our securities, financial reporting and certain governance matters. Because our securities are listed on the institution or affiliated organizations, and whether any financial or other business arrangement, direct or indirect, involving bank “insiders” (directors, officers, employees and 10%-or-greater shareholders) which involves terms and conditions more favorable to the insiders than would be available in a comparable transaction with unrelated parties.
Under the Pennsylvania Banking Code, Customers Bank is permitted to branch throughout Pennsylvania. Pennsylvania law also provides Pennsylvania state-chartered banks elective parity with the power of national banks, federal thrifts, and state-chartered institutions in other states as authorized by the FDIC,NYSE, we are subject to a required noticeNYSE's rules for listed companies, including rules relating to the Pennsylvania Department of Banking and Securities. The Pennsylvania Banking Code also imposes restrictions on payment of dividends, as well as minimum capital requirements.
In October 2012, Pennsylvania enacted three laws known as the “Banking Law Modernization Package,” all of which became effective on December 24, 2012. The intended goal of the law, which applies to Customers Bank, is to modernize Pennsylvania’s banking laws and to reduce regulatory burden at the state level where possible, given the increased regulatory demands at the federal level as described below.
The law also permits banks to disclose formal enforcement actions initiated by the Pennsylvania Department of Banking and Securities (the "Department"), clarifies that the Department has examination and enforcement authority over subsidiaries as well as affiliates of regulated banks and bolsters the Department’s enforcement authority over its regulated institutions by clarifying its ability to remove directors, officers and employees from institutions for violations of laws or orders or for any unsafe or unsound practice or breach of fiduciary duty. Changes to existing law also allow the Department to assess civil money penalties of up to $25,000 per violation.
The law also sets a new standard of care for bank officers and directors, applying the same standard that exists for non-banking corporations in Pennsylvania. The standard is one of performing duties in good faith, in a manner reasonably believed to be in the best interests of the institutions and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. Directors may rely in good faith on information, opinions and reports provided by officers, employees, attorneys, accountants or committees of the board, and an officer may not be held liable simply because he or she served as an officer of the institution.
Interstate Branching. Federal law allows the Federal Reserve and FDIC, and the Pennsylvania Banking Code allows the Pennsylvania Department of Banking and Securities, to approve an application by a state banking institution to acquire interstate branches. For more information on federal law, see the discussion under “Federal Banking Laws – Interstate Branching” that follows.
Pennsylvania banking laws authorize banks in Pennsylvania to acquire existing branches or branch de novo in other states and also permit out-of-state banks to acquire existing branches or branch de novo in Pennsylvania.
In April 2008, Banking Regulators in the States of New Jersey, New York and Pennsylvania entered into a Memorandum of Understanding (the “Interstate MOU”) to clarify their respective roles, as home and host state regulators, regarding interstate branching activity on a regional basis pursuant to the Riegle-Neal Amendments Act of 1997. The Interstate MOU establishes the regulatory responsibilities of the respective state banking regulators regarding bank regulatory examinations and is intended to reduce the regulatory burden on state-chartered banks branching within the region by eliminating duplicative host state compliance exams.
Under the Interstate MOU, the activities of branches Customers established in New Jersey or New York would be governed by Pennsylvania state law to the same extent that federal law governs the activities of the branch of an out-of-state national bank in such host states. Issues regarding whether a particular host state law is preempted are to be determined in the first instance by the Pennsylvania Department of Banking and Securities. In the event that the Pennsylvania Department of Banking and Securities and the applicable host state regulator disagree regarding whether a particular host state law is pre-empted, the Pennsylvania Department of Banking and Securities and the applicable host state regulator would use their reasonable best efforts to consider all points of view and to resolve the disagreement.corporate governance.
FEDERAL BANKING LAWS
Interstate Branching.The Riegle-Neal Interstate Banking and Branching Efficiency Act, of 1994 (called the “Interstate Act”), among other things, permits bank holding companies to acquire banks in any state. A bank may also merge with a bank in another state. Interstate acquisitions and mergers are subject, in general, to certain concentration limits and state entry rules relating to the age of the bank. Under the Interstate Act, the responsible federal regulatory agency is permitted to approve the acquisition of less than all of the branches of an insured bank by an out-of-state bank or bank holding company without the acquisition of an entire bank, only if the law of the state in which the branch is located permits. Under the Interstate Act, branches of state-chartered banks that operate in other states are covered by the laws of the chartering state, rather than the host state. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) created a more permissive interstate branching regime by permitting banks to establish de novo branches in any state if a bank chartered by such state would have been permitted to establish the branch. For more information on interstate branching under Pennsylvania law, see “Pennsylvania Banking Laws – Interstate Branching” above.below.
Prompt Corrective Action. Federal banking law mandates certain “prompt corrective actions,” which Federal banking agencies are required to take, and certain actions which they have discretion to take, based upon the capital category into which a Federally regulated depository institution falls. Regulations have been adopted by the Federal bank regulatory agencies setting forth detailed procedures and criteria for implementing prompt corrective action in the case of any institution that is not adequately capitalized. Under the rules, an institution will be deemed to be “adequately capitalized” or better if it exceeds the minimum Federal regulatory capital requirements. However, it will be deemed “undercapitalized” if it fails to meet the minimum capital requirements, “significantly undercapitalized” if it has a common equity tier 1 risk-based capital ratio that is less than 3.0%, or has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than 4.0%, or a leverage ratio that is less than 3.0%, and “critically undercapitalized” if the institution has a ratio of tangible equity to total assets that is equal to or less than 2.0%. The rules require an undercapitalized institution to file a written capital restoration plan, along with a performance guaranty by its holding company or a third party. In addition, an undercapitalized institution becomes subject to certain restrictions including a prohibition on the payment of dividends, a limitation on asset growth and expansion, and in certain cases, a limitation on the payment of bonuses or raises to senior executive officers and a prohibition on the payment of certain “management fees” to any “controlling person.” Institutions that are classified as undercapitalized are also subject to certain additional supervisory actions, including increased reporting burdens and regulatory monitoring, a limitation
on the institution’s ability to make acquisitions, open new branch offices, or engage in new lines of business, obligations to raise additional capital, restrictions on transactions with affiliates and restrictions on interest rates paid by the institution on deposits. In certain cases, bank regulatory agencies may require replacement of senior executive officers or directors or sale of the institution to a willing purchaser. If an institution is deemed to be “critically undercapitalized” and continues in that category for four quarters, the statute requires, with certain narrowly limited exceptions, that the institution be placed in receivership.
Safety and Soundness; Regulation of Bank Management. The Federal Reserve Board possesses the power to prohibit a bank from engaging in any activity that would be an unsafe and unsound banking practice and in violation of the law. Moreover, Federal law enactments have expanded the circumstances under which officers or directors of a bank may be removed by the institution’s Federal supervisory agency; restricted and further regulated lending by a bank to its executive officers, directors, principal shareholders or related interests thereof; restricted management personnel of a bank from serving as directors or in other management positions with certain depository institutions whose assets exceed a specified amount or which have an office within a specified geographic area; and restricted management personnel from borrowing from another institution that has a correspondent relationship with the bank for which they work.
Capital Rules. Federal banking agencies have issued certain “risk-based capital” guidelines, which supplemented existing capital requirements. In addition, the Federal Reserve Board imposes certain “leverage” requirements on member banks. Banking regulators have authority to require higher minimum capital ratios for an individual bank or bank holding company in view of its circumstances.
The risk-based capital guidelines require all banks and bank holding companies to maintain capital levels in compliance with “risk-based capital” ratios. In these ratios, the on-balance-sheet assets and off-balance-sheetoff-balance sheet exposures are assigned a risk-weight based upon the perceived and historical risk of incurring a loss of principal from that exposure. The risk-based capital rules are designed to make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies and to minimize disincentives for holding liquid assets.
The risk-based capital rules also may consider interest-rate risk. Institutions with interest-rate risk exposure above a normal level would be required to hold extra capital in proportion to that risk. Customers currently monitors and manages its assets and liabilities for interest-rate risk, and management believes that the interest-rate risk rules which have been implemented and proposed will not materially adversely affect its operations.
The Federal Reserve Board’s “leverage” ratio rules require member banks which are rated the highest in the composite areas of capital, asset quality, management, earnings and liquidity to maintain a ratio of “Tier 1” capital to “adjusted total assets” of not less than 3.0%. For banks which are not the most highly rated, the minimum “leverage” ratio will range from 4.0% to 5.0%, or higher at the discretion of the Federal Reserve Board, and is required to be at a level commensurate with the nature of the level of risk of the bank's condition and activities.
For purposes of the capital requirements, “Tier 1,” or “core,” capital is defined to include common shareholders’ equity and certain noncumulative perpetual preferred stock and related surplus. “Tier 2,” or “qualifying supplementary,” capital is defined to include a bank’s allowance for loan lossesACL up to 1.25% of risk-weighted assets, plus certain types of preferred stock and related surplus, certain “hybrid capital instruments” and certain term subordinated debt instruments.
Capital Rules. In July 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-based capital rules applicable to the Bancorp and Customers Bank. The FDIC and the OCC have subsequently approved these rules. The final rules were adopted following the issuance of proposed rules by the Federal Reserve in June 2012 and implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to two consultative documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December 2010 and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and liquidity requirements.
The rules include risk-based capital and leverage ratios, planned to bewere phased in from 2015 to 2019, and refine the definition of what constitutes “capital” for purposes of calculating those ratios. Effective January 1, 2015, the new minimum capital level requirements applicable to the Bancorp and Customers Bank under the final rules were:
(i) a common equity Tier 1 risk-based capital ratio of 4.5%;
(ii) a Tier 1 risk-based capital ratio of 6% (increased from 4%);
(iii) a total risk-based capital ratio of 8% (unchanged from rules in effect prior to January 1, 2015) and
(iv) a Tier 1 leverage ratio of 4% for all institutions.
The final rules also establish a “capital conservation buffer” above the new regulatory minimum capital requirements.
The capital conservation buffer will bewas phased-in over four years beginning on January 1, 2016, as follows: the maximum buffer will bewas 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5%2.500% for 2019 and thereafter.
Effective January 1, 2017, the minimum capital level requirements (including the capital conservation buffer) applicable to the Bancorp and Customers Bank under the final rules were:
(i) a common equity Tier 1 capital ratio of 5.75%;
(ii) a Tier 1 risk-based capital ratio of 7.25% and
(iii) a total risk-based capital ratio of 9.25%.
Effective January 1, 2018,2019, the minimum capital level requirements (including the capital conservation buffer) applicable to the Bancorp and Customers Bank under the final rules are:
(i) a common equity Tier 1 capital ratio of 6.375%;
(ii) a Tier 1 risk-based capital ratio of 7.875% and
(iii) a total risk-based capital ratio of 9.875%.
Considering the capital conservation buffer, to avoid limitations on certain actions or activities, banks will be required to maintain the following ratios beginning January 1, 2019:
(i) a common equity Tier 1 capital ratio of 7.0%;
(ii) a Tier 1 risk-based capital ratio of 8.5%; and
(iii) a total risk-based capital ratio of 10.5%.
Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if their capital levels fall below the minimum capital level plus capital conservation buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions.
Basel III provided discretion for regulators to impose an additional buffer, the “countercyclical buffer,” of up to 2.5% of common equity Tier 1 capital to take into account the macro-financial environment and periods of excessive credit growth. However, the final rules permit the countercyclical buffer to be applied only to “advanced approach banks” (i.e., banks with $250 billion or more in total assets or $10 billion or more in total foreign exposures), which currently excludes the Bancorp and Customersthe Bank. The final rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, some of which will be phased out over time. However, the final rules provide that small depository institution holding companies with less than $15 billion in total assets as of December 31, 2009, (which includes the Bancorp) will be able to permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010, as additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature.
In addition, the final rules provide for smaller banking institutions (less than $250 billion in consolidated assets) an opportunity to make a one-time election to opt out of including most elements of accumulated other comprehensive income (loss) in regulatory capital. Importantly, the opt-out excludes from regulatory capital not only unrealized gains and losses on available-for-saleavailable for sale debt securities, but also accumulated net gains and losses on cash-flow hedges and amounts attributable to defined benefit postretirement plans. CustomersThe Bank selected the opt-out election in its March 31, 2015 Call Report.
The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including Customersthe Bank, if their capital levels begin to show signs of weakness. These revisions took effect on January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital conservation buffer, insured depository institutions will be required to meet the following increased capital level requirements in order to qualify as “well capitalized:”
(i) a common equity Tier 1 capital ratio of 6.5%;
(ii) a Tier 1 risk-based capital ratio of 8% (increased from 6%);
(iii) a total risk-based capital ratio of 10% (unchanged from rules in effect prior to January 1, 2015); and
(iv) a Tier 1 leverage ratio of 5% (increased from 4%).
The final rules set forth certain changes for the calculation of risk-weighted assets, which were required to be utilized as of January 1, 2015. The standardized approach final rule utilizes an increased number of credit-risk exposure categories and risk weights and also addresses:addressed:
(i) an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act;
(ii) revisions to recognition of credit-risk mitigation;
(iii) rules for risk weighting of equity exposures and past-due loans;
(iv) revised capital treatment for derivatives and repo-style transactionstransactions;
(v) the option to use a formula-based approach referred to as the simplified supervisory formula approach to determine the risk weight of various securitization tranches in addition to the previous “gross-up” method (replacing the credit ratings approach for certain securitization); and
(v)(vi) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject to the “advance“advanced approach rules” that apply to banks with greater than $250 billion in consolidated assets.
In addition, in December 2018, the U.S. federal banking agencies finalized rules that would permit bank holding companies and banks to phase-in, for regulatory capital purposes, the day-one impact of the new CECL accounting rule on retained earnings over a period of three years, with 25% of the day-one impact recognized on the adoption date (January 1, 2020 for Customers) and an additional 25% recognized annually on January 1 for the next three years.
In first quarter 2020, as part of its response to the impact of COVID-19, the U.S. federal banking regulatory agencies issued an interim final rule that provided the option to temporarily delay certain effects of CECL on regulatory capital for two years, followed by a three-year transition period. The interim final rule allows banking organizations to delay for two years 100% of the day-one impact of adopting CECL and 25% of the cumulative change in the reported allowance for credit losses since adopting CECL. Customers has elected to adopt the interim final rule, which is reflected in the regulatory capital data presented below.
In April 2020, the U.S. federal banking regulatory agencies issued an interim final rule that permits banks to exclude the impact of participating in the SBA PPP program in their regulatory capital ratios. Specifically, PPP loans are zero percent risk weighted and a bank can exclude all PPP loans pledged as collateral to the PPPLF from its average total consolidated assets for purposes of calculating the Tier 1 capital to average assets ratio (i.e. leverage ratio). Customers applied this regulatory guidance in the calculation of its regulatory capital ratios.
As of December 31, 20172021 and 2016,2020, Customers Bank and the Bancorp met all capital adequacy requirements to which they were subject. For additional information on Customers' regulatory capital ratios, refer to “NOTE"NOTE 19 – REGULATORY MATTERS”CAPITAL" to theCustomers' audited consolidated financial statements.
Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank billAct was enacted by Congress on July 15, 2010, and was signed into law by President Obama on July 21, 2010. Among many other provisions, the legislation:
•established the Financial Stability Oversight Council, a federal agency acting as the financial system’s systemic risk regulator with the authority to review the activities of significant bank holding companies and non-bank financial firms, to make recommendations and impose standards regarding capital, leverage, conflicts and other requirements for financial firms and to impose regulatory standards on certain financial firms deemed to pose a systemic threat to the financial health of the U.S. economy;
•created a new Consumer Financial Protection BureauCFPB within the U.S. Federal Reserve, which has substantive rule-making authority over a wide variety of consumer financial services and products, including the power to regulate unfair, deceptive or abusive acts or practices;
•permitted state attorneys generalattorney generals and other state enforcement authorities broader power to enforce consumer protection laws against banks;
authorized federal regulatory agencies to ban compensation arrangements at financial institutions that give employees incentives to engage in conduct that could pose risks to the nation’s financial system;
granted the U.S. Government resolution authority to liquidate or take emergency measures with regard to troubled financial institutions, such as bank holding companies, that fall outside the existing resolution authority of the Federal Deposit Insurance Corporation;
•required that the amount of any interchange fee charged by a debit card issuer with respect to a debit card transaction must be reasonable and proportional to the cost incurred by the issuer. On June 29, 2011, for banks with assets of $10 billion or greater, such as the Bank, the Federal Reserve Board set the interchange rate cap at $0.21 per transaction and 5 basis points multiplied by the value of the transaction;
•gave the FDIC substantial new authority and flexibility in assessing deposit insurance premiums, which may result in increased deposit insurance premiums for Customers in the future;
•increased the deposit insurance coverage limit for insurable deposits to $250,000 generally, and removes the limit entirely for transaction accounts;
•permitted banks to pay interest on business demand deposit accounts; and
extended the national bank lending (or loans-to-one-borrower) limits to other institutions;
•prohibited banks subject to enforcement action such as a memorandum of understandingMOU from changing their charter without the approval of both their existing charter regulator and their proposed new charter regulator andregulator.
imposed new limits on asset purchase and sale transactions betweenIn July 2018, the Federal Reserve stated that it would no longer require bank holding companies with less than $100 billion in total consolidated assets to comply with the modified version of the liquidity coverage ratio. In addition, in October 2018, the federal bank regulators proposed to revise their liquidity requirements so that banking organizations that are not global systemically important banks and their insiders.have less than $250 billion in total consolidated assets and less than $75 billion in each of off-balance-sheet exposure, nonbank assets, cross-jurisdictional activity and short-term wholesale funding would not be subject to any liquid coverage ratio or net stable funding ratio requirements.
In February 2014, the Federal Reserve adopted rules to implement certain of these enhanced prudential standards. Beginning in 2015, the rules require publicly traded bank holding companies with $10 billion or more in total consolidated assets to establish risk committees and require bank holding companies with $50 billion or more in total consolidated assets to comply with enhanced liquidity and overall risk management standards. Customers has established a risk committee and is in compliance with this requirement. In October 2018, the Federal Reserve and the other federal bank regulators proposed rules that would tailor the application of the enhanced prudential
standards to bank holding companies and depository institutions pursuant to the EGRRCPA amendments, including by raising the asset threshold for application of many of these standards. For example, all publicly traded bank holding companies with $50 billion or more in total consolidated assets would be required to maintain a risk committee.
Many of these provisions are subject to further rule making and to the discretion of regulatory bodies, including Customers Bank’s primary federal banking regulator, the Federal Reserve. It is not possible to predict at this time the extent to which regulations authorized or mandated by the Dodd-Frank Act and EGRRCPA will impose requirements or restrictions on Customers Bank in addition to or different from the provisions summarized above.
Regulatory Reform and Legislation. From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of Customers in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions and other financial institutions. Customers cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on its financial condition or results of operations. A change in statutes, regulations or regulatory policies applicable to Customers or our subsidiaries could have a material effect on our business, financial condition and results of operations.
Deposit Insurance Assessments. Customers Bank’s deposits are insured by the FDIC up to the limits set forth under applicable law and are subject to deposit insurance premium assessments. The FDIC imposes a risk-based deposit premium assessment system, which was amended pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “Act”).2005. Under this system, the amount of FDIC assessments paid by an individual insured depository institution, like Customers Bank, is based on the level of perceived risk incurred in its activities. The FDIC places a depository institution in one of four risk categories determined by reference to its capital levels and supervisory ratings. In addition, in the case of those institutions in the lowest risk category, the FDIC further determines its assessment rates based on certain specified financial ratios.
In February 2011, the FDIC adopted a final rule modifying the risk-based assessment system and setting initial base assessment rates beginning in April 2011, ranging from 2.5 to 45 basis points of Tier I capital.
On June 22, 2020, the FDIC issued a final rule that mitigates the deposit insurance assessment effects of participating in the PPP, the PPPLF and MMLF. Pursuant to the final rule, the FDIC will generally remove the effect of PPP lending in calculating an institution's deposit insurance assessment. The final rule also provides an offset to an institution's total assessment amount for the increase in its assessment base attributable to participation in the PPP and MMLF.
In addition to deposit insurance assessments, banks are subject to assessments to pay the interest on Financing Corporation bonds. The Financing Corporation was created by Congress to issue bonds to finance the resolution of failed thrift institutions. The FDIC sets the Financing Corporation assessment rate every quarter.
Community Reinvestment Act. Under the Community Reinvestment Act of 1977, (“CRA”), the record of a bank holding company and its subsidiary banks must be considered by the appropriate Federal banking agencies, including the Federal Reserve Board, in reviewing and approving or disapproving a variety of regulatory applications including approval of a branch or other deposit facility, office relocation, a merger and certain acquisitions. Federal banking agencies have demonstrated an increased readiness to deny applications based on unsatisfactory CRA performance. The Federal Reserve Board is required to assess Customers' record to determine if it is meeting the credit needs of the community, including the low-and-moderate- incomelow-and-moderate-income neighborhoods that it serves. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 amended the CRA to require, among other things, that the Federal Reserve Board make publicly available an evaluation of the bank's record of meeting the credit needs of its entire community, including low-and-moderate-income neighborhoods. This evaluation includes a descriptive rating (outstanding, satisfactory, needs to improve or substantial noncompliance) and a statement describing the basis for the rating.
Incentive Compensation. In June 2010, the Federal Reserve Board, OCC and FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors.
The Federal Reserve Board will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as Customers, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness, and the organization is not taking prompt and effective measures to correct the deficiencies.
In addition, Section 956 of the Dodd-Frank Act required certain regulators (including the FDIC, SEC and Federal Reserve Board) to adopt requirements or guidelines prohibiting excessive compensation. In April and May 2016, the Federal Reserve, jointly with five other federal regulators, published a proposed rule in response to Section 956 of the Dodd-Frank Act, which
requires implementation of regulations or guidelines to: (i) prohibit incentive-based payment arrangements that encourage inappropriate risks by certain financial institutions by providing excessive compensation or that could lead to material financial loss and (ii) require those financial institutions to disclose information concerning incentive-based compensation arrangements to the appropriate federal regulator.
The proposed rule identifies three categories of institutions that would be covered by these regulations based on average total consolidated assets, applying less prescriptive incentive-based compensation program requirements to the smallest covered institutions (Level 3) and progressively more rigorous requirements to the larger covered institutions (Level 1). Under the proposed rule, Customers would fall into the smallest category (Level 3), which applies to financial institutions with average total consolidated assets greater than $1 billion and less than $50 billion. The proposed rules would establish general qualitative requirements applicable to all covered entities, which would include (i) prohibiting incentive arrangements that encourage inappropriate risks by providing excessive compensation; (ii) prohibiting incentive arrangements that encourage inappropriate risks that could lead to a material financial loss; (iii) establishing requirements for performance measures to appropriately balance risk and reward; (iv) requiring board of director oversight of incentive arrangements and (v) mandating appropriate record keeping. Under the proposed rule, larger financial institutions with total consolidated assets of at least $50 billion would also be subject to additional requirements applicable to such institutions’ “senior executive officers” and “significant risk-takers.” These additional requirements would not be applicable to Customers because it currently has less than $50 billion in total consolidated assets. Comments on the proposed rule were due by July 22, 2016. As of the date of this document, the final rule has not yet been published by these regulators.
Consumer Financial Protection Laws and Enforcement. Customers Bank is subjectThe CFPB and the federal banking agencies continue to a variety offocus attention on consumer protection laws includingand regulations. The CFPB is responsible for promoting fairness and transparency for mortgages, credit cards, deposit accounts and installment financial products and services and for interpreting and enforcing the Truth in Lending Act,federal consumer financial laws that govern the provision of such products and services. Federal consumer financial laws enforced by the CFPB include, but are not limited to, the ECOA, TILA, the Truth in Savings Act, adopted as part ofHMDA, RESPA, the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the Electronic Funds Transfer Act, the Real Estate Settlement ProceduresFair Debt Collection Practices Act, and the Fair Credit Reporting Act. The CFPB is also authorized to prevent any institution under its authority from engaging in an unfair, deceptive, or abusive act or practice in connection with consumer financial products and services. Customers is subject to multiple federal consumer protection statutes and regulations, adopted thereunder. including, but not limited to, those referenced above.
In particular, fair lending laws prohibit discrimination in the aggregate,provision of banking services, and the enforcement of these laws has been an increasing focus for the CFPB, the HUD, and other regulators. Fair lending laws include ECOA and the Fair Housing Act, which outlaw discrimination in credit and residential real estate transactions on the basis of prohibited factors including, among others, race, color, national origin, gender, and religion. A lender may be liable for policies that result in a disparate treatment of, or have a disparate impact on, a protected class of applicants or borrowers. If a pattern or practice of lending discrimination is alleged by a regulator, then that agency may refer the matter to the DOJ for investigation. Failure to comply with these and similar statutes and regulations can result in Customers Bancorp becoming subject to formal or informal enforcement actions, the imposition of civil money penalties and consumer litigation.
The CFPB has exclusive examination and primary enforcement authority with respect to compliance with thesefederal consumer financial protection laws and regulations by institutions under its supervision and is authorized, individually or jointly with the federal bank regulatory agencies, to conduct investigations to determine whether any person is, or has, engaged in conduct that violates such laws or regulations. The CFPB may bring an administrative enforcement proceeding or civil action in federal district court. In addition, in accordance with a MOU entered into between the CFPB and the DOJ, the two agencies have agreed to coordinate efforts related to enforcing the fair lending laws, which includes information sharing and conducting joint investigations; however, as a result of recent leadership changes at the DOJ and CFPB, as well as changes in the enforcement policies and priorities of each agency, the extent to which such coordination will continue to occur in the near term is uncertain. As an independent bureau funded by the Federal Reserve Board, the CFPB may impose requirements that are more stringent than those of the other bank regulatory agencies.
As an insured depository institution with total assets of more than $10 billion, the Bank is subject to the CFPB’s supervisory and enforcement authorities. The Dodd-Frank Act also permits states to adopt stricter consumer protection laws and regulations involves substantial expensestate attorneys general to enforce consumer protection rules issued by the CFPB. As a result, the Bank operates in a stringent consumer compliance environment and administrative time onmay incur additional costs related to consumer protection compliance, including but not limited to potential costs associated with CFPB examinations, regulatory and enforcement actions and consumer-oriented litigation. The CFPB, other financial regulatory agencies, including the partFederal Reserve, as well as the DOJ, have, over the past several years, pursued a number of Customers.enforcement actions against depository institutions with respect to compliance with fair lending laws.
UDAP and UDAAP. Banking regulatory agencies have increasingly used a general consumer protection statute to address “unethical” or otherwise “bad” business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade CommissionFTC Act, ("the FTC Act"), which is the primary federal law that prohibits unfair or deceptive acts or practices, referred to as "UDAP," and unfair methods of competition in or affecting commerce. “Unjustified consumer injury” is the principal focus of the FTC Act. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with UDAP laws and regulations. However, UDAP laws and regulations have been expanded under the Dodd-Frank Act to apply to “unfair, deceptive or abusive acts or practices,” referred to as "UDAAP,"
which have been delegated to the Consumer Financial Protection Bureau (“CFPB”)CFPB for supervision. The CFPB has published its first Supervision and Examination Manual that addresses compliance with and the examination of UDAAP.
Privacy Protection and Cybersecurity. The Bank is subject to regulations implementing the privacy protection provisions of the GLBA. These regulations require the Bank to disclose its privacy policy, including identifying with whom it shares "nonpublic personal information," to customers at the time of establishing the customer relationship and annually thereafter. The regulations also require the Bank to provide its customers with initial and annual notices that accurately reflect its privacy policies and practices. In addition, to the extent its sharing of such information is not covered by an exception, the Bank is required to provide its customers with the ability to "opt-out" of having the Bank share their nonpublic personal information with unaffiliated third parties.
The Bank is subject to regulatory guidelines establishing standards for safeguarding customer information. These regulations implement certain provisions of the GLBA. The guidelines describe the federal bank regulatory agencies’ expectations for the creation, implementation and maintenance of an information security program, which would include administrative, technical and physical safeguards appropriate to the size and complexity of the institution and the nature and scope of its activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of customer records and information, protect against any anticipated threats or hazards to the security or integrity of such records and protect against unauthorized access to or use of such records or information that could result in substantial harm or inconvenience to any customer. These guidelines, along with related regulatory materials, increasingly focus on risk management and processes related to information technology and the use of third parties in the provision of financial services. In October 2016, the federal banking agencies issued an advance notice of proposed rulemaking on enhanced cybersecurity risk-management and resilience standards that would apply to large and interconnected banking organizations and to services provided by third parties to these firms. These enhanced standards would apply only to depository institutions and depository institution holding companies with total consolidated assets of $50 billion or more. The federal banking agencies have not yet taken further action on these proposed standards. Privacy and data security areas are expected to receive increased attention at the federal level. An increasing number of state laws and regulations have been enacted in recent years to implement privacy and cybersecurity standards and regulations, including data breach notification and data privacy requirements. Recently, several states have adopted regulations requiring certain financial institutions to implement cybersecurity programs that meet specified requirements. In addition, other jurisdictions in which our customers do business, such as the European Union, have adopted similar requirements. This trend of activity is expected to continue to expand, requiring continual monitoring of developments in the states and nations in which our customers are located and ongoing investments in our information systems and compliance capabilities,
Bank Holding Company Regulation
As a bank holding company, Customers Bancorp is also subject to additional regulation.
The Bank Holding CompanyBHC Act requires the Bancorp to secure the prior approval of the Federal Reserve Board before it owns or controls, directly or indirectly, more than five percent (5%) of the voting shares or substantially all of the assets of any bank. It also prohibits acquisition by the BancorpIn addition, bank holding companies are required to act as a source of more than five percent (5%)financial strength to each of the voting shares of, or interest in, or all or substantially all of the assets of, any bank located outside of the state in which a current bank subsidiary is located unless such acquisition is specifically authorized by laws of the state intheir banking subsidiaries pursuant to which such bank is located. holding company may be required to commit financial resources to support such subsidiaries in circumstances when, absent such requirements, they might not do so.
A bank holding company is prohibited from engaging in or acquiring direct or indirect control of more than five percent (5%) of the voting shares of any company engaged in non-banking activities unless the Federal Reserve Board, by order or regulation, has found such activities to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making this determination, the Federal Reserve Board considers whether the performance of these activities by a bank holding company would offer benefits to the public that outweigh the possible adverse effects.
Control Acquisitions. The CBCA prohibits a person or group of persons from acquiring “control” of a bank holding company unless the Federal Reserve has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act, such as Customers Bancorp, would, under the circumstances set forth in the presumption, constitute acquisition of control of Customers Bancorp.
In addition, the CBCA prohibits any entity from acquiring 25% (the BHC Act has a lower limit for acquirers that are existing bank holding companies) or more of a bank holding company’s or bank’s voting securities, or otherwise obtaining control or a controlling influence over a bank holding company or bank without the approval of the Federal Reserve. On January 31, 2020, the Federal Reserve Board approved the issuance of a final rule (which became effective April 1, 2020) that clarifies and codifies the Federal Reserve’s standards for determining whether one company has control over another. The final rule establishes four categories of tiered presumptions of noncontrol that are based on the percentage of voting shares held by the investor (less than 5%, 5-9.9%, 10-14.9% and 15-24.9%) and the presence of other indicia of control. As the percentage of ownership increases, fewer indicia of control are permitted without falling outside of the presumption of noncontrol. These indicia of control include nonvoting equity ownership, director
representation, management interlocks, business relationship and restrictive contractual covenants. Under the final rule, investors can hold up to 24.9% of the voting securities and up to 33% of the total equity of a company without necessarily having a controlling influence.
Applications under the Bank Holding CompanyBHC Act and the Change in Control ActCBCA are subject to review, based upon the record of compliance of the applicant with the CRA.
The Bancorp is required to file an annual report with the Federal Reserve Board and any additional information that the Federal Reserve Board may require pursuant to the Bank Holding CompanyBHC Act. Further, under Section 106 of the 1970 amendments to the Bank Holding CompanyBHC Act and the Federal Reserve Board’s regulations, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of credit or provision of any property or services. The so-called “anti-tie-in” provisions state generally that a bank may not extend credit,
lease, sell property or furnish any service to a customer on the condition that the customer obtains additional credit or service from the bank, or on the condition that the customer not obtain other credit or service from a competitor.
The Federal Reserve Board permits bank holding companies to engage in non-banking activities so closely related to banking or managing or controlling banks as to be a proper incident thereto. A number of activities are authorized by Federal Reserve Board regulation, while other activities require prior Federal Reserve Board approval. The types of permissible activities are subject to change by the Federal Reserve Board.
PENNSYLVANIA BANKING LAWS
Pennsylvania banks that are Federal Reserve members may establish new branch offices only after approval by the Pennsylvania Department of Banking and Securities and the Federal Reserve Board. Approval by these regulators can be subject to a variety of factors, including the convenience and needs of the community, whether the institution is sufficiently capitalized and well managed, issues of safety and soundness, the institution’s record of meeting the credit needs of its community, whether there are significant supervisory concerns with respect to the institution or affiliated organizations, and whether any financial or other business arrangement, direct or indirect, involving bank insiders involves terms and conditions more favorable to the insiders than would be available in a comparable transaction with unrelated parties. Under the Pennsylvania Banking Code, the Bank is permitted to branch throughout Pennsylvania. Pennsylvania law also provides Pennsylvania state-chartered banks elective parity with the power of national banks, federal thrifts, and state-chartered institutions in other states as authorized by the FDIC, subject to a required notice to the Pennsylvania Department of Banking and Securities. The Pennsylvania Banking Code also imposes restrictions on payment of dividends, as well as minimum capital requirements.
In October 2012, Pennsylvania enacted three laws known as the “Banking Law Modernization Package,” all of which became effective on December 24, 2012. The intended goal of the law, which applies to the Bank, is to modernize Pennsylvania’s banking laws and to reduce regulatory burden at the state level where possible, given the increased regulatory demands at the federal level as described below.
The law also permits banks to disclose formal enforcement actions initiated by the Department, clarifies that the Department has examination and enforcement authority over subsidiaries as well as affiliates of regulated banks and bolsters the Department’s enforcement authority over its regulated institutions by clarifying its ability to remove directors, officers and employees from institutions for violations of laws or orders or for any unsafe or unsound practice or breach of fiduciary duty. Changes to existing law also allow the Department to assess civil money penalties of up to $25,000 per violation.
The law also sets a new standard of care for bank officers and directors, applying the same standard that exists for non-banking corporations in Pennsylvania. The standard is one of performing duties in good faith, in a manner reasonably believed to be in the best interests of the institutions and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary prudence would use under similar circumstances. Directors may rely in good faith on information, opinions and reports provided by officers, employees, attorneys, accountants or committees of the board, and an officer may not be held liable simply because he or she served as an officer of the institution.
Interstate Branching. Federal law allows the Federal Reserve and FDIC, and the Pennsylvania Banking Code allows the Pennsylvania Department of Banking and Securities, to approve an application by a state banking institution to acquire interstate branches. For more information on federal law, see the discussion under “Federal Banking Laws – Interstate Branching” above.
Pennsylvania banking laws authorize banks in Pennsylvania to acquire existing branches or branch de novo in other states and also permit out-of-state banks to acquire existing branches or branch de novo in Pennsylvania.
In April 2008, Banking Regulators in the States of New Jersey, New York and Pennsylvania entered into the Interstate MOU to clarify their respective roles, as home and host state regulators, regarding interstate branching activity on a regional basis pursuant to the Riegle-Neal Amendments Act of 1997. The Interstate MOU establishes the regulatory responsibilities of the respective state banking regulators regarding bank regulatory examinations and is intended to reduce the regulatory burden on state-chartered banks branching within the region by eliminating duplicative host state compliance exams.
Under the Interstate MOU, the activities of branches Customers established in New Jersey or New York would be governed by Pennsylvania state law to the same extent that federal law governs the activities of the branch of an out-of-state national bank in such host states. Issues regarding whether a particular host state law is preempted are to be determined in the first instance by the Pennsylvania Department of Banking and Securities. In the event that the Pennsylvania Department of Banking and Securities and the applicable host state regulator disagree regarding whether a particular host state law is pre-empted, the Pennsylvania Department of Banking and Securities and the applicable host state regulator would use their reasonable best efforts to consider all points of view and to resolve the disagreement.
Item 1A. Risk Factors
Summary of Risk Factors
Risks Related to the Proposed Spin-off of BankMobile and Merger with Flagship Community Bank
We face a number of risks relating to our announced plans to dispose of BankMobile through a spin-off and merger.
We have announced our plans to dispose of our BankMobileOur business through a spin-off of BankMobile to our shareholders, to
be followed by a merger of our BankMobile Technologies, Inc. subsidiary, which we refer to as BMT, into Flagship
Community Bank, which we refer to as Flagship. The completion of the spin-off and merger will beis subject to a number of conditions,risks and a summary of the significant risk factors is set forth below. These risks are discussed in more detail following this summary and should be read together with this summary and considered along with other information contained in this report before investing in our securities.
•Risks related to the Bancorp's banking operations:
◦Risks associated with our lending activities and effective management of credit risks in our loan and lease portfolio;
◦Risks related to maintaining an appropriate level of ACL;
◦Risks associated with our investment securities portfolio including receiptmarket and credit risks and the uncertainties surrounding macroeconomic conditions;
◦Risks related to planned changes in the composition of all necessary regulatory approvals, receipt by Flagship of shareholder approvals of certain matters relating to its acquisition of BMT, Flagship’sour loan portfolio including our emphasis on commercial and industrial, commercial real estate, consumer, and mortgage warehouse lending;
◦Risks associated with maintaining sufficient liquidity including our ability to raise approximately $100 million throughgather, grow and retain our lower cost deposits;
◦Risks and uncertainties associated with the issuanceeffectiveness of shares of its common stockour business strategies, operations, and other conditions. Certain of the conditions will not be within our control,technology in managing growth and we cannot guarantee you that we will be ablemaintaining profitability;
◦Risks related to complete the spin-offchanges to estimates and merger on the terms we have agreed to with Flagship, or at all.
The steps we take to complete these transactions mayassumptions made by management in preparing financial statements. These changes could adversely affect our business, operating results, reported assets and liabilities, financial condition and capital levels;
◦Risks related to changes in accounting standards and policies which can be difficult to predict and can materially impact how we record and report our financial results;
◦Risks related to our geographic concentration in the value of Customers and/or BankMobile. Uncertainty asNortheast and Mid-Atlantic regions;
◦Risks related to our dependency on our executive officers and key personnel to implement our strategy and our ability to complete the transactionsretain their services;
◦Risks related to significant competition from other financial institutions and uncertainty asfinancial services providers;
◦Risks related to the timing of the completion of theuncertainty about reference rate reform;
transactions may adversely affect analyst and shareholder views of◦Risks related to CBIT, our business and prospects, which could adversely affect our share price. These uncertainties also may adversely impact our relationshipsblockchain-based instant payments platform;
◦Risks associated with our currentdependency on our information technology and potential higher education institution customerstelecommunications systems and our BankMobile team members, and could result inthird-party servicers including exposures to systems failures, interruptions or breaches of security;
◦Risks associated with the loss of, customers and key team members.or failure to adequately safeguard, confidential or proprietary information;
Executing•Risks related to the spin-off and merger may also result in the diversion of management’s attention from Customers’ day-to-day operations generally, and the expenses we incur in executing the transactions may exceed our expectations, which may adversely affect our results of operations. In addition, even if we are successful in completing the spin-off and merger, it is possible that we and our shareholders may not receive the benefits we presently anticipate from these transactions.
If the proposed divestiture of BankMobile from Customers is completed, the market value of our common stock may be affected.BMT:
We cannot assure you that the combined value of the Customers common stock and the Flagship/BankMobile common stock received by shareholders immediately following◦Risks associated with BM Technologies after completion of the spin-off and merger, as adjusted for any changes in the combined capitalization of these companies, will be equal to, greater than, or less than what the value of Customers' common stock would have been had the proposed spin-off not occurred. The BankMobile business segment to be divested in the spin-off has reported a net loss during the six calendar quarter periods ending December 31, 2017, of $16.9 million after taxes, or approximately $0.52 per diluted share, and the segment has operated in a net loss position in five of those six calendar quarters. Also, Flagship is expected to raise a significant amount of new capital prior to the transaction. While typically the share price of the residual business (i.e, Customers) would reflect the loss in income from the spin-off business, because of the complexity of this transaction, the effect on our stock price is uncertain. In this instance, the BankMobile business was operating at a net loss before the spin-off, the spin-off entity is to immediately be sold and merged with Flagship in exchange for an ownership interest in Flagship that will exceed 50% of the combined entities, and Flagship is expected to raise a significant amount of new capital prior to the transaction pursuant to a new business plan. As a result, the effect of the spin-off and merger on the market value of Customers' common stock, or on the combined value of Customers' common stock and the Flagship/BankMobile's common stock, will not be known until the market has fully evaluated Customers’ business without its BankMobile business and has also fully evaluated the new Flagship/BankMobile business.
There could be significant tax liability to Customers and its shareholders if the spin-off of BMT fails to qualify as a tax-free transaction.
The spin-off of BMT to Customers’ shareholders followed by a merger of BMT with Flagship is intended to constitute a “plan of reorganization” within the meaning of relevant sections of the Treasury RegulationsMegalith Financial Acquisition Corp. through our various service and the Internal Revenue Code and as such is expected to be treated as a tax-free reorganization to both Customers and its shareholders for U.S. federal income tax purposes. The purchase and sale agreement between Customers and Flagship provides that the parties will use their best efforts to ensure such tax treatment and shall obtain the opinion of tax counsel that the contemplated transactions should constitute a “reorganization,” and there should be no resulting U.S. federal income tax liability to Customers or its shareholders. Receipt of a letter stating tax counsel’s opinion on the tax-free nature of the contemplated transactions is a condition to close the transactions. The tax counsel’s opinion will be based on and rely on, among other things, facts, assumptions, representations and undertakingsloan agreements with BM Technologies;
•Risks related to Customers, BMTthe ongoing COVID-19 pandemic, climate change and Flagship, including those regarding past and future conduct of Customers’, BMT’s, and Flagship’s respectivemacroeconomic conditions:
◦Risks related to worsening general business and other matters.
The opinion of tax counsel is not a binding determination on the Internal Revenue Service or the courts as to whether the contemplated transactions qualify as “reorganization” or are exempt from U.S. federal income taxes. In addition, the facts, assumptions, representations and undertakings of Customers, BMT and Flagship considered by tax counsel in developing its opinion could prove to be incorrect, or an event could occur contradictory to that assumed by tax counsel in reaching its opinion. As a result, notwithstanding the determination of tax counsel, the IRS could determine that the distribution is taxable to Customers or its shareholders participating in the distribution, or both. If the spin-off of BMT, or the subsequent merger of BMT with Flagship in exchange for Flagship common shares, is determined to be taxable to Customers or its shareholders for U.S. federal income tax purposes, the distribution could be treated as a capital gain or a taxable dividend to Customers or its shareholders, respectively, for U.S. federal income tax purposes, and Customers or its shareholders that are subject to US federal income tax could incur significant or material U.S. federal income tax liabilities.
If the Amended and Restated Purchase and Assumption Agreement is amended to satisfy regulatory, legal or other matters that may be identified, such amendment may result in terms oreconomic conditions that result in taxable gains to Customers, BankMobile/Flagship shareholders or both.
In the normal course of regulatory reviews and approvals, or continuing review by Customers or Flagship prior to the completion of the spin-off and merger transactions, matters may be identified that require the terms or conditions of the Amended and Restated Purchase and Assumption Agreement to be changed, or new terms and conditions to be added, to address the matters. It is possible that such amendments to the Amended and Restated Purchase and Assumption Agreement may alter the transactions in a manner that results in tax counsel, or the Internal Revenue service or courts, determining that the proposed transactions are taxable to Customers or our shareholders receiving Flagship Community Bank shares in the merger, or both.
Due to the inherent complexity of the proposed spin-off and merger transactions, the federal banking or other regulators may take longer than expected to review the transactions, and the regulators, Customers or Flagship may identify additional matters to be considered that will take additional time to resolve, the completion of the proposed transactions may occur later than mid-year 2018.
The proposed transactions will be considered to varying degrees by the Federal Reserve Bank of Philadelphia, the Federal Reserve Board of Governors, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, the Commonwealth of Pennsylvania, the State of Florida, and possibly other regulatory authorities. In addition, Customers and Flagship employees and representatives continue to review materials relating to the proposed transactions. Customers and Flagship will need to obtain a number of approvals and file a number of documents to comply with the requirements of many of these regulatory authorities. Because of the complexity of the transactions, it is possible that one or more of these regulatory authorities may take longer to complete its review. It is also possible that matters may be identified in any of these reviews that may require additional time to resolve. Considered together, the possible extended period for review and the period that may be necessary to resolve any matters identified, it is possible that completion of the proposed transactions may occur later than mid-year 2018.
Failure to complete the proposed spin-off of BankMobile and merger with Flagship could negatively impact our share price, our future business and financial results.
We cannot assure you that our proposed spin-off of BankMobile followed by a merger of BMT into Flagship will be completed in the time frame we currently anticipate, or at all. If we do not complete the proposed spin-off and merger, we and our shareholders will not receive the expected benefits of such proposed transactions, but we will have incurred significant costs in
connection with our pursuit of the transactions, including our own costs relating to the proposed transaction and the costs of Flagship relating to the proposed transaction and related matters, certain of which we are obligated to pay even if the proposed transaction is not completed. In addition, we cannot assure you that alternative opportunities to sell or otherwise divest BankMobile will be available to us, or, if available, will be on terms at least as favorable to us and our shareholders as the terms of the proposed spin-off and merger with Flagship. Market conditions, the possible need to secure regulatory, shareholder or other approvals and other factors will affect our ability to pursue alternative opportunities.
In addition, the value of our common and preferred stock may decline if the proposed transactions are not completed, and uncertainty as to whether alternative transactions may be available for the disposition of the BankMobile business, and as to the timing, form and terms of any such alternative disposition may adversely affect analyst and shareholder views as to the value of the BankMobile business, which could further adversely affect the value of our securities.
If we are unable to complete the spin-off of BankMobile before exceeding the $10 billion total asset threshold, our business and potential for future success could be materially adversely affected.
Our business and future prospects may suffer if we are unable to remain under $10 billion in total assets as of December 31 of each year before we spin-off or otherwise dispose of the BankMobile business. If we are unable to complete the spin-off or otherwise dispose of BankMobile before exceeding the $10 billion total asset threshold, we would experience a significant reduction in BankMobile interchange fee income. Under federal law and regulation, we must remain under $10 billion in total assets as of December 31 of each year to qualify as a small issuer of debit cards and receive the optimal debit card processing fee. If we were to lose this status, BankMobile would operate unprofitably unless we were able to generate additional fees to replace the lost interchange fee revenue. As a result, our inability to complete the spin-off of BankMobile and merger with Flagship or otherwise divest of BankMobile in a timely manner could materially and adversely affect us;
◦Risks associated with the ongoing COVID-19 pandemic including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic;
◦Risks related to the SBA’s PPP program and PPP loans remaining on our financial conditionbalance sheet;
◦Risks related to climate change and results of operations. Because we cannot be certain of completingrelated legislative and regulatory initiatives on our business;
•Risks related to the spin-off and merger by July 1, 2018, we reduced our assets below $10 billion at December 31, 2017, in order to eliminate the risk of not receiving full interchange fees, which would occur if we no longer qualified for the smaller issuer exemption from the Durbin Amendment for 2018.
Certain termsregulation of our agreement with Flagship may expose us to significant liabilities.industry:
We have agreed to indemnify Flagship and its directors and officers against losses and liabilities incurred by them in connection◦Risks associated with the proposed transactionshighly regulated environment in which we operate, including the effects of heightened regulatory and supervisory requirements applicable to banks with assets in excess of $10 billion;
◦Risks related to maintaining adequate regulatory capital to support our business strategies including the long-term impact of the new regulatory capital standards and the capital rules on U.S. banks;
◦Risks related to our use of third-party vendors and our other ongoing third-party business relationships which are subject to increasing regulatory requirements and attention;
◦Risks associated to us being subject to numerous laws and governmental regulations and to indemnify themregular examinations by our regulators of our business and certain others in connectioncompliance with certain expenseslaws and additionalregulations. Our failure to comply with such laws and regulations or to adequately address any matters relating to the proposed transactions. In addition, we have agreed to obtain, at our expense, director and officer liability insurance for the benefit of Flagship’s directors and officers to cover them for similar losses and liabilities. Although our agreement to provide indemnification is subject to certain limitations and exceptions, including limitations on the dollar amount of losses payable by us, significant indemnification claims by Flagship, its directors and officers or other indemniteesidentified during these examinations could materially and adversely affect us;
◦Risks related to reviews performed by the Internal Revenue Service and state taxing authorities for the fiscal years that remain open for investigation and potential changes in U.S. federal, state or local tax laws;
•Risks related to our financial condition. Also, in connection with the proposed transactions, Customers deposited $1.0 million in an escrow account with a third partysecurities:
◦Risks related to be reserved for paymentour voting common stock;
◦Risks related to Flagship in the event theour fixed-to-floating-rate non-cumulative perpetual preferred stock, Series E and Series F; and
◦Risks related agreement is terminated for reasons described in the Amended Agreement.to our senior notes and subordinated notes.
If we are unable to complete the spin-off of BankMobile and merger with Flagship in a timely fashion, or at all, we will continue to face the risks and challenges associated with the BankMobile business.
If we do not complete the proposed spin-off of BankMobile and merger with Flagship in a timely fashion, or at all, we will continue to face the risks and challenges associated with the BankMobile business, including those relating to the integration of the Disbursement business, described in this Risk Factors discussion and elsewhere in this Annual Report on Form 10-K. We cannot assure you that we will be able to address and manage these risks so as to preserve or increase the value of BankMobile, and any failure to preserve or increase the value of BankMobile could adversely affect the business of Customers as a whole and our ability to spin-off or otherwise dispose of BankMobile in an alternative transaction on favorable terms, or at all.
•General risk factors
Risks Related to the Bancorp’s Banking Operations
Our business is highly susceptible to credit risk. If our allowance for loan lossesACL is insufficient to absorb losses in our loan and lease portfolio, our earnings could decrease.
Lending money is a substantial part of our business, and each loan and lease carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:
•the financial condition and cash flows of the borrower and/or the project being financed;
•whether a loan is collateralized and, if so, the changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan;loan or lease;
•the discount on the loan at the time of its acquisition and capital, which could have regulatory implications;acquisition;
•the duration of the loan;loan or lease;
•the credit history of a particular borrowerborrower; and
•changes in current and future economic and industry conditions.
At December 31, 2017, Customers' allowanceOur credit standards, policies and procedures are designed to reduce the risk of credit losses to a low level but may not prevent us from incurring substantial credit losses.
Additionally, we may restructure originated or acquired loans if we believe the borrowers are experiencing problems servicing the debt pursuant to current terms, and we believe the borrower is likely to fully repay their restructured obligations. We may also be subject to legal or regulatory requirements for restructured loans. With respect to restructured loans, we may grant concessions to borrowers experiencing financial difficulties in order to facilitate repayment of the loan losses totaled $38.0 million, which represents 0.56%by a reduction of totalthe stated interest rate for the remaining life of the loan to lower than the current market rate for new loans held for investment. with similar risk or an extension of the maturity date.
Management makes various assumptions and judgments about the collectibility of our loan and lease portfolio, including the creditworthiness of our borrowers and the probability of theirour borrowers making payments, as well as the value of real estate and other assets serving as collateral for the repayment of many of our loans.loans and leases. As described in "NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION" to our audited financial statements, on January 1, 2020, Customers adopted ASC 326, Measurement of Credit Losses on Financial Instruments ("ASC 326"), which replaced the "incurred loss" model for recognizing credit losses with an "expected loss" model referred to as the CECL model. The adoption resulted in an increase of $79.8 million to the beginning balance of our ACL. Under the CECL model, we are required to present certain financial assets carried at
amortized cost, such as loans held for investment and HTM debt securities, at the net amount expected to be collected. The measurement of expected credit losses is based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. This measurement will take place at the time the financial asset is first added to the balance sheet and periodically thereafter. This differs significantly from the incurred loss model required under previous GAAP, which delayed recognition until it was probable a loss had been incurred. The CECL model may create more volatility in the level of our reserves. At December 31, 2021, Customers' ACL totaled $137.8 million, which represented 1.53% of total loans and leases held for investment (excluding loans receivable, mortgage warehouse at fair value and loan receivable, PPP), a non-GAAP measure. 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. Please refer to the reconciliation schedules in "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, LOANS AND LEASES, Credit Risk."
In determining the amount of the allowance for loan losses,ACL, significant factors considered include loss experience in particular segments of the portfolio, trends and absolute levels of classified and criticized loans and leases, trends and absolute levels in delinquent loans and leases, trends in risk ratings, trends in industry and Customers' charge-offs by particular segments and changes in existing generalcurrent and future economic and business conditions affecting our lending areas and the national economy.economy, including the impact of the COVID-19 pandemic. If our assumptions are incorrect, our allowance for loan lossesACL may not be sufficient to cover losses inherent in our loan and lease portfolio, resulting in additions to the allowance.ACL.
Management reviews and re-estimates the allowance for loan lossesACL quarterly. Additions to our allowance for loan lossesACL as a result of management's reviews and re-estimates could materially decrease net income. Our regulators, as an integral part of their examination process, periodically review our allowance for loan lossesACL and may requirelead us to increase our allowance for loan lossesACL by recognizing additional provisions for loancredit losses on loans and leases charged to expense, or to decrease our allowance for loan lossesACL by recognizing loan charge-offs, net of recoveries. Any such additional provisions for loancredit losses on loans and leases or net charge-offs as required by these regulatory agencies, could have a material adverse effect on our financial condition and results of operations and possible risk-based capital.
In first quarter 2020, as part of its response to the impact of COVID-19, the U.S. federal banking regulatory agencies issued an interim final rule that provided the option to temporarily delay certain effects of CECL on regulatory capital for two years, followed by a three-year transition period. The interim final rule allows banking organizations to delay for two years 100% of the day-one impact of adopting CECL and 25% of the cumulative change in the reported allowance for credit losses since adopting CECL. We elected to adopt the interim final rule.
Planned changes in the composition of our loan portfolio may expose us to increased lending risks.
We intend to continue emphasizing the origination of commercial loans, including specialty loans, loans to mortgage banking businesses and loans to consumers including the purchase of loan portfolios from third party originators or fintech companies. Our focus will be on funding commercial and industrial and consumer loan growth with excess deposits and the forgiveness of PPP loans. Changes in the composition of our loan portfolio could have a significant adverse effect on our overall credit profile, which could result in a higher percentage of non-accrual loans, increased provision for loan losses, and an increased level of net charge-offs, all of which could have a material and adverse effect on our financial condition and results of operations. Consumer loans are particularly affected by economic conditions, including interest rates, the rate of unemployment, housing prices, the level of consumer confidence, changes in consumer spending, and the number of personal bankruptcies. A weakening in business or economic conditions, including higher unemployment levels, increased interest rates or declines in home prices could adversely affect borrowers' ability to repay their loans, which could negatively impact our credit performance.
As of December 31, 2021, Customers had $2.1 billion in consumer loans outstanding, or 14.7% of the total loan and lease portfolio, which includes loans held for sale and loans receivable, mortgage warehouse at fair value and loans receivable, PPP, compared to $1.6 billion, or 10.3% of the total loan and lease portfolio, as of December 31, 2020.
Our emphasis on commercial, multi-family/commercial real estate and mortgage warehouse lending may expose us to increased lending risks.
We intend to continue emphasizing the origination of commercial loans and specialty loans, including loans to mortgage banking businesses. Commercial loans, including multi-family and commercial real estate loans, can expose a lender to risk of non-payment and loss because repayment of the loans often depends on the successful operation of a business or property and the borrower’s cash flows. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one-to-four-family residential mortgage loans. In addition, we may need to increase our allowance for loancredit losses in the future to account for an increase in probableexpected credit losses associated with such loans. Also, we expect that many of our commercial borrowers will have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one-to-four-family residential mortgage loan.
As a lender to mortgage banking businesses, we provide financing to mortgage bankers by purchasing, subject to resale under a master repurchase agreement, the underlying residential mortgages on a short-term basis pending the ultimate sale of the mortgages to investors. We are subject to the risks associated with such lending, including, but not limited to, the risks of fraud, bankruptcy and possible default by the borrower, closing agents and the residential borrower on the underlying mortgage, any of which could result in credit losses. The risk of fraud associated with this type of lending includes, but is not limited to, settlement process risks, the risk of financing nonexistent loans or fictitious mortgage loan transactions, or the risk that collateral delivered is fraudulent or non-existent, creating a risk of loss of the full amount financed on the underlying residential mortgage loan, or in the settlement processes. In first quarter 2013, fraud was discovered in our held-for-sale loan portfolio. Additional fraudulentFraudulent transactions could have a material adverse effect on our financial condition and results of operations.
Our lending to commercial mortgage businesses is a significant part of our assets and earnings. This business is subject to seasonality of the mortgage lending business, and volumes are likely to decline if interest rates increase, generally. A decline in the rate of growth, volume or profitability of this business unit, or a loss of its leadership could adversely affect our results of operations and financial condition.
As of December 31, 2017,2021, we had $8.4$12.4 billion in commercial loans outstanding, approximately 96.2%85.3% of our total loan and lease portfolio, which includes loans held for sale.
Decreased origination, volume and pricing decisions of competitors may adversely affect our profitability.
We currently operate a residential mortgage banking business but plan to expand our origination, sale and servicingloans receivable, mortgage warehouse at fair value and loans receivable, PPP, as compared to $14.2 billion, or 89.8% of residential mortgage loans in the future. We also began selling recenttotal loan and lease portfolio, as of December 31, 2020.
Our New York State multi-family loan originations to third parties in third quarter 2014. Changes in market interest rates and pricing decisionsportfolio could be adversely impacted by our loan competitors may adversely affect demand for our residential-mortgage and multi-family loan products, the revenue realized on the sale of loans and revenues received from servicing such loans for others, and ultimately reduce our net income. New regulations, increased regulatory reviews, changes in legislation or regulation.
On June 14, 2019, the structureNew York State legislature passed the Housing Stability and Tenant Protection Act of 2019, impacting about one million rent regulated apartment units. Among other things, the secondary mortgage markets that we utilizelegislation: (i) curtailed rent increases from Material Capital Improvements and Individual Apartment Improvements; (ii) all but eliminated the ability for apartments to sell mortgage loans or other rule changes that could affectexit rent regulation; (iii) eliminated vacancy decontrol and high-income deregulation; and (iv) repealed the multi-family resale market may be introduced20% vacancy bonus. In total, it generally limits a landlord's ability to increase rents on rent regulated apartments and may increase costs and makemakes it more difficult to operateconvert rent regulated apartments to market rate apartments. As a residential mortgage origination businessresult, the value of the collateral located in New York State securing our multi-family loans or sellthe future net operating income of such properties could potentially become impaired. At December 31, 2021, our total multi-family loans.
Federal Home Loan Bankexposure in New York State was approximately $685.3 million, of Pittsburgh may not pay dividendswhich approximately $543.9 million, or repurchase capital stock79.4%, was provided for loans to rent regulated properties in the future.
On December 23, 2008, the Federal Home Loan Bank of Pittsburgh (“FHLB”) announced that it would voluntarily suspend the payment of dividends and the repurchase of excess capital stock until further notice. The FHLB announced at that time that it expected its ability to pay dividends and add to retained earnings to be significantly curtailed due to low short-term interest rates, an increased cost of maintaining liquidity, other-than-temporary impairment charges and constrained access to debt markets at attractive rates. While the FHLB resumed payment of dividends and capital stock repurchasesmulti-family community, primarily in 2012, capital stock repurchases from member banks are reviewed on a quarterly basis by the FHLB, and there is no guarantee that such dividends and capital stock repurchases will continue in the future. As of December 31, 2017, the Bank held $83.7 million of FHLB capital stock.New York City.
The fair value of our investment securities can fluctuate due to market conditions. Adverse economic performance can lead to adverse security performance and other-than-temporarypotential impairment.
As of December 31, 2017,2021, the fair value of our investment securities portfolio was $471.4 million.$3.8 billion. We have historically followed a conservative investment strategy, with concentrations in securities that are backed by government-sponsored enterprises. In the future,Since 2020, we may seekhave been seeking to increase yields through more aggressive strategies, which may includehas included a greater percentage of corporate securities, non-agency mortgage-backed securities and other structured credit products or non-agency mortgage-backed securities.products. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect of the securities, defaults by the issuer or with respect to the underlying securities, and changes in market interest rates and continued instability in the capital markets. Any of these factors, among others, such as a change in management's intent to holdsell the securities, until recovery in fair value, could cause other-than-temporary impairmentscredit losses and realized and/or unrealized losses in future periods and declines in other comprehensive income,OCI, which could have a material adverse effect on us. The process for determining whether impairment of a security is other than temporaryexists usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security.
During 2017, we recorded other-than-temporary impairment losses of $12.9 million related to our equity holdings in Religare for the full amount of the decline in fair value from the cost basis established at December 31, 2016 through September 30, 2017, because we no longer have the intent to hold these securities until a recovery in fair value. The fair value of the Religare equity securities at September 30, 2017, of $2.3 million became the new cost basis of the securities. 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 we currently do not have a tax strategy in place capable of generating sufficient capital gains to utilize any capital losses resulting from the Religare investment.
Changes to estimates and assumptions made by management in preparing financial statements could adversely affect our business, operating results, reported assets and liabilities, financial condition and capital levels.
Changes to estimates and assumptions made by management in connection with the preparation of our consolidated financial statements could adversely affect the reported amounts of assets and liabilities and the reported amounts of income and expenses. The preparation of our consolidated financial statements requires management to make certain critical accounting estimates and assumptions that could affect the reported amounts of assets and liabilities and the reported amounts of income and expense during the reporting periods. Changes to management’s assumptions or estimates could materially and adversely affect our business, operating results, reported assets and liabilities, financial condition and capital levels.
Changes in accounting standards and policies can be difficult to predict and can materially impact how we record and report our financial results.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the FASB or the SEC changes the financial accounting and reporting standards or the policies that govern the
preparation of our financial statements. These changes can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. We could be required to apply new or revised guidance retrospectively, which may result in the revision of prior period financial statements by material amounts. The implementation of new or revised accounting guidance could have a material adverse effect on our financial results or net worth. Notably,For example, we adopted ASC 326 on January 1, 2020 which replaced the FASB recently issued a new frameworkincurred loss methodology for estimatingdetermining our provision for credit losses and the allowance forACL with the CECL model. As discussed above, our adoption of CECL resulted in an increase to our ACL of $79.8 million. The impact of CECL in future periods will be significantly influenced by the composition, characteristics and quality of our loan and lease losses that could significantly alter the current estimateportfolio, as well as other elementsthe current economic conditions and forecasts of the U.S. banking model.
Downgrades in U.S. Government and federal agency securities could adversely affect us.
The long-term impact of the downgrade of the U.S. Government and federal agencies from an AAA to an AA+ credit rating is still uncertain. However, in addition to causing economic and financial market disruptions, the downgrade, and any future downgrades and/or failures to raise the U.S. debt limit if necessary in the future, could, among other things,macroeconomic variables utilized. Should these factors materially adversely affect the market value of the U.S. and other government and governmental agency securities owned by us, the availability of those securities as collateral for borrowing and our ability to access capital markets on favorable terms, as well as have other material adverse effects on the operation of our business and our financial results and condition. In particular, it could increase interest rates and disrupt payment systems, money markets, and long-term or short-term fixed-income markets, adversely affecting the cost and availability of funding, which could negatively affect profitability. Also, the adverse consequences as a result of the downgrade could extend to the borrowers of the loanschange, we make and, as a result, could adversely affect our borrowers’ ability to repay their loans.
We may not be able to maintain consistent earnings or profitability.
Although we made profit for the years 2011 through 2017, there can be no assurance that we will be able to remain profitable in future periods, or, if profitable, that our overall earnings will remain consistent or increase in the future. Our earnings also may be reduced by increased expenses associated with increased assets, such asrequired to increase or decrease our ACL which will impact our reported earnings thereby introducing additional employee compensation expense, and increased interest expense on any liabilities incurred or deposits solicited to fund increases in assets. If earnings do not grow proportionately withvolatility into our assets or equity, our overall profitability may be adversely affected.
Continued or worsening general business and economic conditions could materially and adversely affect us.
Our business and operations are sensitive to general business and economic conditions in the United States. If the U.S. economy experiences worsening conditions such as a recession, we could be materially and adversely affected. Weak economic conditions may be characterized by deflation, instability in debt and equity capital markets, a lack of liquidity and/or depressed prices in the secondary market for mortgage loans, increased delinquencies on loans, residential and commercial real estate price declines and lower home sales and commercial activity. Adverse changes in any of these factors could be detrimental to our business. Our business is also significantly affected by monetary and related policies of the U.S. Federal Government, its agencies and government-sponsored entities. Adverse changes in economic factors or U.S. Government policies could have a negative effect on us.reported earnings.
The geographic concentration in the Northeast and Mid-Atlantic regions makes our business susceptible to downturns in the local economies and depressed banking markets, which could materially and adversely affect us.
OurWe have experienced exponential growth over the last two years as a result of participating in the SBA's PPP loans, and expanded our franchise in new geographies such as Texas, Florida and North Carolina. We intend to grow in these new markets and enter additional markets in the future. At December 31, 2021, our loan and deposit activities areremained largely based in the Northeast and Mid-Atlantic regions. As a result, our financial performance depends in part upon economic conditions in these regions. These regions have experienced deteriorating local economic conditions in the past, economic cycle, and a downturn in the regional real estate market could harm our financial condition and results of operations because of the geographic concentration of loans within these regions, and because a large percentage of the loans are secured by real property. If there is a decline in real estate values, the collateral value for our loans will decrease, and our probability of incurring losses will increase as the ability to recover on defaulted loans by selling the underlying real estate will be lessened. We expect our loan and deposit activities to continue expanding beyond the Northeast and Mid-Atlantic regions to service customers across the nation.
Additionally, we have made a significant investment in commercial real estate loans. Often in a commercial real estate transaction, repayment of the loan is dependent on the property generating sufficient rental income to service the loan. Economic conditions may affect a tenant’s ability to make rental payments on a timely basis, and may cause some tenants not to renew their leases, each of which may impact the debtor’s ability to make loan payments. Further, if expenses associated
with commercial properties increase dramatically, a tenant’s ability to repay, and therefore the debtor’s ability to make timely loan payments, could be adversely affected. All of these factors could increase the amount of non-performing loans,NPLs, increase our provision for loan losses and reduce our net income.
Our business is highly susceptible to credit risk.
As a lender, we are exposed to the risk that our customers will be unable to repay their loans according to the contractual terms and that the collateral securing the payment of their loans (if any) may not be sufficient to assure repayment. The risks inherent in making any loan include risks with respect to the ability of borrowers to repay their loans and, if applicable, the period of time over which the loan is repaid, risks relating to proper loan underwriting and guidelines, risks resulting from changes in economic and industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as to the future value of collateral. Similarly, we have credit risk embedded in our securities portfolio. Our credit standards, policies and procedures are designed to reduce the risk of credit losses to a low level but may not prevent us from incurring substantial credit losses.
Additionally, we may restructure originated or acquired loans if we believe the borrowers are experiencing problems servicing the debt pursuant to current terms, and we believe the borrower is likely to fully repay their restructured obligations. We may also be subject to legal or regulatory requirements for restructured loans. With respect to restructured loans, we may grant concessions to borrowers experiencing financial difficulties in order to facilitate repayment of the loan by a reduction of the stated interest rate for the remaining life of the loan to lower than the current market rate for new loans with similar risk or an extension of the maturity date.
We depend on our executive officers and key personnel to implement our strategy and could be harmed by the loss of their services.
We believe that the implementation of our strategy will depend in large part on the skills of our executive management team, and our ability to motivate and retain these and other key personnel. Accordingly, the loss of service of one or more of our executive officers or key personnel could reduce our ability to successfully implement our growth strategy and materially and adversely affect us. Leadership changes will occur from time to time, and if significant resignations occur, we may not be able to recruit additional qualified personnel. We believe our executive management team possesses valuable knowledge about the banking industry and that their knowledge and relationships would be very difficult to replicate. Although our Chief Executive Officer,CEO, CFO, and President and Chief Financial Officer have entered into employment agreements with us, it is possible that they may not complete the term of their employment agreement or may choose not to renew it upon expiration.
Our customers also rely on us to deliver personalized financial services. Our strategic model is dependent upon relationship managers and private bankers who act as a customer’s single point of contact to us. The loss of the service of these individuals could undermine the confidence of our customers in our ability to provide such personalized services. We need to continue to attract and retain these individuals and to recruit other qualified individuals to ensure continued growth. In addition, competitors may recruit these individuals in light of the value of the individuals’ relationships with their customers and communities, and we may not be able to retain such relationships absent the individuals. In any case, if we are unable to attract and retain our relationship managers and private bankers and recruit individuals with appropriate skills and knowledge to support our business, our growth strategy, business, financial condition and results of operations may be adversely affected.
In addition, our ability to expand into new business lines, such as digital currency through our CBIT offerings, are highly dependent upon our ability to attract and retain key personnel. We cannot assure you that our recruiting efforts for these positions will be successful or that they will enhance our business, results of operations or financial condition.
Our success also depends on the experience of our branch managers and lending officers and on their relationships with the customers and communities they serve. The loss of these key personnel could negatively impact our banking operations. The loss of key senior personnel, or the inability to recruit and retain qualified personnel in the future, such as those in our compliance, risk and legal departments, could have a material adverse effect on us.
Potential limitations Because many of our team members continue to work remotely on incentive compensation contained in proposed federal agency rulemaking may adversely affecta “hybrid model”, the ability of our ability to attract and retain our highest performing team members.
In April 2011 and May 2016, the Federal Reserve, other federal banking agencies and the SEC jointly published proposed rules designed to implement provisions of the Dodd-Frank Act prohibiting incentive compensation arrangements that would encourage inappropriate risk taking at covered financial institutions, which includes a bank or bank holding company with $1 billion or more in assets, such as we. It cannot be determined at this time whether or when a final rule will be adopted, and whether compliance with such a final rule will substantially affect the manner in which we structure compensation for our executiveskey personnel and other team members. Depending on the naturemanagement to motivate personnel and application of the final rules, we may not be able to successfully compete with certain financial institutions and other companies that are not subject to some or all of the rules to retain and attract executives and other high-performing team members. If this were to occur, relationships that we have
established with our clientsmaintain corporate culture may be impaired and our business, financial condition and results of operations could be adversely affected, perhaps materially.affected.
We face significant competition from other financial institutions and financial services providers, which may materially and adversely affect us.
Commercial and consumer banking is highly competitive. Changes in market interest rates and pricing decisions by our loan competitors may adversely affect demand for our loan products and the revenue realized on the sale of loans, and ultimately reduce our net income. Our markets contain a large number of community and regional banks as well as a significant presence of the country’s largest commercial banks. We compete with other state and national financial institutions, including savings and loan associations, savings banks and credit unions, for deposits and loans. In addition, we compete with financial intermediaries, such as consumer finance companies, mortgage banking companies, insurance companies, securities firms, mutual funds and several government agencies, as well as major retailers and fintechs, in providing various types of loans and other financial services. Some of these competitors may have a long history of successful operations in our markets, greater ties to local businesses and more expansive banking relationships, as well as better established depositor bases. Competitors may also have greater resources and access to capital and may possess other advantages such as operating more ATMs and conducting extensive promotional and advertising campaigns or operating a more developed Internet platform. Competitors may also exhibit a greater tolerance for risk and behave more aggressively with respect to pricing in order to increase their market share.
We expect to drive organic growth by employing our Concierge Banking® and single-point-of-contact strategies, which provide specific relationship managers or private bankers for all customers. Many of our competitors provide similar services, and others may replicate our model. Our competitors may have greater resources than we do and may be able to provide similar services more quickly, efficiently and extensively. To the extent others replicate our model, we could lose what we view as a competitive advantage, and our financial condition and results of operations may be adversely affected.
The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Increased competition among financial services companies due to the recent consolidation of certain competing financial institutions may adversely affect our ability to market our products and services. Technological advances have lowered barriers to entry and made it possible for banks to compete in our market without a retail footprint by offering competitive rates, as well as non-banks to offer products and services traditionally provided by banks. Our ability to compete successfully depends on a number of factors, including, among others:
•the ability to develop, maintain and build upon long-term customer relationships based on high quality, personal service, effective and efficient products and services, high ethical standards and safe and sound assets;
•the scope, relevance and competitive pricing of products and services offered to meet customer needs and demands;
•the ability to provide customers with maximum convenience of access to services and availability of banking representatives;
•the ability to attract and retain highly qualified team members to operate our business;
•the ability to expand our market position;
•customer access to our decision makers and customer satisfaction with our level of serviceservice; and
•the ability to operate our business effectively and efficiently.
Failure to perform in any of these areas could significantly weaken our competitive position, which could materially and adversely affect us.
In addition, the financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services including internet services, cryptocurrencies and payment systems. In addition to improving the ability to serve customers, the effective use of technology increases efficiency and enables financial institutions to reduce long-term costs. These technological advancements also have made it possible for non-financial institutions, such as the "fintech companies" and marketplace lenders, to offer products and services that have traditionally been offered by financial institutions. The process of "disintermediation," or removing banks from their traditional role as financial intermediaries, could result in loss of customer deposits and other sources of revenue, which could have a material adverse effect on our financial condition and results of operations. Further, in many cases fintech companies and similar non-bank financial service firms, unlike the Bank, are not subject to extensive regulation and supervision. The absence of significant oversight and regulatory compliance obligations may allow such companies to realize certain competitive advantages over us, which may result in increased competition for our customers' business. Federal and state banking agencies continue to deliberate over the regulatory treatment of fintech companies, including whether the agencies are authorized to grant charters or licenses to such companies and whether it would be appropriate to do so in consideration of several regulatory and economic factors. The increased demand for, and availability of, alternative payment systems and currencies not only increases competition for such services, but has created a more complex operating environment that, in certain cases, may require additional or different controls to manage fraud, operational, legal and compliance risks.
Like other financial services institutions, our asset and liability structures are monetary in nature. Such structures are affected by a variety of factors, including changes in interest rates, which can impact the value of financial instruments held by us.
Like other financial services institutions, we have asset and liability structures that are essentially monetary in nature and are directly affected by many factors, including domestic and international economic and political conditions, broad trends in business and finance, legislation and regulation affecting the national and international business and financial communities, monetary and fiscal policies, inflation, currency values, market conditions, the availability and terms (including cost) of short-term or long-term funding and capital, the credit capacity or perceived creditworthiness of customers and counterparties and the level and volatility of trading markets. Such factors can impact customers and counterparties of a financial services institution and may impact the value of financial instruments held by a financial services institution.
Our earnings and cash flows largely depend upon the level of our net interest income, which is the difference between the interest income we earn on loans, investments and other interest earning assets, and the interest we pay on interest bearing liabilities, such as deposits and borrowings. Because different types of assets and liabilities may react differently and at different times to market interest-rate changes, changes in interest rates can increase or decrease our net interest income. When interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a period, an increase in interest rates
would reduce net interest income. Similarly, when interest-earning assets mature or reprice more quickly, and because the magnitude of repricing of interest-earning assets is often greater than interest-bearing liabilities, falling interest rates would reduce net interest income.
Accordingly, changes in the level of market interest rates affect our net yield on interest-earning assets and liabilities, loan and investment securities portfolios and our overall financial results. Changes in interest rates may also have a significant impact on any future loan origination revenues. Changes in interest rates also have a significant impact on the carrying value of a significant percentage of the assets, both loans and investment securities, on our balance sheet. We have incurred debt and may incur additional debt in the future, and that debt may also be sensitive to interest rates and any increase in interest rates could materially and adversely affect us. Interest rates are highly sensitive to many factors beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, particularly the Federal Reserve. Adverse changes in the Federal Reserve’s interest-rate policies or other changes in monetary policies and economic conditions could materially and adversely affect us.
Uncertainty about the future of LIBOR may adversely affect our business.
LIBOR is the reference rate used for many of our transactions, including our lending and borrowing and our purchase and sale of securities that we use to manage risk related to such transactions. However, a reduced volume of interbank unsecured term borrowing coupled with recent legal and regulatory proceedings related to rate manipulation by certain financial institutions has led to international reconsideration of LIBOR as a financial benchmark. The FCA, which regulates the process for establishing LIBOR, announced in July 2017 that the sustainability of LIBOR cannot be guaranteed. The administrator for LIBOR announced on March 5, 2021 that it will permanently cease to publish most LIBOR settings beginning on January 1, 2022 and cease to publish the overnight, one-month, three-month, six-month and 12-month USD LIBOR settings on July 1, 2023. Accordingly, the FCA has stated that it does not intend to persuade or compel banks to submit to LIBOR after such respective dates. Until such time, however, FCA panel banks have agreed to continue to support LIBOR.
In October 2021, the federal bank regulatory agencies issued a Joint Statement on Managing the LIBOR Transition. In that guidance, the agencies offered their regulatory expectations and outlined potential supervisory and enforcement consequences for banks that fail to adequately plan for and implement the transition away from LIBOR. The failure to properly transition away from LIBOR may result in increased supervisory scrutiny.
We have adopted a variety of interest rates to replace LIBOR in our financial instruments going forward, including the Term Secured Overnight Financing Rate, the Bloomberg Short-Term Bank Yield Index and others. We are in the process of managing this transition, facilitating communication with our customers and counterparties, and monitoring the impacts of this transition. The discontinuance of LIBOR may result in uncertainty or differences in the calculation of the applicable interest rate or payment amount depending on the terms of the governing instruments and may also increase operational and other risks to Customers and the industry.
The market transition away from LIBOR to an alternative reference rate is complex and could have a range of adverse effects on Customers' business, financial condition and results of operations. In particular, any such transition could:
•adversely affect the interest rates paid or received on, and the revenue and expenses associated with Customers' floating rate obligations, loans, deposits and other financial instruments tied to LIBOR rates, or other securities or financial arrangements given LIBOR's role in determining market interest rates globally;
•adversely affect the value of Customers' floating rate obligations, loans, deposits and other financial instruments tied to LIBOR rates, or other securities or financial arrangements given LIBOR’s role in determining market interest rates globally;
•prompt inquiries or other actions from regulators in respect of Customers' preparation and readiness for the replacement of LIBOR with an alternative reference rate;
•result in disputes, litigation or other actions with counterparties regarding the interpretation and enforceability of certain fallback language in LIBOR-based securities; and
•require the transition to or development of appropriate systems and analytics to effectively transition our risk management processes from LIBOR-based products to those based on the applicable alternative pricing benchmark,
In addition, the implementation of LIBOR reform proposals may result in increased compliance costs and operational costs, including costs related to continued participation in LIBOR and the transition to a replacement reference rate or rates. We cannot reasonably estimate the expected cost.
We launched CBIT, a blockchain-based instant payments platform, the development, acceptance and success of which is subject to a variety of factors that are difficult to evaluate.
On October 18, 2021, Customers Bank launched CBIT on the TassatPay blockchain-based instant B2B payments platform, which serves a growing array of B2B clients who want the benefit of instant payments: including key over-the-counter desks, exchanges, liquidity providers, market makers, funds, and B2B verticals such as trading operations, real estate, manufacturing, and logistics. CBIT may only be created by, transferred to and redeemed by commercial customers of Customers Bank on the TassatPay instant B2B payments platform. CBIT is not listed or traded on any digital currency exchange. As of December 31, 2021, Customers Bank held $1.9 billion of deposits from new customers participating in CBIT. These new customers are primarily concentrated in the digital currency industry.
The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services including internet services, cryptocurrencies and payment systems. In addition to improving the ability to serve clients, the effective use of technology increases efficiency and enables financial institutions to reduce long-term costs. These technological advancements also have made it possible for non-financial institutions, such as "fintech companies" and marketplace lenders, to offer products and services that have traditionally been offered by financial institutions. Federal and state banking agencies continue to deliberate over the regulatory treatment of fintech companies, including whether the agencies are authorized to grant charters or licenses to such companies and whether it would be appropriate to do so in consideration of several regulatory and economic factors. The increased demand for, and availability of, alternative payment systems and currencies not only increases competition for such services, but has created a more complex operating environment that, in certain cases, may require additional or different controls to manage fraud, operational, legal and compliance risks.
New technologies, such as the blockchain and tokenized payment technologies used by CBIT, could require us to spend more to modify or adapt our products to attract and retain clients or to match products and services offered by our competitors, including fintech companies. New technologies also expose us to additional operational, financial, and regulatory risks. Because many of our competitors have substantially greater resources to invest in technological improvements than we do, or, at present, operate in a less-burdensome regulatory environment, these institutions could pose a significant competitive threat to us.
As noted above, our commercial customers utilizing CBIT are currently concentrated in the digital currency industry. The digital currency industry includes a diverse set of businesses that use digital currencies for different purposes and provide services to others who use digital currencies, including the technologies underlying digital currencies, such as blockchain, and the services associated with digital currencies and blockchain. This is a new and rapidly evolving industry, and the viability and future growth of the industry and adoption of digital currencies and the underlying technology is subject to a high degree of uncertainty, including based upon the adoption of the technology, regulation of the industry, and price volatility, among other factors. Because the sector is relatively new, additional risks may emerge which are not yet known or quantifiable.
Digital currencies, including proprietary, non-public tokens such as CBIT, have only recently become selectively accepted as a form of payment by business. Other factors affecting the further development and acceptance of the digital currency industry and our business include, but are not limited to:
•the adoption and use of digital currencies, including adoption and use as a substitute for fiat currency or for other uses, which may be adversely impacted by continued price volatility;
•the use of digital currencies, or the perception of such use, to facilitate illegal activity such as fraud, money laundering, tax evasion and ransomware scams by our customers;
•heightened risks to digital currency businesses, such as digital currency exchanges, of hacking, malware attacks, and other cyber-security risks, which can lead to significant losses;
•developments in digital currency trading markets, including decreasing price volatility of digital currencies, resulting in narrowing spreads for digital currency trading and diminishing arbitrage opportunities across digital currency exchanges, or
increased price volatility, which could negatively impact our customers and therefore our deposits, either of which in turn may reduce the benefits of CBIT and negatively impact our business; and
•the maintenance and development of the software protocol of the digital currency networks.
If any of these factors, or other factors, slows development of the digital currency industry, it could adversely affect our instant B2B payments initiative and the businesses of the customers upon which it relies, and therefore have a material adverse effect on our business, financial condition and results of operations.
If conditions in digital currency markets change such that certain trading strategies currently employed by our institutional investor customers become less profitable, the benefits of CBIT and our instant B2B payments initiative may be diminished, resulting in a decrease in our deposit balances and adversely impacting our growth strategy. In addition, if a competitor or another third party were to launch an alternative to CBIT (such as Federal Reserve's recently announced plan to develop a virtual real time payment system for banks which is expected to be available as early as 2023), we could lose non-interest bearing deposits and our business, financial condition, results of operations and growth strategy could be adversely impacted. Further, we may be unable to attract and retain experienced employees, which could adversely affect our growth. The further development and acceptance of digital currencies and blockchain technology are subject to a variety of factors that are difficult to evaluate, as discussed above. The slowing or stopping of the development or acceptance of digital currency networks and blockchain technology may adversely affect our ability to continue to grow and capitalize on our digital currency strategy.
Our future growth may be adversely impacted if we are unable to retain and grow this strong, low-to-no cost deposit base. There may be competitive pressures to pay higher interest rates on deposits to our digital currency customers, which could increase funding costs and compress net interest margins. Further, even if we are otherwise able to grow and maintain our non-interest bearing deposit base, our deposit balances may still decrease if our digital currency customers are offered more attractive returns from our competitors. If our digital currency customers withdraw deposits, we could lose a low-cost source of funds which would likely increase our funding costs and reduce our net interest income and net interest margin. These factors could have material effect on our business, financial condition and results of operations.
Our computer systems and network infrastructure, including CBIT and the instant payments platform on which it operates, could be vulnerable to hardware and cybersecurity issues. Our operations are dependent upon our and our vendors' ability to protect computer equipment upon which these technologies operate against damage from fire, power loss, telecommunications failure or a similar catastrophic event. We could also experience a breach by intentional or negligent conduct on the part of our team members or other internal sources. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. We could also become the target of various cyberattacks as a result of our focus on the digital currency industry.
The technology underlying CBIT and the instant payments platform on which it operates may not function properly, which may have a material impact on Customers' operations and financial condition. The importance of CBIT to Customers' operations means that any technological problems in its functionality may have a material adverse effect on Customers' operations, business model and growth strategy.
Many of our larger competitors have substantially greater resources to invest in technological improvements. Third parties upon which we rely for the technology underlying CBIT may not be able to develop, on a cost-effective basis, systems that will enable us to keep pace with such developments. As a result, our larger competitors may be able to offer additional or superior products compared to those that we will be able to provide, which would put us at a competitive disadvantage. We may lose customers seeking new technology-driven products and services to the extent we are unable to provide such products and services. The ability to keep pace with technological change is important and the failure to do so could adversely affect our business, financial condition and results of operations.
We are dependent on our information technology and telecommunications systems and third-party servicers, and systems failures, interruptions or breaches of security could have a material adverse effect on us.
Our business is highly dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party servicers. We outsource many of our major systems, such as data processing, loan servicing and deposit processing systems. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If significant, sustained or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss of customer business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on us.
We are currently implementing, and continue to evaluate and implement upgrades and changes to our information technology systems, some of which are significant. Upgrades involve replacing existing systems with successor systems, making changes to existing systems or cost-effectively acquiring new systems with new functionality. We are aware of inherent risks associated with replacing these systems, including accurately capturing data and system disruptions, and believe we are taking appropriate action to mitigate the risks through testing, training, and staging implementation, as well as ensuring appropriate commercial contracts are in place with third-party vendors supplying or supporting our information technology initiatives. However, there can be no assurances that we will successfully launch these systems as planned or that they will be implemented without disruptions to our operations. Information technology system disruptions, if not anticipated and appropriately mitigated, or failure to successfully implement new or upgraded systems, could have a material adverse effect on our results of operations. Also, we may have to make a significant investment to repair or replace these systems and could suffer loss of critical data and interruptions or delays in our operations.
In addition, we provide our customers with the ability to bank remotely, including online, over the Internet, through apps and over the telephone. The secure transmission of confidential information over the Internet and other remote channels is a critical element of remote banking. Our network could be vulnerable to unauthorized access, computer viruses, phishing schemes and other security breaches. We may be required to spend significant capital and other resources to protect against the threat of security breaches and computer viruses or to alleviate problems caused by security breaches or viruses. To the extent that our activities or the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, regulatory scrutiny, litigation and other possible liabilities. Any inability to prevent security breaches or computer viruses could also cause existing customers to lose confidence in our systems and could materially and adversely affect us.
Additionally, financial products and services have become increasingly technology-driven. Our ability to meet the needs of our customers competitively and in a cost-efficient manner is dependent on the ability to keep pace with technological advances and to invest in new technology as it becomes available. Certain competitors may have greater resources to invest in technology and may be better equipped to market new technology-driven products and services. The ability to keep pace with technological change is important, and the failure to do so could have a material adverse impact on our business and therefore on our financial condition and results of operations.
Loss of, or failure to adequately safeguard, confidential or proprietary information may adversely affect our operations, net income or reputation.
We regularly collect, process, transmit and store significant amounts of confidential information regarding our customers, team members and others. This information is necessary for the conduct of our business activities, including the ongoing maintenance of deposit, loan, investment management and other account relationships for our customers, and receiving instructions and affecting transactions for those customers and other users of our products and services. In addition to confidential information regarding our customers, team members and others, we compile, process, transmit and store proprietary, non-public information concerning our own business, operations, plans and strategies. In some cases, this confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on our behalf.
Information security risks have generally increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber-attacks. A failure in or breach of our operational or information security systems or those of our third-party service providers, as a result of cyber-attacks or information security breaches or due to team member error, malfeasance or other disruptions could adversely affect our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and/or cause losses. As a result, cyber security and the continued development and enhancement of the controls and processes designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for us.
If this confidential or proprietary information were to be mishandled, misused or lost, we could be exposed to significant regulatory consequences, reputational damage, civil litigation and financial loss. Mishandling, misuse or loss of this confidential or proprietary information could occur, for example, if the confidential or proprietary information were erroneously provided to parties who were not permitted to have the information, either by fault of the systems or our team members, or the systems or employees of third parties which have collected, compiled, processed, transmitted or stored the information on our behalf, where the information is intercepted or otherwise inappropriately taken by third parties or where there is a failure or breach of the network, communications or information systems which are used to collect, compile, process, transmit or store the information.
Although we employ a variety of physical, procedural and technological safeguards to protect this confidential and proprietary information from mishandling, misuse or loss, these safeguards do not provide absolute assurance that mishandling, misuse or loss of the information will not occur, or that if mishandling, misuse or loss of the information did occur, those events would be promptly detected and addressed. Additionally, as information security risks and cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities.
Our directors and executive officers can influence the outcome of shareholder votes and, in some cases, shareholders may not have the opportunity to evaluate and affect the investment decision regarding potential investment, acquisition or disposition transactions.
As of December 31, 2017, our directors and executive officers, as a group, owned a total of 2,387,023 shares of common stock and exercisable options to purchase up to an additional 12,834 shares of common stock, which potentially gives them, as a group, the ability to control approximately 7.64% of the outstanding common stock. In addition, a director of Customers Bank who is not a director of Customers Bancorp owns an additional 18,447 shares of common stock, which if combined with the directors and officers of Customers Bancorp, potentially gives them, as a group, the ability to control approximately 7.70% of the outstanding common stock. We believe ownership of stock causes directors and officers to have the same interests as shareholders, but it also gives them the ability to vote as shareholders for matters that are in their personal interest, which may be contrary to the wishes of other shareholders. Shareholders will not necessarily be provided with an opportunity to evaluate the specific merits or risks of one or more potential investment, acquisition or disposition transactions. Any decision regarding a potential investment or acquisition transaction will be made by our board of directors. Except in limited circumstances as required by applicable law, consummation of an acquisition will not require the approval of holders of common stock. In addition, under certain circumstances, consummation of a disposition transaction, including the planned spin-off of BankMobile and merger with Flagship, will not require the approval of holders of common stock. Accordingly, shareholders may not have an opportunity to evaluate and affect the board of directors' decision regarding most potential investment or acquisition transactions and/or certain disposition transactions.
In connection with the Disbursement business, we depend on our relationship with higher education institutions and, in turn, student usage of our products and services for future growth of our BankMobile business.
The future growth of our BankMobile business depends, in part, on our ability to enter into agreements with higher education institutions. Our contracts with these clients can generally be terminated at will and, therefore, there can be no assurance that we will be able to maintain these clients. We may also be unable to maintain our agreements with these clients on terms and conditions acceptable to us. In addition, we may not be able to continue to establish new relationships with higher education institution clients. The termination of our current client contracts or our inability to continue to attract new clients could have a material adverse effect on our business, financial condition and results of operations.
Establishing new client relationships and maintaining current ones are also essential components of our strategy for attracting new student customers, deepening the relationships we have with existing customers and maximizing customer usage of our products and services. A reduction in enrollment, a failure to attract and maintain student customers, as well as any future demographic or other trends that reduce the number of higher education students could materially and adversely affect BankMobile's capability for both revenue and cash generation and, as a result, could have a material adverse effect on our business, financial condition and results of operations.
BankMobile's Disbursement business depends on the current government financial aid regime that relies on the outsourcing of financial aid disbursements through higher education institutions.
In general, the U.S. Federal Government distributes financial aid to students through higher education institutions as intermediaries. BankMobile's Disbursement business provides our higher education institution clients an electronic system for improving the administrative efficiency of this refund disbursement process. If the government, through legislation or regulatory action, restructures the existing financial aid regime in such a way that reduces or eliminates the intermediary role played by financial institutions serving higher education institutions or limits or regulates the role played by service providers such as we, our business, results of operations and BankMobile's prospects for future growth could be materially and adversely affected.
A change in the availability of financial aid, as well as U.S. budget constraints, could materially and adversely affect our financial performance by reducing demand for BankMobile's services.
The higher education industry depends heavily upon the ability of students to obtain financial aid. As part of our contracts with our higher education institution clients that use BankMobile's Disbursement business services, students’ financial aid and other refunds are sent to us for disbursement. The fees that we charge most of our Disbursement business higher education institution clients are based on the number of financial aid disbursements that we make to students. In addition, our relationships with Disbursement business higher education institution clients provide us with a market for BankMobile. Consequently, a change in the availability or amount of financial aid that restricts client use of our Disbursement business service or otherwise limits our ability to attract new higher education institution clients could materially and adversely affect our financial performance. Also, decreases in the amount of financial aid disbursements from higher education institutions to students could materially and adversely affect our financial performance. Future legislative and executive-branch efforts to reduce the U.S. federal budget deficit or worsening economic conditions may require the government to severely curtail its financial aid spending, which could materially and adversely affect our business, financial condition and results of operations.
Providing disbursement services to higher education institutions is an uncertain business; if the market for BankMobile's products does not continue to develop, we will not be able to grow this portion of our business.
The success of BankMobile's Disbursement business will depend, in part, on our ability to generate revenues by providing financial transaction services to higher education institutions and their students. The market for these services has evolved, and the long-term viability and profitability of this market is unproven. Our business will be materially and adversely affected if we do not develop and market products and services that achieve and maintain market acceptance. Outsourcing disbursement services may not become as widespread in the higher education industry as we anticipate, and our products and services may not achieve continued commercial success. Also, the Department of Education has proposed issuing prepaid cards directly to students, which may have the effect of reducing the need for outsourcing disbursement services or the volume of activity processed by the disbursement services. In addition, higher education institution clients could discontinue using our services and return to in-house disbursement solutions. If the outsourcing of disbursement services does not become as widespread as we anticipate, if higher education institution clients return to their prior methods of disbursement, or if prepaid card services displace the current disbursement process, our growth prospects, business, financial condition and results of operations could be materially and adversely affected.
Our business and future success may suffer if we are unable to successfully implement our strategy to convert student deposit customers to lifetime BankMobile customers.
A significant component of our growth strategy is dependent on our ability to have students of our higher education institution clients select BankMobile during the refund disbursement selection process and to convert those student BankMobile customers, along with the existing student customers we acquired through the Disbursement business acquisition, into lifetime customers with BankMobile as their primary banking relationship. In particular, our growth strategy depends on our ability to successfully cross-sell our core banking products and services to these student customers after they graduate from college. We may not be successful in implementing this strategy because these student customers and potential student customers may believe our products and services are unnecessary or unattractive. Our failure to sell our products and services to students after they graduate and to attract new student customers could have a material adverse effect on our prospects, business, financial condition and results of operations.
Breaches of security measures, unauthorized access to or disclosure of data relating to our higher education institution clients or BankMobile and student BankMobile account holders, computer viruses or unauthorized software ("malware"),malware, fraudulent activity and infrastructure failures could materially and adversely affect our reputation or harm our business.
business including the unauthorized access to or disclosure of data relating to BMT serviced deposit account holders.
Companies that process and transmit cardholder information have been specifically and increasingly targeted by sophisticated criminal organizations in an effort to obtain the information and utilize it for fraudulent transactions. The encryption software and the other technologies we use to provide security for storage, processing and transmission of confidential customer and other information may not be effective to protect against data-security breaches. The risk of unauthorized circumvention of our security measures has been heightened by advances in computer capabilities and the increasing sophistication of hackers.
Unauthorized access to our computer systems or those of our third-party service providers, could result in the theft or publication of the information or the deletion or modification of sensitive records, and could cause interruptions in our operations. Any inability to prevent security breaches could damage our relationships with our higher education institution customers, cause a decrease in transactions by individual cardholders, expose us to liability for unauthorized purchases and subject us to network fines. These claims also could result in protracted and costly litigation. If unsuccessful in defending that litigation, we might be forced to pay damages and/or change our business practices. Further, a significant data-security breach could lead to additional regulation, which could impose new and costly compliance obligations. Any material increase in our costs resulting from litigation or additional regulatory burdens being imposed upon us or litigation could have a material adverse effect on our operating revenues and profitability.
In addition, our higher education institution clients and student BankMobile account holders disclose to us certain “personally identifiable” information, including student contact information, identification numbers and the amount of credit balances, which they expect we will maintain in confidence. It is possible that hackers, customers or team members acting unlawfully or contrary to our policies or other individuals, could improperly access our or our vendors’ systems and obtain or disclose data about our customers. Further, because customer data may also be collected, stored or processed by third-party vendors, it is possible that these vendors could intentionally, negligently or otherwise disclose data about our clients or customers.
We rely to a large extent upon sophisticated information technology systems, databases and infrastructure, and take reasonable steps to protect them. However, due to their size, complexity, content and integration with or reliance on third-party systems, they are vulnerable to breakdown, malicious intrusion, natural disaster and random attack, all of which pose a risk of exposure of sensitive data to unauthorized persons or to the public.
A cybersecurity breach of ourOur information systems couldhave been, and will continue to be, subject to cybersecurity breaches, which lead to fraudulent activity such asthat can result in identity theft, losses on the part of our banking customers, additional security costs, negative publicity and damage to our reputation and brand. In addition, our customers could be subject toor team members are the targets of scams that may result in the release of sufficient information concerning themselves or their accounts to allow others unauthorized access to their accounts or our systems (e.g., “phishing” and “smishing”). Claims for compensatory or other damages may be brought against us as a result of a breach of our systems or fraudulent activity. If we are unsuccessful in defending against any resulting claims against us, we may be forced to pay damages, which could materially and adversely affect our financial condition and results of operations.
Because many of our employees continue to work remotely on a “hybrid model”, the risk of cybersecurity breaches is increased.
Because the techniques used to obtain unauthorized access, disable or degrade service or sabotage systems change frequently and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures.
Further, computer viruses, ransomware or malware could infiltrate our systems, thus disrupting our delivery of services and making our applications unavailable. Although we utilize several preventative and detective security controls in our network, they may be
ineffective in preventing computer viruses, ransomware or malware that could damage our relationships with our merchant customers, cause a decrease in transactions by individual cardholders, or cause us to be in non-compliance with applicable network rules and regulations.
In addition, a significant incident of fraud or an increase in fraud levels generally involving our products could result in reputational damage to us, which could reduce the use of our products and services. Such incidents could also lead to a large financial loss as a result of the protection for unauthorized purchases we provide to BankMobileBM Technologies customers given that we may be liable for any uncollectible account holder overdrafts and any other losses due to fraud or theft. Such incidents of fraud could also lead to regulatory intervention, which could increase our compliance costs. Compliance with the various complex laws and regulations is costly and time consuming, and failure to comply could have a material adverse effect on our business. Additionally, increased regulatory requirements on our services may increase our costs, which could materially and adversely affect our business, financial condition and results of operations. Accordingly, account data breaches and related fraudulent activity could have a material adverse effect on our future growth prospects, business, financial condition and results of operations.
A disruption to our systems or infrastructure could damage our reputation, expose us to legal liability, cause us to lose customers and revenue, result in the unintentional disclosure of confidential information or require us to expend significant efforts and resources or incur significant expense to eliminate these problems and address related data and security concerns. The harm to our business could be even greater if such an event occurs during a period of disproportionately heavy demand for our products or services or traffic on our systems or networks.
Prior to our acquisition of the Disbursement business,Business,the Federal Reserve Board and FDIC took regulatory enforcement action against Higher One, which subjected us to regulatory inquiry and potential regulatory enforcement action, which may result in liabilities adversely affecting our business, financial conditions and/or results of operations or in reputational harm.harm even after BMT's divestiture.
Since August 2013 until the acquisition of the Disbursement business,Business, we provided deposit accounts and services to college students through Higher One, which had relationships with colleges and universities in the United States, using Higher One’s technological services. Because Higher One was not a bank, it had to partner with one or more banks to provide the deposit accounts and services to students. Higher One and one of Higher One’s former bank partners (the “predecessor bank”), announced in May 2014 that the Federal Reserve Board notified them that certain disclosures and operating processes of these entities may have violated certain laws and regulations and may result in penalties and restitution. In May 2014, the Federal Reserve also informed us, as one of Higher One’s bank partners, that it was recommending a regulatory enforcement action be initiated against us based on the same allegations.
In July 2014, the predecessor bank referenced above, which no longer is a partner with Higher One, entered into a consent order to cease and desist with the Federal Reserve Board pursuant to which it agreed to pay a total of $3.5 million in civil money penalties and an additional amount that it may be required to pay in restitution to students in the event Higher One is unable to pay the restitution obligations, if any, imposed on Higher One (“back-up restitution”). We believe that the circumstances of its relationship with Higher One and the student customers are different than the relationship between the predecessor bankus and Higher One and the student customers.
In December 2015, Higher One entered into consent orders with both the Federal Reserve Board and the FDIC. Under the consent order with the Federal Reserve Board, Higher One agreed to pay $2.2 million in civil money penalties and $24 million in restitution to students. Under the consent order with the FDIC, Higher One agreed to pay an additional $2.2 million in civil money penalties and $31 million in restitution to students. In addition, a third partner bank, which is regulated by the FDIC, also entered into a consent order to cease and desist with the FDIC pursuant to which it agreed to pay $1.8 million in civil money penalties and an additional amount in restitution to students in the event Higher One is unable to meet its restitution obligation.
We believe that we identified key critical alleged compliance deficiencies within 30 days of first accepting deposits through our relationship with Higher One and caused such deficiencies to be remediated within approximately 120 days. In addition, we understand that the total amount of fees that Higher One collected from students who opened accounts with us during the relevant time period is substantially less than the total fees that Higher One collected from students who opened deposit accounts at the other partner banks during the relevant time period. In addition, as Higher One paid the restitution and deposited such monies to pay the required restitution, we did not expect that backup restitution would be required.
Nonetheless, as previously disclosed, we had been in discussions with the Federal Reserve Board regarding these matters from 2013 and in an effort to move forward, on December 6, 2016, we agreed to the issuance by the Federal Reserve Board of a
combined Order to Cease and Desist and Order of Assessment of a Civil Money Penalty Issued Upon Consent Pursuant to the Federal Deposit Insurance Act, as amended (the "Order")Order and agreed to a penalty of $960 thousand. We had previously set aside a reserve for the civil money penalty and made payment in 2016.
We remain subject to the jurisdiction and examination of the Federal Reserve Board, and further action could be taken to the extent we do not comply with the terms of the Order or if the Federal Reserve Board were to identify additional violations of applicable laws and regulations. Any further action could have a material adverse effect on our business, financial conditions and/or results of operations or our reputation.
Termination of, or changes to, the MasterCard association registration could materially and adversely affect our business, financial condition and results of operations.
The student checking account debit cards issued in connection with the Disbursement business are subject to MasterCard association rules that could subject us to a variety of fines or penalties that may be levied by MasterCard for acts or omissions by us or businesses that work with us. The termination of the card association registration held by us or any changes in card association or other network rules or standards, including interpretation and implementation of existing rules or standards, that increase the cost of doing business or limit our ability to provide our products and services could materially and adversely affect our business, financial condition and results of operations.
Our business and future success may suffer if we are unable to continue to successfully implement our strategy for BankMobile.
The effective use of technology can increase efficiency and enable financial institutions to better serve customers and to reduce costs. However, some new technologies, including BankMobile, are not fully tested, and we may incur substantial expenses and devote significant management time and resources in order for BankMobile to compete effectively. Revenue generated from BankMobile’s no-fee or very-low-fee banking strategy may not perform as well as we expect or enhance the value of our business as a whole, and it could materially and adversely affect our financial condition and results of operations. Additionally, if the benefits of BankMobile do not meet the expectations of financial or industry analysts, the market price of our common stock may decline.
We intend to engage in acquisitions of other businesses from time to time. These acquisitions may not produce revenue or earnings enhancements or cost savings at levels, or within time frames, originally anticipated and may result in unforeseen integration difficulties.
WeAlthough we currently do not have any agreements or understandings with respect to business acquisitions, we regularly evaluate opportunities to strengthen our current market position by acquiring and investing in banks and in other complementary businesses, or opening new branches, and when appropriate opportunities arise, subject to regulatory approval, we plan to engage in acquisitions of other businesses and in opening new branches. Such transactions could, individually or in the aggregate, have a material effect on our operating results and financial condition, including short and long-term liquidity. Our acquisition activities could be material to our business. For example, we could issue additional shares of Voting Common Stock in a purchase transaction, which could dilute current shareholders’ value or ownership interest. These activities could require us to use a substantial amount of cash or other liquid assets and/
or incur debt. In addition, if goodwill recorded in connection with acquisitions were determined to be impaired, then we would be required to recognize a charge against our earnings, which could materially and adversely affect our results of operations during the period in which the impairment was recognized. Our acquisition activities could involve a number of additional risks, including the risks of:
•incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating the terms of potential transactions, resulting in our attention being diverted from the operation of our existing business;
•using inaccurate estimates and judgments to evaluate credit, operations, management and market risks with respect to the target institution or assets;
•being potentially exposed to unknown or contingent liabilities of banks and businesses we acquire;
•being required to expend time and expense to integrate the operations and personnel of the combined businesses;
•experiencing higher operating expenses relative to operating income from the new operations;
•creating an adverse short-term effect on our results of operations;
•losing key team members and customers as a result of an acquisition that is poorly receivedreceived; and
•incurring significant problems relating to the conversion of the financial and customer data of the entity being acquired into our financial and customer product systems.
Additionally, in evaluating potential acquisition opportunities, we may seek to acquire failed banks through FDIC-assisted acquisitions. While the FDIC may, in such acquisitions, provide assistance to mitigate certain risks, such as sharing in exposure to loan losses and providing indemnification against certain liabilities, of the failed institution, we may not be able to accurately estimate our potential exposure to loan losses and other potential liabilities, or the difficulty of integration, in acquiring such institutions.
Depending on the condition of any institutions or assets that are acquired, any acquisition may, at least in the near term, materially adversely affect our capital and earnings and, if not successfully integrated following the acquisition, may continue to have such effects. We cannot assure you that we will be successful in overcoming these risks or any other problems encountered in connection with pending or potential acquisitions. Our inability to overcome these risks could have an adverse effect on levels of reported net income, return on equity and return on assets and the ability to achieve our business strategy and maintain market value.
Our acquisitions generally will require regulatory approvals, and failure to obtain them would restrict our growth.
We intendAlthough we currently do not have any agreements or understandings with respect to business acquisitions, we may in the future seek to complement and expand our business by pursuing strategic acquisitions of community banking franchises and other businesses. Generally, any acquisition of target financial institutions, banking centers or other banking assets by us may require approval by, and cooperation from, a number of governmental regulatory agencies, possibly including the Federal Reserve, the OCC and the FDIC, as well as state banking regulators. In acting on applications, federal banking regulators consider, among other factors:
•the effect of the acquisition on competition;
•the financial condition, liquidity, results of operations, capital levels and future prospects of the applicant and the bank(s) involved;
•the quantity and complexity of previously consummated acquisitions;
•the managerial resources of the applicant and the bank(s) involved;
•the convenience and needs of the community, including the record of performance under the Community Reinvestment Act;CRA;
•the effectiveness of the applicant in combating money laundering activitiesactivities; and
•the extent to which the acquisition would result in greater or more concentrated risks to the stability of the United States banking or financial system.
Such regulators could deny our application based on the above criteria or other considerations, which could restrict our growth, or the regulatory approvals may not be granted on terms that are acceptable to us. For example, we could be required to sell banking centers as a condition to receiving regulatory approvals, and such a condition may not be acceptable to us or may reduce the benefit of any acquisition.
The success of future transactions will depend on our ability to successfully identify and consummate acquisitions of banking franchises that meet our investment objectives. Because of the intense competition for acquisition opportunities and the limited number of potential targets, we may not be able to successfully consummate acquisitions on attractive terms, or at all, that are necessary to grow our business.
Our acquisition history should be viewed in the context of the recent opportunities available to us as a result of the confluence of our access to capital at a time when market dislocations of historical proportions resulted in attractive asset acquisition opportunities. As conditions change, we may prove to be unable to execute our acquisition strategy, which could materially and adversely affect us. The success of future transactions will depend on our ability to successfully identify and consummate transactions with target banking franchises that meet our investment objectives. There are significant risks associated with our ability to identify and successfully consummate these acquisitions. There are a limited number of acquisition opportunities, and we expect to encounter intense competition from other banking organizations competing for acquisitions and also from other investment funds and entities looking to acquire financial institutions. Many of these entities are well established and have extensive experience in identifying and consummating acquisitions directly or through affiliates. Many of these competitors possess ongoing banking operations with greater financial, technical, human and other resources and access to capital than we do, which could limit the acquisition opportunities we pursue. Our competitors may be able to achieve greater
cost savings, through consolidating operations or otherwise, than we could. These competitive limitations give others an advantage in pursuing certain acquisitions. In addition, increased competition may drive up the prices for the acquisitions we pursue and make the other acquisition terms more onerous, which would make the identification and successful consummation of those acquisitions less attractive to us. Competitors may be willing to pay more for acquisitions than we believe is justified, which could result in our having to pay more for them than we prefer or to forego the opportunity. As a result of the foregoing, we may be unable to successfully identify and consummate acquisitions on attractive terms, or at all, that are necessary to grow our business.
We will generally establish the pricing of transactions and the capital structure of banking franchises to be acquired by us on the basis of financial projections for such banking franchises. In general, projected operating results will be based on the judgment of our management team. In all cases, projections are only estimates of future results that are based upon assumptions made at the time that the projections are developed, and the projected results may vary significantly from actual results. General economic, political and market conditions can have a material adverse impact on the reliability of such projections. In the event that the projections made in connection with our acquisitions, or future projections with respect to new acquisitions, are not accurate, such inaccuracies could materially and adversely affect us.
Some institutions we could acquire may have distressed assets, and there can be no assurance that we will be able to realize the value predicted from these assets or that we will make sufficient provision for future losses in the value of, or accurately estimate the future write-downs taken in respect of, these assets.
Loan portfolios and other assets acquired in transactions may experience increases in delinquencies and losses in the loan portfolios, or in amounts that exceed initial forecasts developed during the due diligence investigation prior to acquiring those assets. In addition, asset values may be impaired in the future due to factors that cannot currently be predicted, including deterioration in economic conditions and subsequent declines in collateral values and credit quality indicators. Any of these events could adversely affect the financial condition, liquidity, capital position and value of institutions acquired and of our business as a whole. Further, as a registered bank holding company, if we acquire bank subsidiaries, they may become subject to cross-guaranty liability under applicable banking law. If we do so and any of the foregoing adverse events occur with respect to one subsidiary, they may adversely affect other subsidiaries. Asset valuations are estimates of value, and there is no certainty that we will be able to sell assets of target institutions at the estimated value, even if it is determined to be in our best interests to do so. The institutions we may target may have substantial amounts of asset classes for which there is currently limited or no marketability.
As a result of an investment or acquisition transaction, we may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on our financial condition and results of operations.
We conduct due diligence investigations of target institutions we intend to acquire. Due diligence is time consuming and expensive due to the operations, accounting, finance and legal professionals who must be involved in the due diligence process. Even if extensive due diligence is conducted on a target institution with which we may be combined, this diligence may not reveal all material issues that may affect a particular target institution, and factors outside our control, or the control of the target institution, may later arise. If, during the diligence process, we fail to identify issues specific to a target institution or the environment in which the target institution operates, we may be forced to later write down or write off assets, restructure operations or incur impairment or other charges that could result in reporting losses. These charges may also occur if we are not successful in integrating and managing the operations of the target institution with which we combine. In addition, charges of this nature may cause us to violate net-worth or other covenants to which we may be subject as a result of assuming preexisting debt held by a target institution or by virtue of obtaining debt financing.
Resources could be expended in considering or evaluating potential investment or acquisition transactions that are not consummated, which could materially and adversely affect subsequent attempts to locate and acquire or merge with another business.
We anticipate that the investigation of each specific target institution and the negotiation, drafting and execution of relevant agreements, disclosure documents and other instruments will require substantial management time and attention and substantial costs for accountants, attorneys and others. If a decision is made not to complete a specific investment or acquisition transaction, the costs incurred up to that point for the proposed transaction likely would not be recoverable. Furthermore, even if an agreement is reached relating to a specific target institution, we may fail to consummate the investment or acquisition transaction for any number of reasons, including those beyond our control. Any such event will result in a loss of the related costs incurred and could result in additional costs or expenses, which could materially and adversely affect subsequent attempts to locate and acquire or merge with another institution and our reported earnings.
If we do not open new branches or do not achieve targeted profitability on new branches, earnings may be reduced.
Our ability to open or acquire branches is subject to regulatory approvals. We cannot predict whether the banking regulators will agree with our growth plans or if or when they will provide the necessary branch approvals. Numerous factors contribute to the performance of a new branch, such as a suitable location, competition, our ability to hire and retain qualified personnel, and the effectiveness of our marketing strategy. It takes time for a new branch to generate significant deposits and loan volume to offset expenses, some of which, like salaries and occupancy expense, are relatively fixed costs. The initial cost, including capital asset purchases, for each new branch to open would be in a range of approximately $200 thousand to $250 thousand. Additionally, there can be no assurance that any of these new branches will ever become profitable. During the period of time before a branch can become profitable, operating a branch will negatively impact net income.
To the extent that we are unable to increase loans through organic core loan growth, we may be unable to successfully implement our growth strategy, which could materially and adversely affect us.
In addition to growing our business through strategic acquisitions, we also intend to grow our business through organic core loan growth. While loan growth has been strong, and our loan balances have increased over the last several fiscal years, much of the loan growth came from multi-family and commercial real estate lending. Ifif we are unsuccessful in diversifying our loan originations, or if we do not grow the existing business lines, our results of operations and financial condition could be negatively impacted.
We may not be able to effectively manage our growth.
Our future operating results and financial condition depend to a large extent on our ability to successfully manage our growth. Our growth has placed, and it may continue to place, significant demands on our operations and management. Whether through additional acquisitions or organic growth, our current plan to expand our business is dependent upon our ability to:
•continue to implement and improve our operational, credit underwriting and administration, financial, accounting, enterprise risk management and other internal and disclosure controls and procedures and our reporting systems and processes in order to manage a growing number of client relationships;
•comply with changes in, and an increasing number of, laws, rules and regulations, including those of any national securities exchange on which any of our securities become listed;
•scale our technology and other systems’ platforms;
•maintain and attract appropriate staffing;
•operate profitably or raise capitalcapital; and
•support our asset growth with adequate deposits, funding and liquidity while maintainingexpanding our net interest margin and meeting our customers’ and regulators’ liquidity requirements.
We may not successfully implement improvements to, or integrate, our management information and control systems, credit underwriting and administration, internal and disclosure controls, and procedures and processes in an efficient or timely manner and may discover deficiencies in existing systems and controls. In particular, our controls and procedures must be able to accommodate an increase in loan volume in various markets and the infrastructure that comes with new banking centers and banks. Our growth strategy may divert management from our existing business and may require us to incur additional expenditures to expand our administrative and operational infrastructure and, if we are unable to effectively manage and grow our banking franchise, including to the satisfaction of our regulators, we could be materially and adversely affected. In addition, if we are unable to manage our current and future expansion in our operations, we may experience compliance, operational and regulatory problems and delays, have to slow our pace of growth or even stop our market and product expansion, or have to incur additional expenditures beyond current projections to support such growth, any one of which could materially and adversely affect us. If we experience difficulties with the development of new business activities or the integration process of acquired businesses, the anticipated benefits of any particular acquisition may not be realized fully, or at all, or may take longer to realize than expected. Additionally, we may be unable to recognize synergies, operating efficiencies, cost projections and/or expected benefits within expected time frames, and cost projections, or at all. We also may not be able to preserve the goodwill of an acquired financial institution. Our growth could lead to increases in our legal, audit, administrative and financial compliance costs, which could materially and adversely affect us.
If our techniques for managing risk are ineffective, we may be exposed to material unanticipated losses.
In order to manage the significant risks inherent in our business, we must maintain effective policies, procedures and systems that enable us to identify, monitor and control our exposure to material risks, such as credit, interest rate, operational, legalcompliance and reputational risks. Our risk management methods may prove to be ineffective due to their design, implementation or the degree to which we adhere to them, or as a result of the lack of adequate, accurate or timely information or otherwise. If our risk management efforts are ineffective, we could suffer losses that could have a material adverse effect on our business, financial condition or results of operations. In addition, we could be subject to litigation, particularly from our customers, and sanctions or fines from regulators. Our techniques for managing the risks we face may not fully mitigate the risk exposure in all economic or market environments, including exposure to risks that we might fail to identify or anticipate.
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.
Our system of internal controls, including internal controls over financial reporting, is an important element of our risk-
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 employee 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.regulations, or may result in untimely or inaccurate 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 or strengthen internal control over financial reporting. 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.
We may not be able to meet the cash flow requirements of our loan funding obligations, deposit withdrawals, or other business needs and fund our asset growth unless we maintain sufficient liquidity.
We must maintain sufficient liquidity to fund our balance sheet growth in order to successfully grow our revenues, make loans, and repay deposit and other liabilities as these mature or are drawn. This liquidity can be gathered in both wholesale and non-wholesale funding markets. Our asset growth over the past few years has been funded with various forms of deposits and wholesale funding, including brokered and wholesale time deposits, FHLB advances and Federal funds line borrowings. Total wholesale deposits including brokered and municipal deposits were 39.8%14.2% of total deposits at December 31, 2017.2021. Our gross loan to deposit ratio was 128.1%86.8% at December 31, 2017,2021, and our loan to deposit ratio excluding the commercial mortgage warehouse and PPP loan portfolio funded by short-term FHLB borrowings was 101.7%53.4% at December 31, 2017.2021. Wholesale funding can cost more than deposits generated from our traditional branch system and customer relationships and is subject to certain practical limits such as our liquidity policy limits, our available collateral for FHLB borrowings capacity and Federal funds line limits with our lenders. Additionally, regulators consider wholesale funding beyond certain points to be imprudent and might suggest or require that future asset growth be reduced or halted. In the absence of appropriate levels and mix of funding, we might need to reduce interest-earning asset growth through the reduction of current production, sales of loans and/or the sale of participation interests in future and current loans. This might reduce our future growth and net income.
The amount of funds loaned to us is generally dependent on the value of the eligible collateral pledged and our financial condition. These lenders could reduce the percentages loaned against various collateral categories, eliminate certain types of collateral and otherwise modify or even terminate their loan programs, if further disruptions in the capital markets occur. Any change to or termination of our borrowings from the FHLB or correspondent banks could have an adverse effect on our profitability and financial condition, including liquidity.
We may not be able to develop and retain a strong core deposit base and other low-cost, stable funding sources.
We depend on checking, savings and money market deposit account balances and other forms of customer deposits as a primary source of funding for our lending activities. We expect that our future loan growth will largely depend on our ability to retain and grow a strong, low-cost deposit base. Because 28.0% of our deposit base as of December 31, 2017, was time deposits, it may prove harder to maintain and grow our deposit base than would otherwise be the case, especially since many of these deposits currently pay interest at above-market rates. As of December 31, 2017, $1.5 billion,2021, $380.5 million, or 76.3%75.0%, of our total time deposits, are scheduled to mature through December 31, 2018.2022. We are working to transition certain of our customers to lower- costlower-cost traditional bank deposits as higher-cost funding, such as time deposits, mature. If interest rates increase, whether due to changes in inflation, monetary policy, competition or other factors, we would expect to pay higher interest rates on deposits,
which would increase our funding costs and compress our net interest margin. We may not succeed in moving our deposits to lower-yielding savings and transactions products, which could materially and adversely affect us. In addition, with concerns about bank failures over the past several years and the end of the FDIC’s non-interest transaction deposit guarantee program on December 31, 2012, customers, particularly those who may maintain deposits in excess of insured limits, have becomecontinue to be concerned about the extent to which their deposits are insured by the FDIC. Our customers may withdraw deposits to ensure that their deposits with us are fully insured and may place excess amounts in other institutions or make investments that are perceived as being more secure and/or higher yielding. Further, even if we are able to maintain and grow our deposit base, deposit balances can decrease when customers perceive alternative investments, such as the stock market, will provide a better risk/return tradeoff. If customers move money out of bank deposits, we could lose a relatively low-cost source of funds, increasing our funding costs and reducing our net interest income and net income.
Certain deposit balances serviced by BM Technologies can vary over the course of the year based on student enrollment and the timing of deposits made into those accounts, with seasonal inflows at the start of each semester that are drawn down until the following
semester. Additionally, any such loss of funds could result in lower loan originations and growth, which could materially and adversely affect our results of operations and financial condition, including liquidity.
Separately, the Amended Agreement Our deposit service agreement with Flagship provides that weBM Technologies is scheduled to expire on December 31, 2022 and will sell deposits related to the BankMobile business segment divested by us and acquired by Flagship to Flagship for $10 million. The BankMobile-related deposit balances fluctuate throughout the year, and the amountnot be renewed. As of December 31, 2021, Customers held $1.8 billion of deposits sold will depend on the timing of the divestiture. Deposit balances associated with the BankMobile business segment can vary over the course of the year, from a seasonal low of approximately $400 million in June and July when student enrollment is lowerserviced by BM Technologies, which are expected to a high of as much as $900 million in September or January when student enrollment is high and individual account balances are generally at their peak. The sale of the BankMobile-related deposit balances will be offset in partleave Customers Bank by the transfer of interest-bearing investment securities and/or loans with the deposits, reducing our interest-earning assets and thereby reducing any adverse effects of the BankMobile divestiture on our capital ratios and liquidity position that may result from the BankMobile divestiture.
Our “high-touch” personalized service banking model may be replicated by competitors.
We expect to drive organic growth by employing our Concierge Banking® and single-point-of-contact strategies, which provide specific relationship managers or private bankers for all customers. Many of our competitors provide similar services, and others may replicate our model. Our competitors may have greater resources than we doDecember 31, 2022 and may be able to provide similar services more quickly, efficiently and extensively. Toimpact the extent others replicate our model, we could lose what we view as a competitive advantage, and our financial condition and resultsfunding of operations may be adversely affected.
Customers' future growth initiatives.
Competitors’ technology-driven products and services and improvements to such products and services may adversely affect our ability to generate core deposits through mobile banking.
Our organic growth strategy focuses on, among other things, expanding market share through our “high-tech” model, which includes remote account opening, remote deposit capture, mobile and mobiledigital banking. These technological advances such as BankMobile, are intended to allow us to generate additional core deposits at a lower cost than generating deposits through opening and operating branch locations. Some of our competitors may have greater resources to invest in technology and may be better equipped to market new technology-driven products and services. This may result in limiting, reducing or otherwise adversely affecting our growth strategy in this area and our access to deposits through mobile banking. In addition, to the extent we fail to keep pace with technological changes or incur respectively large expenses to implement technological changes, our business, financial condition and results of operations may be adversely affected.
We may sufferincur losses due to minority investments in other financial institutions or related companies.
From time to time, weWe may make or consider making minority investments in other financial institutions or technology companies in the financial services business.business, or other unrelated businesses, including for strategic reasons or to see technological improvements or advantages. If we do so, we may not be able to influence the activities of companies in which we invest and may suffer losses due to these activities. Investments in foreign companies could pose additional risks as a result of distance, language barriers and potential lack of information (for example, foreign institutions, including foreign financial institutions, may not be obligated to provide as much information regarding their operations as those in the United States). Our investment in Religare, which is a diversified financial services company in India, represents such an investment. In fourth quarter 2016, we announced our decision to exit our investmentDuring the year ended December 31, 2021, Customers sold all of the outstanding shares in Religare. As a result of that decision, we recorded an impairment loss of $7.3CB Green Ventures Pte Ltd. and CUBI India Ventures Pte Ltd., which held the equity securities issued by Religare, for $3.8 million, and recognized $2.8 million in earnings in fourth quarter 2016loss on sale of foreign subsidiaries within non-interest income on the consolidated statement of income.
Risks related to the divestiture of BMT
We continue to face the risks and adjusted our cost basischallenges associated with BM Technologies following the merger of BMT with Megalith Financial Acquisition Corp.
On January 4, 2021, we completed the divestiture of BMT through the merger of BMT with MFAC. In connection with the closing of the Religare securitiesdivestiture, MFAC changed its name to their estimated fair value“BM Technologies, Inc.” Our agreement with MFAC relating to the merger of $15.2 million atBMT and MFAC provided that the shares issuable by MFAC in connection with the merger would be issued directly to Customers Bancorp shareholders rather than being issued to and held by us. In connection with the divestiture, we have entered into various agreements with BM Technologies, including a transition services agreement, software license agreement, deposit servicing agreement, non-competition agreement and loan agreement for periods ranging from one to ten years. The deposit service agreement is scheduled to expire on December 31, 2016. We recorded additional impairment losses totaling $12.9 million during 2017 for the decline in fair value from2022 and will not be renewed. As of December 31, 2016, through September 30, 2017. The fair value2021, Customers held $1.8 billion of the Religare equity securities at September 30, 2017, of $2.3 million became the new cost basis of the securities. Atdeposits serviced by BM Technologies, which are expected to leave Customers Bank by December 31, 2017,2022 and may impact the fair valuefunding of Customers' future growth initiatives. The loan agreement with BM Technologies was terminated early in November 2021. The transition services agreement with BM Technologies, as amended, expires on March 31, 2022, except for accounting services which expired on February 15, 2022. We will continue to face the Religare equity securities was $3.4 million, which resulted in an unrealized gain of $1.0 million recognized in accumulated other comprehensive incomerisks and challenges associated with no adjustment for deferred taxesBM Technologies through these agreements. We are also exposed to potential liabilities to the acquirer under the contractual provisions such as we currently do not have a tax strategy in place capable of generating sufficient capital gains to utilize any capital losses resulting from the Religare investment. To the
extentrepresentation, warranties and indemnities. If we are unable to exit the Religare investment as plannedaddress and pursuantmanage these risks, our business, financial condition and results of operations could be adversely affected.
Risks related to the terms contemplated,ongoing COVID-19 Pandemic, Climate Change and Macroeconomic Conditions
Worsening general business and economic conditions could materially and adversely affect us.
Our business and operations are sensitive to general business and economic conditions in the United States. If the U.S. economy experiences worsening conditions such as a recession, we could be materially and adversely affected. Weak economic conditions may be characterized by deflation, instability in debt and equity capital markets, a lack of liquidity and/or depressed prices in the secondary market for mortgage loans, increased delinquencies on loans, residential and commercial real estate price declines and lower home sales and commercial activity. Adverse changes in any of these factors could be detrimental to our business. Our business is also significantly
affected by monetary and related policies of the U.S. Federal Government, its agencies and government-sponsored entities. Adverse changes in economic factors or U.S. Government policies could have a negative effect on us.
Over the last several years, there have been several instances where there has been uncertainty regarding the ability of Congress and the President collectively to reach agreement on federal budgetary and spending matters. A period of failure to reach agreement on these matters, particularly if accompanied by an actual or threatened government shutdown, may have an adverse impact on the U.S. economy. Additionally, a prolonged government shutdown may inhibit our ability to evaluate borrower creditworthiness and originate and sell certain government-backed loans.
In addition, the U.S. economy contracted into a recession in the first half of 2020, primarily driven by the COVID-19 pandemic. The U.S. government and the Federal Reserve responded to the pandemic with unprecedented measures. In addition to the Federal Reserve reducing the target federal funds rate, Congress passed the CARES Act that included an estimated $2 trillion stimulus package. Although the U.S. economy began to recover in third quarter 2020 as social distancing policies loosened, economic metrics in fourth quarter 2020 indicated an uneven path to recovery. In December 2020, Congress amended the CARES Act with the CAA to provide an additional $900 billion of stimulus relief to mitigate the continued impacts of the pandemic. While certain factors point to improving economic conditions, uncertainty remains regarding the path of the economic recovery, the mitigating impacts of government interventions, the success of vaccine distribution and the efficacy of administered vaccines to the COVID-19 variants. Conditions related to inflation, global supply chains, unemployment, volatile interest rates, international conflicts, changes in trade policies and other factors, such as real estate values, state and local municipal budget deficits, government spending and the U.S. national debt may, directly and indirectly, adversely affect our financial condition and results of operations.
The COVID-19 pandemic has impacted our business, and the ultimate impact on our business and financial results will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. As a result, the demand for our products and services may be significantly impacted. Furthermore, the pandemic has influenced and could further influence the recognition of credit losses in our loan and lease portfolios and has increased and could further increase our ACL, particularly as businesses remain closed and as more customers may draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, the securities we hold may lose value. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including:
•The duration, extent, and severity of the pandemic. COVID-19 has not yet been contained; continuing spread and rise of new variants could affect significantly more households and businesses, or cause additional limitations on commercial activity, increased unemployment, increased property vacancy rates and general economic and financial instability. The continuation of the pandemic may also negatively impact regional economic conditions for a period of time, resulting in declines in the market price per shareloan demand and collateral values. The duration and severity of the Religare common stockpandemic continues to be impossible to predict, as is the potential for a seasonal or other resurgence. We also believe we will continue to see the economic effects of the pandemic even after the COVID-19 outbreak has subsided, which is expected to continue to affect our business, financial position, results of operations and prospects.
•The response of governmental authorities. To date, many of the actions of governmental authorities, including eviction forbearance, occupancy restrictions and vaccine mandates, have been directed toward curtailing household and business activity to contain COVID-19 while simultaneously deploying fiscal and monetary policy measures to partially mitigate the adverse changes in foreign currency exchange rates,effects on individual households and businesses. The ultimate success or impact of these actions and their effect on our customers and the economy generally is still unclear. Further, some measures, such as a suspension of mortgage and other loan payments and foreclosures, may have a negative impact on our business.
•The effect on our customers, counterparties, employees, and third-party service providers. COVID-19 and its associated consequences and uncertainties are affecting individuals, households, and businesses differently and unevenly. Negative impacts on our customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans.
•The effect on economies and markets. Whether the actions of governmental and nongovernmental authorities will be successful in mitigating the adverse effects of COVID-19 is unclear. National, regional, and local economies and markets could suffer disruptions that are lasting. Governmental actions are meaningfully influencing the interest-rate environment
and financial-market activity and could have lasting effects on taxes and other economic factors, which could adversely affect our results of operations and financial condition.
To the extent the COVID-19 pandemic and its variants continue to adversely affect the economy, and/or adversely affects our business, results of operations or financial condition, it may also have the effect of increasing the likelihood and/or magnitude of other risks described herein, including those risks related to business operations, industry/market, our securities and credit, or risks described in our other filings with the SEC.
We are a participating lender in SBA’s PPP program and have originated a significant number of loans under this program, which may result in a material amount of PPP loans remaining on our consolidated balance sheets at a very low yield for an extended period of time.
The PPP, originally established under the CARES Act and extended under the Economic Aid Act and CAA, authorizes financial institutions to make federally-guaranteed loans to qualifying small businesses and non-profit organizations. These loans carry an interest rate of 1% per annum and a maturity of 2 years for loans originated prior to June 5, 2020 and 5 years for loans originated on or after June 5, 2020. The PPP provides that such loans may be forgiven if the borrowers meet certain requirements with respect to maintaining employee headcount and payroll and the use of the loan proceeds after the loan is originated. The initial phase of the PPP, after being extended multiple times by Congress, expired on August 8, 2020. However, on January 11, 2021, the SBA reopened the PPP for First Draw PPP loans to small business and non-profit organizations that did not receive a loan through the initial PPP phase. Further, on January 13, 2021, the SBA reopened the PPP for Second Draw loans to small businesses and non-profit organizations that did receive a loan through the initial PPP phase. At least $25 billion had been set aside for Second Draw PPP loans to eligible borrowers with a maximum of 10 employees or for loans of $250,000 or less to eligible borrowers in low or moderate income neighborhoods. Generally, businesses with more than 300 employees and/or less than a 25 percent reduction in gross receipts between comparable quarters in 2019 and 2020 were not eligible for Second Draw loans. Further, maximum loan amounts were increased for accommodation and food service businesses. On March 11, 2021, the American Rescue Plan Act of 2021 was enacted expanding eligibility for first and second round of PPP loans and revising the exclusions from payroll costs for purposes of loan forgiveness. The PPP ended on May 31, 2021.
As of December 31, 2021, we had PPP loans with outstanding balances of $3.3 billion. Our PPP participation was very significant especially compared to the participation of similarly sized and larger competitor financial institutions. Considering our immediate response to originate PPP loans, the loans originated under this program may present potential fraud risk, increasing the risk that loan forgiveness may not be obtained by the borrowers and that the guaranty may not be honored. In addition, there is risk that the borrowers may not qualify for the loan forgiveness feature due to the conduct of the borrower after the loan is originated. Further, although the SBA has streamlined the loan forgiveness process for loans $50,000 or less, it has taken longer than initially anticipated for the SBA to finalize the forgiveness processes. On January 19, 2021, the SBA increased the streamlined loan forgiveness process to loans $150,000 or less. In the third quarter of 2021, Customers partnered with the SBA to deliver responsive digital loan forgiveness service to the small business borrowers through the SBA's portal. Nonetheless, these factors may result in us having to hold a significant amount of these low-yield loans on our books for a significant period of time. We will continue to face increased operational demands and pressures as we monitor and service our PPP loan portfolio, process applications for loan forgiveness and pursue recourse under the SBA guarantees. We have been exposed, and may in the future be subject, to litigation and claims by borrowers under the PPP loans that we have made, and could be subject to investigation and scrutiny by our regulators, Congress, the SBA, the U.S. Treasury Department and other government agencies.
Climate change and related legislative and regulatory initiatives may result in operational changes and expenditures that could significantly impact our business.
The current and anticipated effects of climate change are creating an increasing level of concern for the state of the global environment. As a result, political and social attention to the issue of climate change has increased. In recent years, governments across the world have entered into international agreements to attempt to reduce global temperatures, in part by limiting greenhouse gas emissions. The U.S. Congress, state legislatures and federal and state regulatory agencies have continued to propose and advance numerous legislative and regulatory initiatives seeking to mitigate the effects of climate change. Such initiatives are expected to continue under the new administration, including potentially increasing supervisory expectations with respect to banks' risk management practices, accounting for the effects of climate change in stress testing scenarios and systematic risk assessments, revising expectations for credit portfolio concentrations based on climate related factors, and encouraging investment by banks in climate-related initiatives and lending to communities disproportionately impacted by the effects of climate change. These agreements and measures may result in the imposition of taxes and fees, the required purchase of emission credits, and the implementation of significant operational changes, each of which may require Customers to expend significant capital and incur compliance, operating, maintenance and remediation costs. Given the lack of empirical data on the credit and other financial risks posed by climate change, it is impossible to predict how climate change may impact our financial condition and operations; however, as a banking organization, the physical effects of climate change may present certain unique risks to Customers. For example, weather disasters, shifts in local climates and other disruptions related to climate change
may adversely affect the value of real properties securing our loans, which could diminish the value of our loan portfolio. Such events may also cause reductions in regional and local economic activity that may have an adverse effect on our customers, which could limit our ability to raise and invest capital in these areas and communities, each of which could have a material adverse effect on our financial condition and results of operations.
Severe weather, natural disasters, public health issues, acts of war or terrorism, and other external events could significantly impact our ability to conduct business.
We are requiredSuch events could affect the stability of our deposit base, impair the ability of borrowers to hold capital for United States bank regulatory purposes to support our investment in Religare securities.
Underrepay outstanding loans, impair the U.S. capital adequacy rules, which became effective as of January 1, 2015, we have to hold risk-based capital based on the amount of Religare common stock we own. Based upon the implementation of the final U.S. capital adequacy rules, these investments are currently subject to risk weighting of 100% of the amount of the investment; however, to the extent future aggregated carrying value of certain equity exposures exceeds 10%collateral securing loans, adversely impact our team member base, cause significant property damage, result in loss of revenue, and cause us to incur additional expenses. For example, one of our then total capital, risk weightingslocations experienced flooding and incurred property damage in 2021 as a result. Although management has established disaster recovery policies and procedures, the occurrence of 300% may apply. Any capital that is required to be used to supportany such event could have a material adverse effect on our Religare investment will not be available to supportbusiness, which, in turn, could have a material adverse effect on our United States operations or Customers Bank, if needed.
financial condition and results of operations.
Risks RelatingRelated to the Regulation of Our Industry
Our business, financial condition, results of operations and future prospects could be adversely affected by the highly regulated environment in which we operate.
operate, including the effects of heightened regulatory requirements applicable to banks with assets in excess of $10 billion.
As a bank holding company, we are subject to federal supervision and regulation. Federal regulation of the banking industry, along with tax and accounting laws, regulations, rules and standards, may limit our operations significantly and control the methods by which we conduct business, just as they limit those of other banking organizations. In addition, compliance with laws and regulations can be difficult and costly, and changes to laws and regulations can impose additional compliance costs. The Dodd-Frank Act, which imposes significant regulatory and compliance changes on financial institutions, is an example of this type of federal regulation. Many of these regulations are intended to protect depositors, customers, the public, the banking system as a whole, or the FDIC insurance funds, not stockholders. Regulatory requirements and discretion affect our lending practices, capital structure, investment practices, dividend policy and many other aspects of our business. There are laws and regulations which restrict transactions between us and our subsidiaries. These requirements may constrain our operations, and the adoption of new laws and changes to or repeal of existing laws may have a further impact on our business, financial condition, results of operations and future prospects. Also, the burden imposed by those federal and state regulations may place banks in general, including Customers Bank in particular, at a competitive disadvantage compared to their non-banking competitors. We are also subject to requirements with respect to the confidentiality of information obtained from clients concerning their identities, business and personal financial information, employment and other matters. We require our team members to agree to keep all such information confidential, and we monitor compliance. Failure to comply with confidentiality requirements could result in material liability and adversely affect our business, financial condition, results of operations and future prospects.
Bank holding companies and financial institutions are extensively regulated and currently face an uncertain regulatory environment. Applicable laws, regulations, interpretations, enforcement policies and accounting principles have been subject to significant changes in recent years and may be subject to significant future changes. Future changes may have a material adverse effect on our business, financial condition and results of operations.
Federal and state regulatory agencies may adopt changes to their regulations or change the manner in which existing regulations are applied or interpreted. We cannot predict the substance or effect of pending or future legislation or regulation or the application of laws and regulations on us. Compliance with current and potential regulation, as well as regulatory scrutiny, may significantly increase our costs, impede the efficiency of our internal business processes, require us to increase our regulatory capital and limit our ability to pursue business opportunities in an efficient manner by requiring us to expend significant time, effort and resources to ensure compliance and respond to any regulatory inquiries or investigations. In addition, press coverage and other public statements that assert some form of wrongdoing by financial services companies (including press coverage and public statements that do not involve us) may result in regulatory inquiries or investigations, which, independent of the outcome, may be time-consuming and expensive and may divert time, effort and resources from our business. Evolving regulations and guidance concerning executive compensation may also impose limitations on us that affect our ability to compete successfully for executive and management talent.
In addition, given the current economic and financial environment, regulators may elect to alter standards or the interpretation of the standards used to measure regulatory compliance or to determine the adequacy of liquidity, certain risk management or other operational practices for financial services companies in a manner that impacts our ability to implement our strategy and could affect us in substantial and unpredictable ways and could have a material adverse effect on our business, financial condition and results of operations. Furthermore, the regulatory agencies have extremely broad direction in their interpretation of the regulations and laws and
their interpretation of the quality of our loan portfolio, securities portfolio and other assets. If
any regulatory agency’s assessment of the quality of our assets, operations, lending practices, investment practices, capital structure or other assets of our business differs from our assessment, we may be required to take additional charges or undertake or refrain from undertaking actions that would have the effect of materially reducing our earnings, capital ratios and share price.
Because our total assets exceeded $10 billion at December 31, 2019, we and our bank subsidiary became subject to increased regulatory requirements in 2020. The Dodd-Frank Act and its implementing regulations impose various additional requirements on bank holding companies with $10 billion or more in total assets. In addition, banks with $10 billion or more in total assets are primarily examined by the CFPB with respect to various federal consumer financial protection laws and regulations. As a relatively new agency with evolving regulations and practices, there is some uncertainty as to how the CFPB’s examination and regulatory authority might impact our business. Further, the possibility of future changes in the authority of the CFPB by Congress or the Biden Administration is uncertain, and we cannot predict the impact, if any, changes to the CFPB may have on our business.
With respect to deposit-taking activities, banks with assets in excess of $10 billion are subject to two changes. First, these institutions are subject to a deposit assessment based on a new scorecard issued by the FDIC. This scorecard considers, among other things, the bank’s CAMELS rating, results of asset-related stress testing and funding-related stress, as well as our use of core deposits, among other things. Depending on the results of the bank’s performance under that scorecard, the total base assessment rate is between 1.5 to 40 basis points. Any increase in our bank subsidiary’s deposit insurance assessments may result in an increased expense related to our use of deposits as a funding source. Additionally, banks with over $10 billion in total assets are no longer exempt from the requirements of the Federal Reserve’s rules on interchange transaction fees for debit cards. This means that, as of July 1, 2020, our bank subsidiary is limited to receiving only a “reasonable” interchange transaction fee for any debit card transactions processed using debit cards issued by our bank subsidiary to our customers. The Federal Reserve has determined that it is unreasonable for a bank with more than $10 billion in total assets to receive more than $0.21 plus 5 basis points of the transaction plus a $0.01 fraud adjustment for an interchange transaction fee for debit card transactions. This reduction in the amount of interchange fees we receive for electronic debit interchange reduced our revenues in 2020, and will continue to affect our results of operations for the duration of the Deposit Servicing Agreement with BM Technologies.
Our regulators may also consider our compliance with these regulatory requirements when examining our operations generally or considering any request for regulatory approval we may make, even requests for approvals on unrelated matters.
We operate in a highly regulated environment, and the laws and regulations that govern our operations, corporate governance, executive compensation and accounting principles, or changes in them, or our failure to comply with them, could materially and adversely affect us.
We are subject to extensive regulation, supervision and legislation that govern almost all aspects of our operations. Intended to protect customers, depositors and the FDIC’s Deposit Insurance Fund (the “DIF”)DIF and not our shareholders, these laws and regulations, among other matters, prescribe minimum capital requirements, impose limitations on our business activities, limit the dividends or distributions that we can pay, restrict the ability of our subsidiary bank to engage in transactions with the Bancorp, and impose certain specific accounting requirements on us that may be more restrictive and may result in greater or earlier charges to earnings or reductions in our capital than under generally accepted accounting principles. Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations often impose additional compliance costs and may make certain products impermissible or uneconomic. Our failure to comply with these laws and regulations, even if the failure follows good faith effort or reflects a difference in interpretation, could subject us to restrictions on our business activities, reputational harm, fines and other penalties, any of which could materially and adversely affect us. Further, any new laws, rules and regulations could make compliance more difficult or expensive and also materially and adversely affect us.
Provisions of the Dodd-Frank Act prohibit incentive compensation arrangements that would encourage inappropriate risk taking at covered financial institutions, which includes a bank or bank holding company with $1 billion or more in assets, such as the Company. These prohibitions may adversely affect our ability to retain and attract executives and other high-performing team members or our ability to compete with companies that are not subject to such provisions.
Our use of third-party vendors and our other ongoing third-party business relationships are subject to increasing regulatory
requirements and attention.
We regularly use third-party vendors as part of our business and have other ongoing business relationships with other third parties.parties, including BM Technologies after the completion of the divestiture of BMT on January 4, 2021. These types of third-party relationships are subject to increasingly demanding regulatory requirements and attention by federal banking regulators. Regulation requires us to perform enhanced due diligence, perform ongoing monitoring and control our-third party vendors and other ongoing third-party business relationships. In certain cases, we may be required to renegotiate our agreements with these vendors to meet these enhanced requirements, which could increase our costs. We expect that our regulators will hold us responsible for deficiencies in our oversight and control of our third-party relationships and in the performance of the parties with which we have these relationships. As a result, if our
regulators conclude that we have not exercised adequate oversight and control over our-third party vendors or other ongoing third-party business relationships or that such third parties have not performed appropriately, we could be subject to enforcement actions, including civil money penalties or other administrative or judicial penalties or fines as well as requirements for customer remediation, any of which could have a material adverse effect on our business, financial condition or results of operations.
We are subject to numerous laws and governmental regulations and to regular examinations by our regulators of our business and compliance with laws and regulations, and our failure to comply with such laws and regulations or to adequately address any matters identified during our examinations could materially and adversely affect us.
Federal banking agencies regularly conduct comprehensive examinations of our business, including our compliance with applicable laws, regulations and policies. Examination reports and ratings (which often are not publicly available) and other aspects of this supervisory framework can materially impact the conduct, organic and acquisition growth and profitability of our business. Our regulators have extensive discretion in their supervisory and enforcement activities and may impose a variety of remedial actions, conditions or limitations on our business operations if, as a result of an examination, they determined that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we or our management were in violation of any law, regulation or policy. Examples of those actions, conditions or limitations include enjoining “unsafe or unsound” practices, requiring affirmative actions to correct any conditions resulting from any asserted violation of law, issuing administrative orders that can be judicially enforced, directing increases in our capital, assessing civil monetary penalties against our officers or directors, removing officers and directors and, if a conclusion was reached that the offending conditions cannot be corrected, or there is an imminent risk of loss to depositors, terminating our deposit insurance. Other actions, formal or informal, that may be imposed could restrict our growth, including regulatory denials to expand branches, relocate, add subsidiaries and affiliates, expand into new financial activities or merge with or purchase other financial institutions. The timing of these examinations, including the timing of the resolution of any issues identified by our regulators in the examinations and the final determination by them with respect to the imposition of any remedial actions, conditions or limitations on our business operations, is generally not within our control. We also could suffer reputational harm in the event of any perceived or actual noncompliance with certain laws and regulations. If we become subject to such regulatory actions, we could be materially and adversely affected.
Other litigation and regulatory actions, including possible enforcement actions, could subject us to significant fines, penalties, judgments or other requirements resulting in increased expenses or restrictions on our business activities.
Our business is subject to increased litigation and regulatory risks as a result of a number of factors, including the highly regulated nature of the financial services industry and the focus of state and federal prosecutors on banks and the financial services industry generally. This focus has only intensified since the latest financial crisis and due to COVID-19 pandemic and related federal and state government responses, with regulators and prosecutors focusing on a variety of financial institution practices and requirements.requirements, including our origination and servicing of PPP loans and granting of deferments under the CARES Act, as amended by the CAA, and the Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronavirus. We may, from time to time, be the subject of subpoenas, requests for information, reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding our business. Legal or regulatory actions may subject us to substantial compensatory or punitive damages, significant fines, penalties, obligations to change our business practices or other requirements resulting in increased expenses, diminished income and damage to our reputation. Our involvement in any such matters, even if the matters are ultimately determined in our favor, could also cause significant harm to our reputation and divert management attention from the operation of our business. Further, any settlement, consent order or adverse judgment in connection with any formal or informal proceeding or investigation by government agencies may result in litigation, investigations or proceedings as other litigants and government agencies begin independent reviews of the same activities. As a result, the outcome of legal and regulatory actions could be material to our business, results of operations, financial condition and cash flows, depending on, among other factors, the level of our earnings for that period and could have a material adverse effect on our business, financial condition or results of operations.
The FDIC’s restoration plan and the related increased assessment rate could materially and adversely affect us.
The FDIC insures deposits at FDIC-insured depository institutions up to applicable limits. The amount of a particular institution’s deposit insurance assessment is based on that institution’s risk classification under an FDIC risk-based assessment system. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the institution poses to its regulators. We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay even higher FDIC premiums than the recently increased levels. Any future additional assessments, increases or required prepayments in FDIC insurance premiums may materially and adversely affect us, including reducing our profitability or limiting our ability to pursue certain business opportunities.
The Federal Reserve may require us to commit capital resources to support our subsidiary bank.
As a matter of policy, the Federal Reserve, which examines us and our subsidiaries, expects a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. In addition, the Dodd-Frank Act directs the federal bank regulators to require that all companies that directly or indirectly control an insured depository institution to serve as a source of strength for the institution. Under this requirement, we could be required to provide financial assistance to Customers Bank or any other subsidiary banks we may own in the future should they experience financial distress.
A capital injection may be required at times when we do not have the resources to provide it, and therefore, we may be required to borrow the funds or raise additional equity capital from third parties. Any loans by a holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of the subsidiary bank. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the holding company’s general unsecured creditors, including the holders of its indebtedness. Any financing that must be done by the holding company in order to make the required capital injection may be difficult and expensive and may not be available on attractive terms, or at all, which likely would have a material adverse effect on us.
The long-termWe are subject to stringent capital requirements which may adversely impact ofreturn on equity, require additional capital raises, or limit the new regulatory capital standards and the capital rules on U.S. banks is uncertain.ability to pay dividends or repurchase shares.
In September 2010, the Basel Committee on Banking Supervision, announced an agreement to a strengthened set of capital requirements for internationally active banking organizations in the United States and around the world, known as Basel III. Basel III narrowed the definition of capital, introduced requirements for minimum Tier 1 common capital, increased requirements for minimum Tier 1 capital and total risk-based capital, and changed risk-weighting methodologies. Basel III is being phased in over time untilwas fully phased in by January 1, 2019.
In July 2013, the Federal Reserve adopted a final rule regarding new capital requirements pursuant to Basel III. These rules, which became effective on January 1, 2015, for community banks, increased the required amount of regulatory capital that we must hold, and failure to comply with the capital rules will lead to limitations on the dividend payments to us by Customers Bank and other elective distributions.
In December 2017, the Basel Committee on Banking Supervision published standards that it described as the finalization of the Basel III regulatory framework (commonly referred to as Basel IV). Among other things, these standards revise the Basel Committee’s standardized approach for credit risk and provide a new standardized approach for operational risk capital. Under the Basel framework, these standards will generally bebecame effective on January 1, 2022, with an aggregate output floor phasing in through January 1, 2027. Under the current U.S. capital rules, operational risk capital requirements and a capital floor apply only to advanced-approaches institutions and not to us. The impact of Basel IV on us will depend on the manner in which it is implemented by the federal bank regulators.
Various provisions of the Dodd-Frank Act increase the capital requirements of bank holding companies, such as we, and non-bank financial companies that are supervised by the Federal Reserve. The leverage and risk-based capital ratios of these entities may not be lower than the leverage and risk-based capital ratios for insured depository institutions. The Basel III changes and other regulatory capital requirements will likely result in generally higher regulatory capital standards for us.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct TerrorismPATRIOT Act of 2001 (the “PATRIOT Act”) and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the U.S. Treasury Department to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice,DOJ, Drug Enforcement Administration and Internal Revenue Service.IRS. There is also increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control (the “OFAC”).OFAC. If our policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that we have already acquired or may acquire in the future are deficient, we would be subject to liability, including fines and regulatory actions (such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans), which could materially and adversely affect us. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.
Federal, state and local consumer lending laws may restrict our ability to originate certain mortgage loans or increase our risk of liability with respect to such loans and could increase our cost of doing business.
Federal, state and local laws have been adopted that are intended to eliminate certain lending practices considered “predatory.” These laws prohibit practices such as steering borrowers away from more affordable products, selling unnecessary insurance to borrowers, repeatedly refinancing loans and making loans without a reasonable expectation that the borrowers will be able to repay the loans irrespective of the value of the underlying property. It is our policy not to make predatory loans, but these laws create the potential for liability with respect to our lending and loan investment activities. They increase our cost of doing business and, ultimately, may prevent us from making certain loans and cause us to reduce the average percentage rate or the points and fees on loans that we do make.
Loans that we make through certain federal programs are dependent on the Federal Government’s continuation and support of these programs and on our compliance with their requirements.
We participate in various U.S. Government agency guarantee programs, including PPP and other programs operated by the Small Business Administration.SBA. We are responsible for following all applicable U.S. Government agency regulations, guidelines and policies whenever we originate loans as part of these guarantee programs. If we fail to follow any applicable regulations, guidelines or policies associated with a particular guarantee program, any loans we originate as part of that program may lose the associated guarantee, exposing us to credit risk to which we would not otherwise have been exposed or underwritten as part of our origination process for U.S. Government agency guaranteed loans, or result in our inability to continue originating loans under such programs. The loss of any guarantees for loans we have extended under U.S. Government agency guarantee programs or the loss of our ability to participate in such programs could have a material adverse effect on our business, financial condition or results of operations.
In connection with our acquisition of the Disbursement business, we are subject to further substantial federal and state governmental regulation related to the Disbursement business that could change and thus force us to make modifications to the Disbursement business. Compliance with the various complex laws and regulations is costly and time consuming, and failure to comply could have a material adverse effect on our business. Additionally, increased regulatory requirements on the Disbursement business may increase costs, which could materially and adversely affect our business, financial condition and/or operating results.
As a third-party servicer under the Title IV regulations, we are directly or indirectly subject to a variety of federal and state laws and regulations. Our contracts with most of our higher education institution clients require us to comply with applicable laws and regulations, including:
Title IV of the Higher Education Act of 1965, or Title IV;
the Family Educational Rights and Privacy Act of 1975 ("FERPA");
the USA PATRIOT Act and related anti-money laundering requirements and
certain federal rules regarding safeguarding personal information, including rules implementing the privacy provisions of Gramm-Leach-Bliley Act of 1999 ("GLBA").
Higher Education Regulations
Third-Party Servicer. Because of the services we provide to some institutions with regard to the handling of Title IV funds, we are considered a “third-party servicer” under the Title IV regulations. Those regulations require a third-party servicer to submit annually a compliance audit conducted by outside independent auditors that cover the servicer’s Title IV activities. Each year we must submit a “Compliance Attestation Examination of the Title IV Student Financial Assistance Programs” audit to the Department of Education (“ED”), which includes a report by an independent audit firm. This yearly compliance audit submission to ED provides comfort to our higher education institution clients that we are in compliance with the third-party servicer regulations that may apply to us. We also provide this compliance audit report to clients upon request to help them fulfill their compliance audit obligations as Title IV participating institutions.
Under ED’s regulations, a third-party servicer that contracts with a Title IV institution acts in the nature of a fiduciary in the administration of Title IV programs. Among other requirements, the regulations provide that a third-party servicer is jointly and severally liable with its client institution for any liability to ED arising out of the servicer’s violation of Title IV or its implementing regulations, which could subject us to material fines related to acts or omissions of entities beyond our control. ED is also empowered to limit, suspend or terminate the violating servicer’s eligibility to act as a third-party servicer and to impose significant civil penalties on the violating servicer.
Additionally, on behalf of our higher education institution clients, we are required to comply with ED’s cash management regulations regarding payment of financial aid credit balances to students and providing bank accounts to students that may be used for receiving such payments. In the event ED concluded that we had violated Title IV or its implementing regulations and should be subject to one or more of these sanctions, our business and results of operations could be materially and adversely affected. There is limited enforcement and interpretive history of Title IV regulations.
On May 18, 2015, ED published its Notice of Proposed Rulemaking ("NPRM") on program integrity and improvement issues. Final rules relating to Title IV cash management were published in the Federal Register on October 30, 2015. The Final Rules included, among others, provisions related to (i) restrictions on the ability of higher education institutions and third-party servicers like we to market financial products to students including sending unsolicited debit cards to students, (ii) prohibitions on the assessment of certain types of account fees on student account holders and (iii) requirements related to ATM access for student account holders that became effective as of July 1, 2016. Although the complete impact of the Final Rules are unknown, there could be a significant negative impact on the Disbursement business and, in turn, our business.
FERPA. Our higher education institution clients are subject to FERPA, which provides, with certain exceptions, that an educational institution that receives any federal funding under a program administered by ED may not have a policy or practice of disclosing education records or “personally identifiable information” from education records, other than directory information, to third parties without the student’s or parent’s written consent. Our higher education institution clients that use the Disbursement business services disclose to us certain non-directory information concerning their students, including contact information, student identification numbers and the amount of students’ credit balances. We believe that our higher education
institution clients may disclose this information to us without the students’ or their parents’ consent pursuant to one or more exceptions under FERPA. However, if ED asserts that we do not fall into one of these exceptions or if future changes to legislation or regulations require student consent before our higher education institution clients can disclose this information to us, a sizable number of students may cease using our products and services, which could materially and adversely affect our business, financial condition and results of operations.
Additionally, as we are indirectly subject to FERPA, we may not permit the transfer of any personally identifiable information to another party other than in a manner in which a higher education institution may disclose it. In the event that we re-disclose student information in violation of this requirement, FERPA requires our clients to suspend our access to any such information for a period of five years. Any such suspension could have a material adverse effect on our business, financial condition and results of operations.
State Laws. We may also be subject to similar state laws and regulations, including those that restrict higher education institutions from disclosing certain personally identifiable information of students. State attorneys general and other enforcement agencies may monitor our compliance with state and federal laws and regulations that affect our business, including those pertaining to higher education and banking, and conduct investigations of our business that are time consuming and expensive and could result in fines and penalties that have a material adverse effect on our business, financial condition and results of operations.
Additionally, individual state legislatures may propose and enact new laws that restrict or otherwise affect our ability to offer our products and services as we currently do, which could have a material adverse effect on our business, financial condition and results of operations.Taxes
Reviews performed by the Internal Revenue Service and state taxing authorities for the fiscal years that remain open for investigation may result in a change to income taxes recorded in our consolidated financial statements and adversely affect our results of operations.
We are subject to U.S. federal income tax as well as income tax of various states primarily in the mid-Atlantic region of the United States. Years that remain open for potential reviewGenerally, Customers is no longer subject to examination by (i) the Internal Revenue Service are 2014 through 2016federal, state, and (ii) statelocal taxing authorities are 2012 through 2016.for years prior to the year ended December 31, 2018. Customers is currently under audit by New York for the 2015-2017 tax years and by New York City for the 2016-2017 tax years. The results of these reviews could result in increased recognition of income tax expense in our consolidated financial statements as well as possible fines and penalties.
Our financial results may be adversely affected by changesChanges in U.S. and non-U.S.federal, state or local tax and other laws and regulations.
On December 22, 2017, the 2017 Tax Cuts and Jobs Act was signed into law. The Act, among other things, reduced our corporate federal tax rate from 35% to 21% effective January 1, 2018. Because the applicable accounting guidance requires us to remeasure our deferred tax assets and liabilities through income tax expense using the enacted rate at which we expect the items to be recovered or settled during the period in which the new law was enacted, we recorded an adjustment of $5.5 million in fourth quarter 2017 that increased income tax expense.
Also on December 22, 2017, the SEC released Staff Accounting Bulletin No. 118 to address any uncertainty or diversity in practice in accounting for the income tax effects of the Act in situations in which management does not have the necessary information available, prepared or analyzed in reasonable detail to complete the required accounting during the period of enactment. SAB 118 allows for a measurement period not to extend beyond one year of the Act's enactment date to complete the necessary accounting.
We are currently analyzing the income tax effects of all of the provisions included in the Act and will record adjustments to income tax expense during the period in which the information becomes available, but not to extend beyond December 22, 2018. To the extent further write-downs are required on our net deferred tax asset,may negatively impact our financial condition and results of operations could be materially and adversely affected.
performance.
We are subject to heightened regulatory requirements because we previously exceeded $10 billionchanges in assets.
At June 30, 2017, and September 30, 2017, our total assets were $10.9 billion and $10.5 billion, respectively. The Dodd-Frank Act and its implementing regulations impose various additional requirements on bank holding companies with $10 billion or more in total assets, including compliance with portions of the Federal Reserve’s enhanced prudential oversight requirements and annual stress testing requirements. In addition, banks with $10 billion or more in total assets are also supervised by the Consumer Financial Protection Bureau with respecttax law that could increase Customers' effective tax rates. These law changes may be retroactive to various federal consumer financial protection laws and regulations.
Currently, we are subject to regulations adopted by the CFPB and the Federal Reserve, and both the Federal Reserve and the CFPB are responsible for examining our bank’s compliance with consumer protection laws and those CFPB regulations. Since the CFPB is a relatively new agency with evolving regulations and practices, there is uncertainty as to how the CFPB’s examination and regulatory authority might impact our business.
Compliance with these requirements may necessitate that we hire additional compliance or other personnel, design and implement additional internal controls, or incur other significant expenses, any of which could have a material adverse effect on our business, financial condition or results of operations. Compliance with the annual stress testing requirements, part of which must be publicly disclosed, may also be misinterpreted by the market generally or our customersprevious periods and as a result may adverselycould negatively affect our stock price or ourCustomers' current and future financial performance. In December 2017, the Tax Act was signed into law, which resulted in significant changes to the Code. The Tax Act reduced Customers' Federal corporate income tax rate to 21% beginning in 2018. However, the Tax Act also imposed limitations on Customers' ability to retaintake certain deductions, such as the deduction for FDIC deposit insurance premiums, which partially offset the increase in net income from the lower tax rate.
In addition, a number of the changes to the Code were introduced through the CARES Act and the CAA, and some of the provisions are set to expire in future years. There is substantial uncertainty concerning whether those expiring provisions will be extended, or whether future legislation will further revise the Code. Also, the current administration has indicated it may propose increases to the federal corporate statutory tax rate. An increase in the federal corporate tax rate may increase our customerstax provision expense. We are unable to predict whether these changes, or effectively compete for new business opportunities. To ensure complianceother proposals, will ultimately be enacted.
We are Subject to Regulatory Restrictions on Transactions with these heightened requirements when effective, our regulatorsOur Affiliates and Related Parties. Failure to Comply with Such Regulations Could Materially and Adversely Affect Us.
There are various legal restrictions on the extent to which the Company may require usborrow or otherwise engage in certain types of transactions with the Bank or their respective affiliates and related parties. Under the Federal Reserve Act and the Federal Reserve’s Regulation W, the Bank is subject to fully complyquantitative and qualitative limits on extensions of credit (including credit exposure arising from repurchase and reverse repurchase agreements, securities borrowing and derivative transactions), purchases of assets, and certain other transactions with these requirementsthe Company or take actions to prepare for compliance even before weits other affiliates. Additionally, transactions between the Bank, on the one hand, and the Company or its affiliates, on the other hand, are required to do so. As a result, webe on arm’s length terms. Transactions between the Bank and its affiliates must be consistent with standards of safety and soundness. The Bank has had, and may incur compliance-related costs before we might otherwise be required, including if we do not continueexpected to grow athave in the rate we expectfuture, banking and other business transactions in the ordinary course of business with affiliates of the Company and the Bank, and their respective executive officers, directors, principal shareholders, their immediate families and affiliated companies (commonly referred to as related parties). The failure of the
Company or at all. Our regulators may also consider our preparation for compliancethe Bank to comply with thesethe regulatory requirements when examining our operations generally or considering any request for regulatory approval we may make, even requests for approvals on unrelated matters.
restrictions applicable to Customers and the Bank could materially and adversely affect the Company and the Bank.
Risks RelatingRelated to Our Securities
Risks RelatingRelated to Our Voting Common Stock
The trading volume in our common stock may generally be less than that of other larger financial services companies.
Although the shares of our common stock are listed on the New York Stock Exchange,NYSE, the trading volume in our common stock may generally be less than that of many other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends upon the presence in the marketplace of willing buyers and sellers of our common stock at any given time, which presence will be dependent upon the individual decisions of investors, over which we have no control. Illiquidity of the stock market, or in the trading of our common stock on the New York Stock Exchange,NYSE, could have a material adverse effect on the value of your shares, particularly if significant sales of our common stock, or the expectation of significant sales, were to occur.
We do not expect to pay cash dividends on our common stock in the foreseeable future, and our ability to pay dividends is subject to regulatory limitations.
We have not historically declared nor paid cash dividends on our common stock, and we do not expect to do so in the near future. Any future determination relating to our dividend policy will be made at the discretion of our 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, the ability to service any equity or debt obligations senior to the common stock, our planned growth in assets and other factors deemed relevant by the board of directors. We must be current in the payment of dividends to holders of our Series C, Series D, Series E and Series F Preferred Stock before any dividends can be paid on our common stock.
In addition, as a bank holding company, we are subject to general regulatory restrictions on the payment of cash and in-kind dividends. Federal bank regulatory agencies have the authority to prohibit bank holding companies from engaging in unsafe or unsound practices in conducting their business, which, depending on the financial condition and liquidity of the holding company at the time, could include the payment of dividends. Further, various federal and state statutory provisions limit the amount of dividends that our bank subsidiary can pay to us as its holding company without regulatory approval. See “Market Price of Common Stock and Dividends – Dividends on Common Stock” below for further detail regarding restrictions on our ability to pay dividends.
We may issue additional shares of our common stock in the future which could adversely affect the value or voting power of our outstanding common stock.
Actual or anticipated issuances or sales of substantial amounts of our common stock in the future could cause the value of our common stock to decline significantly and make it more difficult for us to sell equity or equity-related securities in the future at a time and on terms that we deem appropriate. The issuance of any shares of our common stock in the future also would, and equity-related securities could, dilute the percentage ownership interest held by shareholders prior to such issuance. Actual issuances of our common stock could also significantly dilute the voting power of the common stock.
We have also made grants of restricted stock units and stock options with respect to shares of our common stock to our directors and certain team members. We may also issue further equity-based awards in the future. As such shares are issued upon vesting and as such options may be exercised and the underlying shares are or become freely tradeable, the value or voting power of our common stock may be adversely affected, and our ability to sell more equity or equity-related securities could also be adversely affected.
Except for 35,187 warrants held by certain investors atAt December 31, 2017,2021, we are not required to issue any additional equity securities to existing holders of our common stock on a preemptive basis. Therefore, additional common stock issuances, directly or through convertible or exchangeable securities, warrants or options, will generally dilute the holdings of our existing holders of common stock, and such issuances or the perception of such issuances may reduce the market price of our common stock. Our outstanding preferred stock has preference on distribution payments, periodically or upon liquidation, which could eliminate or otherwise limit our ability to make distributions to holders of our common stock. Because our decision to issue debt or equity securities or incur other borrowings in the future will depend on market conditions and other factors beyond our control, the amount, timing, nature or success of our future capital-raising efforts is uncertain. Thus, holders of our common stock bear the risk that our future issuances of debt or equity securities or our incurrence of other borrowings will negatively affect the value of our common stock.
Future issuances of debt securities, which would rank senior to our common stock upon our liquidation, and future issuances of equity securities, which would dilute the holdings of our existing holders of common stock and may be senior to our common stock for the purposes of making distributions, periodically or upon liquidation, may negatively affect the market price of our common stock.
In the future, we may issue additional debt or equity securities or incur other borrowings. Upon our liquidation, holders of our debt securities and other loans and preferred stock will receive a distribution of our available assets before holders of our common stock. If we incur debt in the future, our future interest costs could increase and adversely affect our liquidity, cash flows and results of operations.
Provisions in our articles of incorporation and bylaws may inhibit a takeover of us, which could discourage transactions that would otherwise be in the best interests of our shareholders and could entrench management.
Provisions of our articles of incorporation and bylaws and applicable provisions of Pennsylvania law and the federal Change in Bank Control ActCBCA may delay, inhibit or prevent someone from gaining control of our business through a tender offer, business combination, proxy contest or some other method even though some of our shareholders might believe a change in control is desirable. They might also increase the costs of completing a transaction in which we acquire another financial services business, merge with another financial institution or sell our business to another financial institution. These increased costs could reduce the value of the shares held by our shareholders upon completion of these types of transactions.
Shareholders may be deemed to be acting in concert or otherwise in control of us and our bank subsidiaries, which could impose prior approval requirements and result in adverse regulatory consequences for such holders.
We are a bank holding company regulated by the Federal Reserve. Any entity (including a “group” composed of natural persons) owning 25% or more of a class of our outstanding shares of voting stock, or a lesser percentage if such holder or group otherwise exercises a “controlling influence” over us, may be subject to regulation as a “bank holding company” in accordance with the Bank Holding Company Act of 1956, as amended (the “BHCA”).BHCA. In addition, (i) any bank holding company or foreign bank with a U.S. presence is required to obtain the approval of the Federal Reserve under the BHCA to acquire or retain 5% or more of a class of our outstanding shares of voting stock and (ii) any person other than a bank holding company may be required to obtain prior regulatory approval under the Change in Bank Control ActCBCA to acquire or retain 10% or more of our outstanding shares of voting stock. Any shareholder that is deemed to “control” the company for bank regulatory purposes would become subject to prior approval requirements and ongoing regulation and supervision. Such a holder may be required to divest amounts equal to or exceeding 5% of the voting shares of investments that may be deemed incompatible with bank holding company status, such as an investment in a company engaged in non-financial activities. Regulatory determination of “control” of a depository institution or holding company is based on all of the relevant facts and circumstances. Potential investors are advised to consult with their legal counsel regarding the applicable regulations and requirements.
Our common stock owned by holders determined by a bank regulatory agency to be acting in concert would be aggregated for purposes of determining whether those holders have control of a bank or bank holding company. Each shareholder obtaining control that is a “company” would be required to register as a bank holding company. “Acting in concert” generally means knowing participation in a joint activity or parallel action towards the common goal of acquiring control of a bank or a parent company, whether or not pursuant to an express agreement. The manner in which this definition is applied in individual
circumstances can vary and cannot always be predicted with certainty. Many factors can lead to a finding of acting in concert, including where: (i) the shareholders are commonly controlled or managed; (ii) the shareholders are parties to an oral or written agreement or understanding regarding the acquisition, voting or transfer of control of voting securities of a bank or bank holding company; (iii) the shareholders each own stock in a bank and are also management officials, controlling shareholders, partners or trustees of another company or (iv) both a shareholder and a controlling shareholder, partner, trustee or management official of such shareholder own equity in the bank or bank holding company.
Our directors and executive officers can influence the outcome of shareholder votes and, in some cases, shareholders may not have the opportunity to evaluate and affect the investment decision regarding potential investment, acquisition or disposition transactions.
As of December 31, 2021, our directors and executive officers, as a group, owned a total of 1,985,108 shares of common stock and exercisable options to purchase up to an additional 100,000 shares of common stock, which potentially gives them, as a group, the ability to control approximately 6.34% of the outstanding common stock. In addition, two directors of Customers Bank who are not directors of Customers Bancorp own an additional 142,158 shares of common stock, which if combined with the directors and officers of Customers Bancorp, potentially gives them, as a group, the ability to control approximately 6.77% of the outstanding common stock. We believe ownership of stock causes directors and officers to have the same interests as shareholders, but it also gives them the ability to vote as shareholders for matters that are in their personal interest, which may be contrary to the wishes of other shareholders. Shareholders will not necessarily be provided with an opportunity to evaluate the specific merits or risks of one or more potential investment, acquisition or disposition transactions. Any decision regarding a potential investment or acquisition transaction will be made by our board of
directors. Except in limited circumstances as required by applicable law, consummation of an acquisition will not require the approval of holders of common stock. Accordingly, shareholders may not have an opportunity to evaluate and affect the board of directors' decision regarding most potential investment or acquisition transactions and/or certain disposition transactions.
The FDIC’s policy statement imposing restrictions and criteria on private investors in failed bank acquisitions will apply to us and our investors.
In August 2009, the FDIC issued a policy statement imposing restrictions and criteria on private investors in failed bank acquisitions. The policy statement is broad in scope and both complex and potentially ambiguous in its application. In most cases, it would apply to an investor with more than 5% of the total voting power of an acquired depository institution or its holding company; but in certain circumstances, it could apply to investors holding fewer voting shares. The policy statement will be applied to us if we make additional failed bank acquisitions from the FDIC or if the FDIC changes its interpretation of the policy statement or determines at some future date that it should be applied because of our circumstances.
Investors subject to the policy statement could be prohibited from selling or transferring their interests for three years. They also would be required to provide the FDIC with information about the investor and all entities in the investor’s ownership chain, including information on the size of the capital fund or funds, its diversification, its return profile, its marketing documents, and its management team and business model. Investors owning 80% or more of two or more banks or savings associations would be required to pledge their proportionate interests in each institution to cross-guarantee the FDIC against losses to the Deposit Insurance Fund.
DIF.
Under the policy statement, the FDIC also could prohibit investment through ownership structures involving multiple investment vehicles that are owned or controlled by the same parent company. Investors that directly or indirectly hold 10% or more of the equity of a bank or savings association in receivership also would not be eligible to bid to become investors in the deposit liabilities of that failed institution. In addition, an investor using ownership structures with entities that are domiciled in bank-secrecy jurisdictions would not be eligible to own a direct or indirect interest in an insured depository institution unless the investor’s parent company is subject to comprehensive consolidated supervision as recognized by the Federal Reserve, and the investor enters into certain agreements with the U.S. bank regulators regarding access to information, maintenance of records and compliance with U.S. banking laws and regulations. If the policy statement applies, we (including any failed bank we acquire) could be required to maintain a ratio of Tier 1 common equity to total assets of at least 10% for a period of three years and thereafter maintain a capital level sufficient to be well capitalized under regulatory standards during the remaining period of ownership of the investors. Bank subsidiaries also may be prohibited from extending any new credit to investors that own at least 10% of our equity.
Risks RelatingRelated to Our Fixed-to-Floating-Rate Non-Cumulative Perpetual Preferred Stock, Series C, Series D, Series E and Series F
The shares of our Series C, Series D, Series E and Series F Preferred Stock are equity securities and are subordinate to our existing and future indebtedness.
The shares of Series C, Series D, Series E and Series F Preferred Stock are equity interests in Customers Bancorp and do not constitute indebtedness of Customers Bancorp or any of our subsidiaries and rank junior to all of our existing and future indebtedness and other non-equity claims with respect to assets available to satisfy claims against us, including claims in the event of our liquidation. During the year ended December 31, 2021, we redeemed all of the outstanding shares of Series C and Series D Preferred Stock. If we are forced to liquidate our assets to pay our creditors, we may not have sufficient funds to pay amounts due on any or all of the Series C, Series D, Series E and Series F Preferred Stock then outstanding.
We may not pay dividends on the shares of Series C, Series D, Series E and Series F Preferred Stock.
Dividends on the shares of Series C, Series D, Series E and Series F Preferred Stock are payable only if declared by our board of directors or a duly authorized committee of the board. As a bank holding company, we are subject to general regulatory restrictions on the payment of cash dividends. Federal bank regulatory agencies have the authority to prohibit bank holding companies from engaging in unsafe or unsound practices in conducting their business, which, depending on the financial condition and liquidity of the holding company at the time, could include the payment of dividends. Further, various federal and state statutory provisions limit the amount of dividends that our bank subsidiary can pay to us as its holding company without regulatory approval.
Dividends on the shares of Series C, Series D, Series E and Series F Preferred Stock are non-cumulative.
Dividends on the shares of Series C, Series D, Series E and Series F Preferred Stock are payable only when, as and if authorized and declared by our board of directors or a duly authorized committee of the board. Consequently, if our board of directors or a duly authorized committee of the board does not authorize and declare a dividend for any dividend period, holders of the Series C, Series D, Series E and Series F Preferred Stock will not be entitled to receive any such dividend, and such unpaid dividend will cease to accrue or be payable. If we do not declare and pay
dividends on the Series C, Series D, Series E and Series F Preferred Stock, the market prices of the shares of Series C, Series D, Series E and Series F Preferred Stock may decline.
Our ability to pay dividends on the shares of Series C, Series D, Series E and Series F Preferred Stock is dependent on dividends and distributions we receive from our subsidiaries, which are subject to regulatory and other limitations.
Our principal source of cash flow is dividends from Customers Bank. We cannot assure you that Customers Bank will, in any circumstances, pay dividends to us. If Customers Bank fails to make dividend payments or other permitted distributions to us, and sufficient cash is not otherwise available, we may not be able to make dividend payments on the Series C, Series D, Series E and Series F Preferred Stock. Various federal and state statutes, regulations and rules limit, directly or indirectly, the amount of dividends that our banking and other subsidiaries may pay to us without regulatory approval. In particular, dividend and other distributions from Customers Bank to us would require notice to or approval of the applicable regulatory authority. There can be no assurances that we would receive such approval.
In addition, our right to participate in any distribution of assets of any of our subsidiaries upon the subsidiary’s liquidation or otherwise, and, as a result, the ability of a holder of Series C, Series D, Series E and Series F Preferred Stock to benefit indirectly from such distribution, will be subject to the prior claims of preferred equity holders and creditors of that subsidiary, except to the extent that any of our claims as a creditor of such subsidiary may be recognized. As a result, shares of the Series C, Series D, Series E and Series F Preferred Stock are effectively subordinated to all existing and future liabilities and any outstanding preferred equity of our subsidiaries.
Holders of Series C, Series D, Series E and Series F Preferred Stock should not expect us to redeem their shares when they first become redeemable at our option or on any particular date thereafter, and our ability to redeem the shares will be subject to the prior approval of the Federal Reserve.
Our Series C, Series D, Series E and Series F Preferred Stock are perpetual equity securities, meaning that they have no maturity date or mandatory redemption date, and the shares are not redeemable at the option of the holders thereof. AnyDuring the year ended December 31, 2021, we redeemed all of the outstanding shares of Series C and Series D Preferred Stock. However, any determination we make at any time to propose a redemption of the Series C, Series D, Series E and Series F Preferred Stock will depend upon a number of factors, including our evaluation of our capital position, the composition of our shareholders’ equity and general market conditions at that time. In addition, our right to redeem the Series C, Series D, Series E and Series F Preferred Stock is subject to any limitations established by the Federal Reserve. Under the Federal Reserve’s risk-based capital guidelines applicable to bank holding companies, any redemption of the Series C, Series D, Series E and Series F Preferred Stock is subject to prior approval of the Federal Reserve. There can be no assurance that the Federal Reserve will approve any such redemption.
We may be able to redeem the Series C, Series D, Series E and Series F Preferred Stock before their initial redemption dates upon a “regulatory capital treatment event.”
We may be able to redeem the Series C, Series D, Series E and Series F Preferred Stock before their respective initial redemption dates, in whole but not in part, upon the occurrence of certain events involving the capital treatment of the Series C, Series D, Series E and Series F Preferred Stock, as applicable. In particular, upon our determination in good faith that an event has occurred that would constitute a “regulatory capital treatment event,” with respect to a particular series of the preferred stock, we may redeem that particular series of securities in whole, but not in part, upon the prior approval of the Federal Reserve.
Holders of Series C, Series D, Series E and Series F Preferred stock have limited voting rights.
Holders of Series C, Series D, Series E and Series F Preferred Stock have no voting rights with respect to matters that generally require the approval of voting shareholders. However, holders of Series C, Series D, Series E and Series F Preferred Stock will have the right to vote in the event of non-payments of dividends under certain circumstances, with respect to authorizing classes or series of preferred stock senior to the Series C, Series D, Series E and Series F Preferred Stock, as applicable, and
with respect to certain fundamental changes in the terms of the Series C, Series D, Series E and Series F Preferred Stock, as applicable, or as otherwise required by law.
General market conditions and unpredictable factors could adversely affect market prices for the Series C, Series D, Series E and Series F Preferred Stock.
There can be no assurance regarding the market prices for the Series C, Series D, Series E and Series F Preferred Stock. A variety of factors, many of which are beyond our control, could influence the market prices, including:
•whether we declare or fail to declare dividends on the series of preferred stock from time to time;
•our operating performance, financial condition and prospects or the operating performance, financial condition and prospects of our competitors;
•real or anticipated changes in the credit ratings (if any) assigned to the Series C, Series D, Series E and Series F Preferred Stock or our other securities;
•our creditworthiness;
•changes in interest rates and expectations regarding changes in rates;
•our issuance of additional preferred equity;
•the market for similar securities;
•developments in the securities, credit and housing markets, and developments with respect to financial institutions generallygenerally; and
•economic, financial, corporate, securities market, geopolitical, regulatory or judicial events that affect us, the banking industry or the financial markets generally.
The Series C, Series D, Series E and Series F Preferred Stock may not have an active trading market.
Although the shares of Series C, Series D, Series E and Series F Preferred Stock are listed on the New York Stock Exchange,NYSE, an active trading market may not be established or maintained for the shares, and transaction costs could be high. As a result, the difference between bid and ask prices in any secondary market could be substantial.
The Series C, Series D, Series E and Series F Preferred Stock may be junior or equal in rights and preferences to preferred stock we may issue in the future.
Our Series C, Series D, Series E and Series F Preferred Stock rank equally. Although we do not currently have outstanding preferred stock that ranks senior to the Series C, Series D, Series E and Series F Preferred Stock, the Series C, Series D, Series E and Series F Preferred Stock may rank junior to other preferred stock we may issue in the future that by its terms is expressly senior in rights and preferences to the Series C, Series D, Series E and Series F Preferred Stock, although the affirmative vote or consent of the holders of at least two-thirds of all outstanding shares of the affected class of preferred stock is required to issue any shares of stock ranking senior in rights and preferences to such class. Any preferred stock that ranks senior to the Series C, Series D, Series E and Series F Preferred Stock in the future would have priority in payment of dividends and the making of distributions in the event of any liquidation, dissolution or winding up of Customers Bancorp. Additional issuances by us of preferred stock ranking equally with Series C, Series D, Series E and Series F Preferred Stock do not generally require the approval of holders of the Series C, Series D, Series E and Series F Preferred Stock.
Risks RelatingRelated to Our Debt Securities
Senior Notes and Subordinated Notes
Our 6.375%2.875% Senior Notes, 4.625%4.5% Senior Notes, 3.95% Senior Notes, 6.125% Subordinated Notes and 5.375% Subordinated Notes contain limited covenants.
The terms of our 2.875% Senior Notes, 4.5% Senior Notes and 3.95% Senior Notes, contain limited covenants.
The terms of our 6.375% Senior Notes, 4.625%which we refer to as the Senior Notes, and 3.95% Senior6.125% and 5.375% Subordinated Notes, which we refer to as the Subordinated Notes, generally do not prohibit us from incurring additional debt or other liabilities. If we incur additional debt or liabilities, our ability to pay our obligations on the 6.375% Senior Notes, 4.625% Senior Notes and 3.95% SeniorSubordinated Notes could be adversely affected. In addition, the terms of our 6.375% Senior Notes, 4.625% Senior Notes and 3.95% SeniorSubordinated Notes do not require us to maintain any financial ratios or
specific levels of net worth, revenues, income, cash flows or liquidity and, accordingly, do not protect holders of those notes in the event that we experience material adverse changes in our financial condition or results of operations. Holders of the 6.375% Senior Notes, 4.625% Senior Notes and 3.95% SeniorSubordinated Notes also have limited protection in the event of a highly leveraged transaction, reorganization, default under our existing indebtedness, restructuring, merger or similar transaction.
Our ability to make interest and principal payments on the 6.375% Senior Notes, 4.625% Senior Notes and 3.95% SeniorSubordinated Notes is dependent on dividends and distributions we receive from our subsidiaries, which are subject to regulatory and other limitations.
Our principal source of cash flow is dividends from Customers Bank. We cannot assure you that Customers Bank will, in any circumstances, pay dividends to us. If Customers Bank fails to make dividend payments to us, and sufficient cash is not otherwise available, we may not be able to make interest and principal payments on the 6.375% Senior Notes, 4.625% Senior Notes and 3.95% SeniorSubordinated Notes. Various federal and state statutes, regulations and rules limit, directly or indirectly, the amount of dividends that our banking and other subsidiaries may pay to us without regulatory approval. In particular, dividend and other distributions from Customers Bank to us would require notice to or approval of the applicable regulatory authority. There can be no assurances that we would receive such approval.
In addition, our right to participate in any distribution of assets of any of our subsidiaries upon the subsidiary’s liquidation or otherwise, and, as a result, the ability of a holder of the 6.375%2.875% Senior Notes, 4.625%4.5% Senior Notes and 3.95% Senior Notes to benefit indirectly from such distribution will be subject to the prior claims of preferred equity holders and creditors of that subsidiary, except to the extent that
any of our claims as a creditor of such subsidiary may be recognized. As a result, the 6.375%2.875% Senior Notes, 4.625%4.5% Senior Notes and 3.95% Senior Notes are effectively subordinated to all existing and future liabilities and any outstanding preferred equity of our subsidiaries.
We may not be able to generate sufficient cash to service our debt obligations, including our obligations under the 6.375% Senior Notes, 4.625% Senior Notes and 3.95% SeniorSubordinated Notes.
Our ability to make payments on and to refinance our indebtedness, including the 6.375% Senior Notes, 4.625% Senior Notes and 3.95% SeniorSubordinated Notes will depend on our financial and operating performance, including dividends payable to us from Customers Bank, which are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness, including the notes.
If our cash flows and capital resources and dividends from Customers Bank are insufficient to fund our debt service obligations, we may be unable to provide new loans, other products or to fund our obligations to existing customers and otherwise implement our business plans. As a result, we may be unable to meet our scheduled debt service obligations. In the absence of sufficient operating results and resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations or seek to restructure our indebtedness, including the notes. We may not be able to consummate these transactions, and these proceeds may not be adequate to meet our debt service obligations thenwhen due.
The 6.375% Senior Notes, 4.625% Senior Notes and 3.95% SeniorSubordinated Notes are our unsecured obligations. The 6.375% Senior Notes, 4.625% Senior Notes and 3.95% Senior Notes will rank equal in right of payment with all of our secured and unsecured senior indebtedness and will rank senior in right of payment to all of our subordinated indebtedness. Although the 6.375% Senior Notes, 4.625% Senior Notes and 3.95% Senior Notes are “senior notes,” they will be effectively subordinate to all liabilities of our subsidiaries, includingsubsidiaries. Because the Senior Notes are unsecured, they will be effectively subordinated to all of our future secured senior indebtedness to the extent of the value of the assets securing such indebtedness.
The 6.375%Subordinated Notes will rank equal in right of payment with all of our secured and unsecured subordinated indebtedness and will rank junior in right of payment to all of our senior indebtedness, including the Senior Notes. As is the case with the Senior Notes, 4.625%the Subordinated Notes are effectively subordinated to all liabilities of our subsidiaries. Because the Subordinated Notes are unsecured, they will be effectively subordinated to all of our future secured subordinated indebtedness to the extent of the value of the assets securing such indebtedness.
The Senior Notes and 3.95% SeniorSubordinated Notes may not have an active trading market.
Although the 6.375% Senior Notes are listed on the New York Stock Exchange, an active trading market may not be established or maintained for those notes, and transaction costs could be high. The 4.625% Senior Notes and 3.95% Senior6.125% Subordinated Notes are not listed on any securities exchange, and there is no active trading market for these notes. Although the 5.375% Subordinated Notes are listed on the NYSE, there is no guarantee that a trading market will develop or be maintained. In addition to the other factors described below, the lack of a trading market for the 4.625% Senior Notes and 3.95% SeniorSubordinated Notes may adversely affect the holder’s ability to sell the notes and the prices at which the notes may be sold.
The prices realizable from sales of the 6.375% Senior Notes, 4.625% Senior Notes and 3.95% SeniorSubordinated Notes in any secondary market also will be affected by the supply and demand of the notes, the interest rate, the ranking and a number of other factors, including:
•yields on U.S. Treasury obligations and expectations about future interest rates;
•actual or anticipated changes in our financial condition or results, including our levels of indebtedness;
•general economic conditions and expectations regarding the effects of national policies;
•investors’ views of securities issued by both holding companies and similar financial service firmsfirms; and
•the market for similar securities.
Downgrades in U.S. government and federal agency securities could adversely affect us.
The long-term impact of the downgrade of the U.S. government and federal agencies from an AAA to an AA+ credit rating is still uncertain. However, in addition to causing economic and financial market disruptions, the downgrade, and any future downgrades and/or failures to raise the U.S. debt limit if necessary in the future, could, among other things, materially adversely affect the market value of the U.S. and other government and governmental agency securities owned by us, the availability of those securities as collateral for borrowing and our ability to access capital markets on favorable terms, as well as have other material adverse effects on the operation of our business and our financial results and condition. In particular, it could increase interest rates and disrupt payment systems, money
markets, and long-term or short-term fixed-income markets, adversely affecting the cost and availability of funding, which could negatively affect profitability. Also, the adverse consequences as a result of the downgrade could extend to the borrowers of the loans we make and, as a result, could adversely affect our borrowers’ ability to repay their loans.
We may not be able to maintain consistent earnings or profitability.
Although we made profit for the years 2011 through 2021, there can be no assurance that we will be able to remain profitable in future periods, or, if profitable, that our overall earnings will remain consistent or increase in the future. Our earnings also may be reduced by increased expenses associated with increased assets, such as additional team member compensation expense, and increased interest expense on any liabilities incurred or deposits solicited to fund increases in assets. If earnings do not grow proportionately with our assets or equity, our overall profitability may be adversely affected.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Customers leases its Corporate headquarters located at 701 Reading Avenue, West Reading, PA 19611, and its Bank headquarters at 99 Bridge St., Phoenixville, PA 19460. The table below summarizesBank plans to relocate its home office to Malvern, Pennsylvania in the second quarter of 2022. Customers also leases all of Customers' locations. It includes our leased branch,its branches, limited purpose, and administrative office properties by county and state, as of December 31, 2017.from third parties. Customers believes that its offices are sufficient for its present operations.
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Bank Branches |
County | State | Leased |
Berks (1) | PA | 4 |
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Bucks | PA | 3 |
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Chester (2) | PA | 2 |
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Delaware | PA | 2 |
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Westchester | NY | 1 |
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Mercer | NJ | 1 |
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| | 13 |
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| | | |
Limited Purpose and Administrative Offices |
County | State | Leased |
Berks (3) | PA | 3 |
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Bucks (6) | PA | 1 |
|
Chester (2) | PA | 2 |
|
Delaware (7) | PA | 2 |
|
Lancaster (14) | PA | 1 |
|
Philadelphia (8) | PA | 1 |
|
Fairfax (9) | VA | 1 |
|
Mercer (4) | NJ | 1 |
|
Morris (14) | NJ | 1 |
|
New Haven (16) | CT | 1 |
|
New York (10) | NY | 3 |
|
Westchester (5) | NY | 2 |
|
Suffolk (13) | NY | 1 |
|
Providence (11) | RI | 1 |
|
Rockingham (15) | NH | 1 |
|
Suffolk (12) | MA | 1 |
|
Fayette (17) | GA | 1 |
|
Bergen (18) | NJ | 1 |
|
Cook (19) | IL | 1 |
|
Los Angeles (20) | CA | 1 |
|
| | 27 |
|
| |
(1) | Includes the full service branch at 1001 Penn Avenue, Wyomissing, PA as well as three branches acquired through the Berkshire Bancorp, Inc. acquisition. The lease expirations range from 2020 to 2021. |
| |
(2) | Includes the corporate headquarters of Customers Bank and a full service branch located in a freestanding building at 99 Bridge St., Phoenixville, PA 19460, wherein we lease approximately 31,054 square feet on 4 floors. The lease on this location expires in 2023. Also includes the lease of 5,523 square feet of property at 513 Kimberton Road in Phoenixville, PA where we maintain a full service commercial bank branch and corporate offices. The lease on this location expires in 2019. This excludes a branch located at 215 Lancaster Avenue in Malvern, PA that was closed in October 2017 with an existing lease which expires in 2019. |
| |
(3) | Includes the corporate headquarters of Customers Bancorp and a full service branch located at 1015 Penn Avenue, Wyomissing, PA. The leased space covers a total of 23,719 square feet. This lease expires in 2020. Also, includes the leased administrative offices for the corporate lending group which is housed within the Exeter branch location, expiring in 2021, and an administrative office for Customers personnel in Shillington, PA, expiring in 2018. |
| |
(4) | Includes 7,327 square feet of leased space in Hamilton, NJ from which we conduct our mortgage warehouse activities. The lease on this location expires in 2019. |
| |
(5) | Represents administrative offices for Customers personnel. The leases at these locations expire in 2019 and 2022. |
| |
(6) | Represents administrative offices for Customers personnel. The lease on this location expires in 2025. |
| |
(7) | Includes an administrative office for Customers personnel with a lease expiring in 2018. Also, includes a leased administrative office for BankMobile personnel with a lease expiring in 2022. |
| |
(8) | Represents limited purpose office for Customers personnel. The lease on this location expires in 2023. |
| |
(9) | Represents limited purpose office. The space is currently sublet to a third party. The lease on this location expires in 2019. |
| |
(10) | Represents limited purpose offices. One location is currently sublet to a third party (expires in 2020). Our new location, utilized for Customers personnel, expires in 2027. Also includes one administrative office for Customers personnel under a month-to-month lease. |
| |
(11) | Represents limited purpose office for Customers personnel. The lease on this location expires in 2021. |
| |
(12) | Represents limited purpose office for Customers personnel. The lease on this location expires in 2019. |
| |
(13) | Represents limited purpose office for Customers personnel. The lease on this location expires in 2025. |
| |
(14) | Represents administrative office for Customers personnel. The lease on this location expires in 2018. |
| |
(15) | Represents limited purpose office for Customers personnel. The lease on this location expires in 2018. |
| |
(16) | Includes facilities utilized by BankMobile for the acquired Disbursement business. The lease on this location expires in 2022. |
| |
(17) | Represents limited purpose office for Customers personnel. The lease on this location expires in 2018. |
| |
(18) | Represents limited purpose office for Customers personnel. The lease on this location expires in 2018. |
| |
(19) | Represents limited purpose office for Customers personnel. The lease on this location expires in 2019. |
| |
(20) | Represents limited purpose office for Customers personnel. The lease on this location expires in 2018. |
The Bank branch locations, which range in size from approximately 1,500 to 6,100 square feet, have leases on these locations which expire between 2018 and 2025.
The total minimum net cash lease payments for our current branches, administrative offices and mortgage warehouse lending locations amount to approximately $458,000 per month.
Item 3. Legal Proceedings
For information on Customers' legal proceedings, refer to "NOTE 22 – LOSS CONTINGENCIES" to Customers' audited financial statements.
Edelman Matter
On April 13, 2017, a class action complaint captioned Shaya Edelman, individually, and on behalf of all others similarly situated v. Higher One Holdings, Inc., WEX Bank, Inc., and Customers Bancorp, Inc., Case 2:17-cv-01700-RBS, was filed in the United States District Court for the Eastern District of Pennsylvania. The plaintiff generally alleges, among other things, violations of state consumer protection statutes and federal public policy promulgated in the Higher Education Act, Department of Education Regulations, the Electronic Funds Transfer Act, Regulation E and various common law violations through the offering and use of the Higher One checking account and debit card. Customers Bank, Higher One Holdings, Inc. and Wex Bank, Inc. filed a motion to compel arbitration and stay proceedings. The Court has not yet ruled on the motion. Customers is currently assessing Ms. Edelman’s claims, and is unable to predict the outcome of this lawsuit and therefore cannot determine the likelihood of loss nor estimate a range of possible loss at this time.
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 system for improper purposes and it also alleges defamation, false light, tortious interference with contractual relations, infliction of emotional distress, negligent infliction of emotional distress and loss of consortium. On January 6, 2017, Customers Bank filed Preliminary Objections to the Complaint seeking dismissal of the Plaintiff’s claims against Customers Bank and the employees of Customers Bank named as co-defendants.On April 6, 2017, the Court 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.
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 First Judicial District of Pennsylvania, Court of Common Pleas of Philadelphia. In this Complaint, which is related to the 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.
Item 4. Mine Safety Disclosures
Not Applicable.
PART II
| |
Item 5. | Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Trading Market for Common Stock
Our common stock is traded on the New York Stock ExchangeNYSE under the symbol “CUBI.”
Market Price of Common Stock
The table below presents the high and low closing sale prices of the common stock of Customers Bancorp as reported on the New York Stock Exchange for each of the four quarters of 2017 and 2016.
|
| | | | | | | |
| | High | | Low |
| 2018 | | | |
| First quarter (through February 16, 2018) | $ | 31.29 |
| | $ | 26.65 |
|
| | | | |
| 2017 | | | |
| Fourth quarter | $ | 33.16 |
| | $ | 25.06 |
|
| Third quarter | 32.62 |
| | 27.04 |
|
| Second quarter | 31.59 |
| | 27.37 |
|
| First quarter | 36.21 |
| | 30.23 |
|
| | | | |
| 2016 | | | |
| Fourth quarter | $ | 36.68 |
| | $ | 24.49 |
|
| Third quarter | 26.24 |
| | 23.99 |
|
| Second quarter | 27.27 |
| | 22.34 |
|
| First quarter | 26.50 |
| | 21.78 |
|
| | | | |
As of February 16, 2018,25, 2022, there were approximately 423324 registered shareholders of Customers Bancorp's common stock. Certain shares are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.
Dividends on Common Stock
Customers Bancorp historically has not paid any cash dividends on its shares of common stock. Customers Bancorpstock and does not expect to do so in the foreseeable future.
Any future determination relating to our dividend policy will be made 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 boardBoard of directors.Directors.
In addition, as a bank holding company, Customers Bancorp is subject to general regulatory restrictions on the payment of cash dividends. Federal bank regulatory agencies have the authority to prohibit bank holding companies from engaging in unsafe or unsound practices in conducting their business, which, depending on the financial condition and liquidity of the holding 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 their 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 specified periods.
Beginning January 1, 2015, the ability to pay dividends and the amounts that can be paid will be limited to the extent the Bank's capital ratios do not exceed the minimum required levels plus 250 basis points, as these requirements arewere phased in through January 1, 2019. See "Item 1, Business - Federal Banking Laws" for more information relating to restrictions on the Bank's ability to pay dividends to the Bancorp and the Bancorp's payment of dividends.
Special Dividends of BM Technologies, Inc. Common Stock
On January 4, 2021, Customers Bancorp completed the previously announced divestiture of BankMobile Technologies, Inc., a wholly owned subsidiary of Customers Bank, to MFAC Merger Sub Inc., an indirect wholly-owned subsidiary of MFAC, pursuant to an Agreement and Plan of Merger, dated August 6, 2020, as amended, by and among MFAC, MFAC Merger Sub Inc., BMT, Customers Bank and Customers Bancorp. In connection with the closing of the divestiture, MFAC changed its name to “BM Technologies, Inc.” and began trading on the NYSE under the ticker symbol "BMTX".
Customers received cash consideration of $23.1 million upon closing of the divestiture, and $3.7 million of additional cash consideration in May 2021. Upon closing of the divestiture, holders of Customers common stock who held their Customers shares as of the close of business on December 18, 2020 received an aggregate of 4,876,387 shares of BM Technologies' common stock in the form of special dividend. Each holder of Customers common stock was entitled to receive 0.15389 shares of BM Technologies' common stock for each share of Customers common stock held as of the close of business on December 18, 2020. No fractional shares of BM Technologies' common stock were issued; fractional share otherwise issuable were rounded to the nearest whole share. Certain team members of BMT also received 1,348,748 shares of BM Technologies' common stock as severance.
Issuer Purchases of Equity Securities
On November 26, 2013,August 25, 2021, the Bancorp’s boardBoard of directorsDirectors of Customers Bancorp authorized a stockthe Share Repurchase Program to repurchase plan in which the Bancorp could acquire up to 5%3,235,326 shares of its current outstanding shares at prices not to exceed a 20% premium over the then current book value. The repurchase program has no expiration date but may be suspended, modified or discontinued at any time, and the Bancorp has no obligation to repurchase any amount of itsCompany's common stock under(representing 10% of the program. There were no common stock repurchases during 2017.
EQUITY COMPENSATION PLANS
The following table provides certain summary information as of December 31, 2017, concerning our compensation plans (including individual compensation arrangements) under which shares of our common stock may be issued.
|
| | | | | | | | | | |
| | | | | | | Number of Securities |
| | | Number of Securities | | | | Remaining |
| | | to be Issued upon | | | | Available for Future |
| | | Exercise of | | Weighted-Average | | Issuance Under Equity |
| | | Outstanding Options, | | Exercise Price of | | Compensation Plans |
| | | Warrants, and | | Outstanding Options | | (Excluding Securities Reflected |
| Plan Category | | Rights (#) | | ($) (2) | | in the First Column) (#) |
| Equity Compensation Plans | | | | | | |
| Approved by Security Holders (1) | | 3,308,730 |
| | $ | 21.52 |
| | 1,621,444 | (3) |
| | | | | | | |
| Equity Compensation Plans Not | | | | | | |
| Approved by Security Holders | | N/A | | N/A | | N/A |
(1) IncludesCompany’s outstanding shares of common stock thaton June 30, 2021). The term of the Share Repurchase Program will extend for one year from September 27, 2021, unless earlier terminated. Purchases of shares under the Share Repurchase Program may be issued uponexecuted through open market purchases, privately negotiated transactions, through the exerciseuse of awards grantedRule 10b5-1 plans, or rights accrued under the Amended and Restated Customers Bancorp, Inc. 2004 Incentive Equity and Deferred Compensation Plan, Customers Bancorp, Inc. 2010 Stock Option Plan, the Bonus Recognition and Retention Program ("BRRP") and Customers Bancorp, Inc. Amended and Restated 2014 Employee Stock Purchase Plan.
(2) Does not include restricted stock units and stock awards for which, by definition, there exists no exercise price.
(3) Does not include securities available for future issuance under the BRRP as there is no specificotherwise. The exact number of shares, reserved under this plan. By itstiming for such purchases, and the price and terms at and on which such purchases are to be made will be at the plan linksdiscretion of the award of restricted stock unitsCompany and will comply with all applicable regulatory limitations. The common shares purchased during the year ended December 31, 2021 pursuant to the annual performance awards identified with the participants in the BRRP.Share Repurchase Program were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares purchased as part of publicly announced plans or programs | | Maximum Number of Shares that may yet be purchased under the plans or programs |
| October 1 - October 31, 2021 | | 167,233 | | | $ | 42.95 | | | 167,233 | | | 3,068,093 | |
| November 1 - November 30, 2021 | | — | | | — | | | — | | | 3,068,093 | |
| December 1 - December 31, 2021 | | 360,556 | | | 56.80 | | | 360,556 | | | 2,707,537 | |
| Total | | 527,789 | | | $ | 52.41 | | | 527,789 | | | 2,707,537 | |
Common Stock Performance Graph
The following graph compares the performance of our common stock over the period from December 31, 2012,2016 to December 31, 2017,2021, to that of the total return index for the SNL Mid-Atlantic U.S. Bank Index, SNL U.S. Bank NASDAQ Index, and SNL U.S. Bank NYSE Index, and SNL Mid Cap U.S. Bank index, assuming an investment of $100 on December 31, 2012. The2016 for the SNL U.S. Bank NYSE Index was added to the performance graph because the Bancorp changed the listing of its common stock to the NYSE from NASDAQ in December 2014. Inindices when calculating total annual shareholder return, reinvestment of dividends, if any, is assumed. Customers Bancorp obtained the information contained in the performance graph from SNL Financial.
The graph below is furnished under this Part II, Item 5.5 of this Annual Report on Form 10-K and shall not be deemed to be “soliciting material” or to be “filed” with the Commission or subject to Regulation 14A or 14C or to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended.
Total Return Performance
Item 6. Selected Financial Data[Reserved]
Customers Bancorp, Inc. and Subsidiaries
The following table presents Customers Bancorp’s summary consolidated financial data. Customers Bancorp derived the balance sheet and income statement data for the years ended December 31, 2017, 2016, 2015, 2014 and 2013, from its audited financial statements. The summary consolidated financial data should be read in conjunction with, and is qualified in their entirety by, Customers Bancorp’s financial statements and the accompanying notes and the other information included elsewhere in this Annual Report on Form 10-K. Certain amounts reported below have been reclassified to conform to the 2017 presentation, including the presentation of BankMobile as continuing operations.
|
| | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (dollars in thousands, except per share information) | | | | | | | | | |
| For the Years Ended December 31, | | | | | | | | | |
| Interest income | $ | 372,850 |
| | $ | 322,539 |
| | $ | 249,850 |
| | $ | 190,427 |
| | $ | 128,156 |
|
| Interest expense | 105,507 |
| | 73,042 |
| | 53,560 |
| | 38,504 |
| | 24,301 |
|
| Net interest income | 267,343 |
| | 249,497 |
| | 196,290 |
| | 151,923 |
| | 103,855 |
|
| Provision for loan losses | 6,768 |
| | 3,041 |
| | 20,566 |
| | 14,747 |
| | 2,236 |
|
| Total non-interest income | 78,910 |
| | 56,370 |
| | 27,717 |
| | 25,126 |
| | 22,703 |
|
| Total non-interest expense | 215,606 |
| | 178,231 |
| | 114,946 |
| | 98,914 |
| | 74,024 |
|
| Income before income tax expense | 123,879 |
| | 124,595 |
| | 88,495 |
| | 63,388 |
| | 50,298 |
|
| Income tax expense | 45,042 |
| | 45,893 |
| | 29,912 |
| | 20,174 |
| | 17,604 |
|
| Net income | 78,837 |
| | 78,702 |
| | 58,583 |
| | 43,214 |
| | 32,694 |
|
| Preferred stock dividends | 14,459 |
| | 9,515 |
| | 2,493 |
| | — |
| | — |
|
| Net income attributable to common shareholders | $ | 64,378 |
| | $ | 69,187 |
| | $ | 56,090 |
| | $ | 43,214 |
| | $ | 32,694 |
|
| Earnings per common share: | | | | | | | | | |
| Basic earnings per common share | $ | 2.10 |
| | $ | 2.51 |
| | $ | 2.09 |
| | $ | 1.62 |
| | $ | 1.34 |
|
| Diluted earnings per common share | $ | 1.97 |
| | $ | 2.31 |
| | $ | 1.96 |
| | $ | 1.55 |
| | $ | 1.30 |
|
| At Period End | | | | | |
| Total assets | $ | 9,839,555 |
| | $ | 9,382,736 |
| | $ | 8,398,205 |
| | $ | 6,821,500 |
| | $ | 4,150,493 |
|
| Cash and cash equivalents | 146,323 |
| | 264,709 |
| | 264,593 |
| | 371,023 |
| | 233,068 |
|
| Investment securities | 471,371 |
| | 493,474 |
| | 560,253 |
| | 416,685 |
| | 497,573 |
|
| Loans held for sale (1) | 1,939,485 |
| | 2,117,510 |
| | 1,797,064 |
| | 1,435,459 |
| | 747,593 |
|
| Loans receivable | 6,768,258 |
| | 6,154,637 |
| | 5,453,479 |
| | 4,312,173 |
| | 2,465,078 |
|
| Allowance for loan losses | 38,015 |
| | 37,315 |
| | 35,647 |
| | 30,932 |
| | 23,998 |
|
| FDIC loss sharing receivable (2) | — |
| | — |
| | — |
| | 2,320 |
| | 10,046 |
|
| Deposits | 6,800,142 |
| | 7,303,775 |
| | 5,909,501 |
| | 4,532,538 |
| | 2,959,922 |
|
| Borrowings (3) | 2,062,237 |
| | 1,147,706 |
| | 1,890,442 |
| | 1,812,380 |
| | 782,070 |
|
| Shareholders’ equity | 920,964 |
| | 855,872 |
| | 553,902 |
| | 443,145 |
| | 386,623 |
|
| Tangible common equity (4) | 687,198 |
| | 620,780 |
| | 494,682 |
| | 439,481 |
| | 382,947 |
|
| Selected Ratios and Share Data | | | | | |
| Return on average assets | 0.77 | % | | 0.86 | % | | 0.81 | % | | 0.78 | % | | 0.95 | % |
| Return on average common equity | 9.38 | % | | 12.41 | % | | 11.82 | % | | 10.39 | % | | 9.49 | % |
| Common book value per share | $ | 22.42 |
| | $ | 21.08 |
| | $ | 18.52 |
| | $ | 16.57 |
| | $ | 14.51 |
|
| Tangible book value per common share (4) | $ | 21.90 |
| | $ | 20.49 |
| | $ | 18.39 |
| | $ | 16.43 |
| | $ | 14.37 |
|
| Common shares outstanding | 31,382,503 |
| | 30,289,917 |
| | 26,901,801 |
| | 26,745,529 |
| | 26,646,566 |
|
| Net interest margin, tax equivalent (4) | 2.73 | % | | 2.84 | % | | 2.81 | % | | 2.86 | % | | 3.13 | % |
| Equity to assets | 9.36 | % | | 9.12 | % | | 6.60 | % | | 6.50 | % | | 9.32 | % |
|
| | | | | | | | | | | | | | | | | | | |
| Tangible common equity to tangible assets (4) | 7.00 | % | | 6.63 | % | | 5.89 | % | | 6.45 | % | | 9.23 | % |
| Tier 1 leverage ratio – Customers Bank | 10.09 | % | | 9.23 | % | | 7.30 | % | | 7.39 | % | | 10.81 | % |
| Tier 1 leverage ratio – Customers Bancorp | 8.94 | % | | 9.07 | % | | 7.16 | % | | 6.69 | % | | 10.11 | % |
| Tier 1 risk-based capital ratio – Customers Bank | 13.08 | % | | 11.63 | % | | 8.62 | % | | 9.27 | % | | 13.33 | % |
| Tier 1 risk-based capital ratio – Customers Bancorp | 11.58 | % | | 11.41 | % | | 8.46 | % | | 8.39 | % | | 12.44 | % |
| Total risk-based capital ratio – Customers Bank | 14.96 | % | | 13.61 | % | | 10.85 | % | | 11.98 | % | | 14.11 | % |
| Total risk-based capital ratio – Customers Bancorp | 13.05 | % | | 13.05 | % | | 10.62 | % | | 11.09 | % | | 13.21 | % |
| Asset Quality | | | | | | | | | |
| Non-performing loans | $ | 26,415 |
| | $ | 17,792 |
| | $ | 10,771 |
| | $ | 11,733 |
| | $ | 19,163 |
|
| Non-performing loans to total loans receivable | 0.39 | % | | 0.29 | % | | 0.20 | % | | 0.27 | % | | 0.78 | % |
| Non-performing loans to total loans | 0.30 | % | | 0.22 | % | | 0.15 | % | | 0.20 | % | | 0.60 | % |
| Other real estate owned | $ | 1,726 |
| | $ | 3,108 |
| | $ | 5,057 |
| | $ | 15,371 |
| | $ | 12,265 |
|
| Non-performing assets | 28,141 |
| | 20,900 |
| | 15,828 |
| | 27,104 |
| | 31,428 |
|
| Non-performing assets to total assets | 0.29 | % | | 0.22 | % | | 0.19 | % | | 0.40 | % | | 0.76 | % |
| Allowance for loan losses to total loans receivable | 0.56 | % | | 0.61 | % | | 0.65 | % | | 0.72 | % | | 0.97 | % |
| Allowance for loan losses to non-performing loans | 143.91 | % | | 209.73 | % | | 330.95 | % | | 263.63 | % | | 125.23 | % |
| Net charge-offs | $ | 6,068 |
| | $ | 1,662 |
| | $ | 11,979 |
| | $ | 3,124 |
| | $ | 6,894 |
|
| Net charge-offs to average total loans receivable | 0.09 | % | | 0.03 | % | | 0.26 | % | | 0.09 | % | | 0.37 | % |
| |
(1) | In 2017, 2016, 2015 and 2014, loans held for sale included $1,793,408, $2,116,815, $1,754,950 and $1,332,019 of mortgage warehouse loans at fair value, respectively. |
| |
(2) | The FDIC loss sharing receivable, net of the clawback liability, was included in "Accrued interest payable and other liabilities" as of December 31, 2015. |
(3) Borrowings includes FHLB advances, Federal funds purchased, Subordinated debt and other borrowings.
| |
(4) | Customers’ selected financial data contains non-GAAP financial measures calculated using non-GAAP amounts. These measures include net interest margin tax equivalent, tangible common equity and tangible book value per common share and tangible common equity to tangible assets. Management uses these 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 the Bancorp’s financial results and use of equity. 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. Customers Bancorp calculates tangible common equity by excluding intangible assets from total shareholders’ equity. Tangible book value per common share equals tangible common equity divided by common shares outstanding. The non-GAAP tax-equivalent basis uses a 35% statutory tax rate to approximate interest income as a taxable asset. |
A reconciliation of shareholders’ equity to tangible common equity and other related amounts is set forth below.
|
| | | | | | | | | | | | | | | | | | | |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (in thousands, except per share data) | |
| Shareholders’ equity | $ | 920,964 |
| | $ | 855,872 |
| | $ | 553,902 |
| | $ | 443,145 |
| | $ | 386,623 |
|
| Less: intangible assets | (16,295 | ) | | (17,621 | ) | | (3,651 | ) | | (3,664 | ) | | (3,676 | ) |
| Less: preferred stock | (217,471 | ) | | (217,471 | ) | | (55,569 | ) | | — |
| | — |
|
| Tangible common equity | $ | 687,198 |
| | $ | 620,780 |
| | $ | 494,682 |
| | $ | 439,481 |
| | $ | 382,947 |
|
| Shares outstanding | 31,383 |
| | 30,290 |
| | 26,902 |
| | 26,746 |
| | 26,647 |
|
| Common book value per share | $ | 22.42 |
| | $ | 21.08 |
| | $ | 18.52 |
| | $ | 16.57 |
| | $ | 14.51 |
|
| Less: effect of excluding intangible assets | (0.52 | ) | | (0.59 | ) | | (0.13 | ) | | (0.14 | ) | | (0.14 | ) |
| Common tangible book value per share | $ | 21.90 |
| | $ | 20.49 |
| | $ | 18.39 |
| | $ | 16.43 |
| | $ | 14.37 |
|
| Total assets | $ | 9,839,555 |
| | $ | 9,382,736 |
| | $ | 8,398,205 |
| | $ | 6,821,500 |
| | $ | 4,150,493 |
|
| Less: intangible assets | (16,295 | ) | | (17,621 | ) | | (3,651 | ) | | (3,664 | ) | | (3,676 | ) |
| Total tangible assets | $ | 9,823,260 |
| | $ | 9,365,115 |
| | $ | 8,394,554 |
| | $ | 6,817,836 |
| | $ | 4,146,817 |
|
| | | | | | | | | | |
| Equity to assets | 9.36 | % | | 9.12 | % | | 6.60 | % | | 6.50 | % | | 9.32 | % |
| Tangible common equity to tangible assets | 7.00 | % | | 6.63 | % | | 5.89 | % | | 6.45 | % | | 9.23 | % |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management's Discussion and Analysis should be read in conjunction with “Business – Executive Summary”"Business - Summary" and the Bancorp’s consolidated financial statements and related notes for the year ended December 31, 2017. Certain amounts reported in2021. For the 2016comparison of the years ended December 31, 2020 and 20152019, refer to Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for our fiscal year ended December 31, 2020, filed with the SEC on March 2, 2021.
Overview
Like most financial statements have been reclassified to conforminstitutions, Customers derives the majority of its income from interest it receives on its interest-earning assets, such as loans, leases and investments. Customers' primary source of funds for making these loans, leases and investments are its deposits and borrowings, on which it pays interest. Consequently, one of the key measures of Customers' success is the amount of its net interest income, or the difference between the income on its interest-earning assets and the expense on its interest-bearing liabilities, such as deposits and borrowings. Another key measure is the difference between the interest income generated by interest-earning assets and the interest expense on interest-bearing liabilities, relative to the 2017 presentation. At December 31, 2016, amount of average interest-earning assets, which is referred to as net interest margin.
BankMobile, metpreviously a division of Customers Bank, derived a majority of its revenue from interest income on installment loans, interchange and card revenue and deposit fees. On January 4, 2021, Customers Bancorp completed the criteria to be classified as held for sale and, accordingly, the assets and liabilitiesdivestiture of BankMobile were presented as “Assets held for sale," “Non-interest bearingTechnologies, Inc., a wholly-owned subsidiary of Customers Bank and a component of BankMobile, through a merger with Megalith Financial Acquisition Corp. In connection with the closing of the divestiture, MFAC changed its name to “BM Technologies, Inc.” All of BankMobile’s serviced deposits held for sale,” and “Other liabilities held for sale;” and BankMobile’s operating results and associated cash flows were presented as “Discontinued operations.”loans including the related net interest income remained with Customers Bank after the divestiture. Beginning in thirdfirst quarter 2017,2021, BMT's historical financial results for periods prior to the perioddivestiture are reflected in which Customers decided to spin-off BankMobile rather than selling directly to a third party, BankMobile's assets, liabilities, operatingBancorp’s results and cash flows were no longer reported as held for sale or discontinuedof operations but instead were reported as held and used. Prior reported assets held for sale, non-interest bearing deposits held for sale and other liabilities held for sale have been reclassified to conform with the December 31, 2017 presentation. Amounts previously reported as discontinued operations have also been reclassified to conform withoperations. As a result of the divestiture, Customers' interchange income, deposit account fees and subscription fees decreased for the year ended December 31, 2017 presentation.2021. In addition, Customers' non-interest expenses, such as salaries and employee benefits, technology, professional services, merger and acquisition related expenses and other non-interest expenses, including reimbursements from the white label relationship associated with BMT decreased for the year ended December 31, 2021. In connection with the divestiture, Customers entered into various agreements with BM Technologies, including a transition services agreement, software license agreement, deposit servicing agreement, non-competition agreement and loan agreement for periods ranging from one to ten years. Customers incurred expenses of $59.5 million to BM Technologies under the deposit servicing agreement, included within the technology, communication and bank operations expense in the income from continuing operations during the year ended December 31, 2021. The deposit service agreement is scheduled to expire on December 31, 2022 and will not be renewed. As of December 31, 2021, Customers held $1.8 billion of deposits serviced by BM Technologies, which are expected to leave Customers Bank by December 31, 2022. The loan agreement with BM Technologies was terminated early in November 2021. The transition services agreement with BM Technologies, as amended, expires on March 31, 2022, except for accounting services which expired on February 15, 2022. For additional information, refer to "NOTE 3 – DISCONTINUED OPERATIONS" to Customers' audited financial statements.
In October 2021, Customers Bank launched CBIT on the TassatPay blockchain-based instant B2B payments platform, which serves a growing array of B2B clients who want the benefit of instant payments: including key over-the-counter desks, exchanges, liquidity providers, market makers, funds, and B2B verticals such as trading operations, real estate, manufacturing, and logistics. CBIT may only be created by, transferred to and redeemed by commercial customers of Customers Bank on the real time B2B payments platform by maintaining U.S. dollars in non-interest bearing deposits at Customers Bank. CBIT is not listed or traded on any digital currency exchange. As of December 31, 2021, Customers Bank held $1.9 billion of deposits from new customers participating in CBIT. To further build its franchise and support the growth of its commercial lending initiatives, Customers added three new commercial verticals during 2021 within its specialty banking business. These three new verticals included fund finance, technology and venture capital banking and financial institutions group that provide financing to the private equity industry and cash management services to the alternative investment industry. Customers also launched a pilot digital small balance 7(a) lending within its existing SBA lending business in 2021.
There is credit risk inherent in all loans requiring Customers to maintain an ACL to absorb credit losses on existing loans and leases that may become uncollectible. Customers maintains this allowance by charging a provision for credit losses against its operating earnings. Customers has included a detailed discussion of this process, as well as several tables describing its ACL, in "NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION" and "NOTE 8 – LOANS AND LEASES RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES" to Customers' audited financial statements.
Impact of COVID-19
In March 2020, the outbreak of COVID-19 was recognized as a pandemic by the World Health Organization. The spread of COVID-19 and its variants has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that Customers serves. Governmental responses during the pandemic have included orders closing businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and the Federal Reserve maintaining a low interest rate environment.
Customers has taken deliberate actions to ensure that it has the necessary balance sheet strength to serve its clients and communities, including increases in liquidity and reserves supported by a strong capital position. Customers' business and consumer customers continue to experience varying degrees of financial distress. In order to protect the health of its customers and team members, and to comply with applicable government directives, Customers had modified its business practices, including directing team members to work remotely insofar as it is possible and implementing its business continuity plans and protocols to the extent necessary. Since that time, Customers has launched the “Return to Workplace” initiative, and communicated a goal of having more team members return to the workplace. In that communication, Customers announced the following steps along with a continuing commitment to remain empathetic and cognizant of balancing company principles, customer support, support and remaining vigilant on tracking and preventing COVID-19 exposures to protect our team members and customers. Customers implemented a “ hybrid model” encouraging and tracking the movement of more team members returning to the office, released a communication requiring all team members to read, sign and acknowledge a Code of Commitment to reveal exposures to COVID-19, thereby allowing Customers to manage the possible impact with 100 percent participation of our team members. Customers has started tracking vaccination rates and less than 10 percent of our team members are not vaccinated or not planning to be vaccinated.
On March 27, 2020, the CARES Act was signed into law. It contained substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act included the SBA's PPP, a nearly $350 billion program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks. These loans were intended to guarantee an eight-week or 24-week period of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills. On April 16, 2020, the SBA announced that all available funds had been exhausted and applications were no longer being accepted. On April 22, 2020, an additional $310 billion of funds for the PPP was signed into law. On August 8, 2020, the SBA announced that the PPP was closed and no longer accepting PPP applications from participating lenders. On December 27, 2020, the CAA was signed into law, including Division N, Title III, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, which provided $284 billion in additional funding for the SBA's PPP for small businesses affected by the COVID-19 pandemic. The CAA provided small businesses who received an initial PPP loan and experienced a 25% reduction in gross receipts to request a second PPP loan of up to $2.0 million. On January 11, 2021, the SBA reopened the PPP program to small business and non-profit organizations that did not receive a loan through the initial PPP phase. On March 11, 2021, the American Rescue Plan Act of 2021 was enacted expanding eligibility for first and second round of PPP loans and revising the exclusions from payroll costs for purposes of loan forgiveness. The PPP ended on May 31, 2021. As of December 31, 2021, Customers has helped thousands of small businesses by funding over $10 billion in PPP loans directly or through partnerships.
In response to the COVID-19 pandemic, Customers also implemented a short-term loan modification program to provide temporary payment relief to certain of its borrowers who met the program's qualifications. This program allowed for a deferral of payments for a maximum of 90 days at a time. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan. On December 27, 2020, the CAA was signed into law, which extended and expanded various relief provisions of the CARES Act including the temporary relief from the accounting and disclosure requirements for TDRs until January 1, 2022. All commercial loans previously on deferments became current by December 31, 2021 from a peak of $1.2 billion. Customers had no pending commercial loan deferment requests as of December 31, 2021. As of December 31, 2020, total commercial deferments were $202.1 million, or 1.8% of total loans and leases, excluding PPP loans. Total consumer deferments declined to $6.1 million, or 0.1% of total loans and leases, excluding PPP loans at December 31, 2021, from a peak of $108 million. As of December 31, 2020, total consumer deferments were $16.4 million, or 0.1% of total loans and leases, excluding PPP loans. Excluding loans receivable, PPP from total loans and leases receivable is a non-GAAP measure. 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. Please refer to the following reconciliation schedule.
| | | | | | | | | | | |
| December 31, |
| (dollars in thousands) | 2021 | | 2020 |
| Loans held for sale (GAAP) | $ | 16,254 | | | $ | 79,086 | |
| Loans receivable, mortgage warehouse, at fair value (GAAP) | 2,284,325 | | | 3,616,432 | |
| Loans and leases receivable (GAAP) | 12,268,306 | | | 12,136,733 | |
| Total loans and leases receivable (GAAP) | 14,568,885 | | | 15,832,251 | |
| Less: Loans receivable, PPP | 3,250,008 | | | 4,561,365 | |
| Total loans and leases, excluding PPP (Non-GAAP) | $ | 11,318,877 | | | $ | 11,270,886 | |
| | | |
| Commercial deferments (GAAP) | $ | — | | | $ | 202,100 | |
| Consumer deferments (GAAP) | 6,060 | | | 16,400 | |
| Total deferments (GAAP) | $ | 6,060 | | | $ | 218,500 | |
| | | |
| Commercial deferments to total loans and leases, excluding PPP (Non-GAAP) | — | % | | 1.8 | % |
| Consumer deferments to total loans and leases, excluding PPP (Non-GAAP) | 0.1 | % | | 0.1 | % |
| Total deferments to total loans and leases, excluding PPP (Non-GAAP) | 0.1 | % | | 1.9 | % |
The FRB has taken a range of actions to support the flow of credit to households and businesses. For example, on March 15, 2020, the FRB reduced the target range for the federal funds rate to 0% to 0.25% and announced that it would increase its holdings of U.S. Treasury securities and agency mortgage-backed securities and begin purchasing agency commercial mortgage-backed securities. The FRB has also encouraged depository institutions to borrow from the discount window and has lowered the primary credit rate for such borrowing by 150 basis points while extending the term of such loans up to 90 days. Reserve requirements have been reduced to zero as of March 26, 2020. The FRB also established a range of facilities and programs to support the U.S. economy and U.S. marketplace participants in response to economic disruptions associated with COVID-19, including among others, Main Street Lending facilities to purchase loan participations, under specified conditions, from banks lending to small and medium U.S. businesses and the PPPLF, which was created to bolster the effectiveness of the PPP by taking loans as collateral at face value. Customers participated in some of these facilities or programs to date, primarily the PPPLF. Customers fully repaid the borrowing from the PPPLF during the year ended December 31, 2021. No new advances are available from the PPPLF after July 30, 2021. The economy has since strengthened despite the spread of COVID-19 variants, with higher inflation, stock prices and housing values. In response, the FRB has begun normalizing monetary policy with its decision to taper its quantitative easing in late 2021 and signaled raising the federal funds rate in 2022.
Significant uncertainties as to future economic conditions continue to exist, and Customers has taken deliberate actions in response, including higher levels of on-balance sheet liquidity and maintaining strong capital ratios. The economic pressures, coupled with the implementation of an expected lifetime loss methodology for determining our provision for credit losses as required by CECL contributed to an increased provision for credit losses on loans and leases and off-balance sheet credit exposures in first quarter 2020. The expected lifetime loss methodology incorporates current economic conditions and forecasts for macroeconomic variables over its reasonable and supportable forecast period as required by CECL. Customers has also shifted the mix of its loan portfolio towards commercial loans with floating or adjustable interest rates and increased its non-interest bearing and interest-bearing deposits to position the Bank for future interest rate hikes. Customers continues to monitor the impact of COVID-19 and its variants closely, as well as any effects that may result from the federal government's responses; however, the extent to which the ongoing COVID-19 pandemic will impact Customers' operations and financial results during 2022 is highly uncertain.
New Accounting Pronouncements
For information about the impact that recently adopted or issued accounting guidance will have on us, refer to "NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION" to Customers' audited financial statements.
Critical Accounting Policies and Estimates
Customers has adopted various accounting policies that govern the application of accounting principles generally accepted in the United States of America ("U.S. GAAP")GAAP and that are consistent with general practices within the banking industry in the preparation of its consolidated financial statements. Customers' significant accounting policies are described in NOTE 4 -"NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATIONPRESENTATION" to Customers' audited financial statements.
Certain accounting policies involve significant judgments and assumptions by Customers that have a material impact on the carrying value of certain assets and liabilities.assets. Customers considers these accounting policies to be critical accounting policies. The judgments 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 results of operations.assets.
The critical accounting policiespolicy that areis both important to the portrayal of Customers' financial condition and results of operations and require complex, subjective judgments areis the accounting policies for the following: Allowance for Loan Losses, Purchased Credit-Impaired ("PCI") Loans, Deferred Income Taxes, Unrealized Gains and Losses on Available-for-Sale Securities and Other-Than-Temporary Impairment Analysis, Fair Values of Financial Instruments, Share-Based Compensation and Goodwill and Other Intangible Assets. TheseACL. This critical accounting policiespolicy and material estimates,estimate, along with the related disclosures, are reviewed by Customers' Audit Committee of the Board of Directors.
Allowance for LoanCredit Losses
Customers' ACL at December 31, 2021 represents Customers' current estimate of the lifetime credit losses expected from its loan and lease portfolio and its unfunded lending-related commitments that are not unconditionally cancellable. Management estimates the ACL by projecting a lifetime loss rate conditional on a forecast of economic parameters and other qualitative adjustments, for the loans and leases' expected remaining term.
Customers maintains anuses external sources in the creation of its forecasts, including current economic conditions and forecasts for macroeconomic variables over its reasonable and supportable forecast period (e.g., GDP growth rate, unemployment rate, BBB spread, commercial real estate and home price index). After the reasonable and supportable forecast period, which ranges from two to five years, the models revert the forecasted macroeconomic variables to their historical long-term trends, without specific predictions for the economy, over the expected life of the pool, while also incorporating prepayment assumptions into its lifetime loss rates. Internal factors that impact the quarterly allowance estimate include the level of outstanding balances, portfolio performance and assigned risk ratings. Significant loan/borrower attributes utilized in the models include property type, initial loan to value, assigned risk ratings, delinquency status, origination date, maturity date, initial FICO scores, and borrower state.
The ACL may be affected materially by a variety of qualitative factors that Customers considers to reflect its current judgement of various events and risks that are not measured in our statistical procedures, including uncertainty related to the economic forecasts used in the modeled credit loss estimates, nature and volume of the loan and lease portfolio, credit underwriting policy exceptions, peer comparison, industry data, and model and data limitations. The qualitative allowance for loan losseseconomic forecast risk is further informed by multiple alternative scenarios to arrive at a levelscenario or a composite of scenarios supporting the period-end ACL balance. The evaluation process is inherently imprecise and subjective as it requires significant management believesjudgment based on underlying factors that are susceptible to changes, sometimes materially and rapidly. Customers recognizes that this approach may not be suitable in certain economic environments such that additional analysis may be performed at management's discretion. Due in part to its subjectivity, the qualitative evaluation may be materially impacted during periods of economic uncertainty and late breaking events that could lead to revision of reserves to reflect management's best estimate of expected credit losses.
The ACL is sufficient to absorb estimated credit losses incurred as ofestablished in accordance with our ACL policy. The ACL Committee, which includes the report date. Management’s determination ofBank's Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, Chief Lending Officer, and Chief Credit Officer, among others, reviews the adequacy of the allowance for loan losses is based on periodic evaluationsACL each quarter, together with Customers' risk management team. The ACL policy, significant judgements and the related disclosures are reviewed by Customers' Audit Committee of the loan portfolio and other relevant factors. However, these evaluations are inherently subjectiveBoard of Directors.
The net decrease in our estimated ACL as they require significant estimates by management. Consideration is givenof December 31, 2021 as compared to a variety of factors in establishing these estimates including historical losses, peer and industry data, current economic conditions, size and composition of the loan portfolio, existence and level of loan concentrations, delinquency statistics, criticized and classified assets and impaired loans, results of internal loan reviews, borrowers’ perceived financial and management strengths, adequacy of underlying collateral, dependence on collateral, present value of expected future cash flows and other relevant factors. These factors may be susceptible to significant change. To the extent actual outcomes differ from management's estimates, additional provisions for loan losses may be required which may adversely affect Customers' results of operations in the future.
Subsequentour December 31, 2020 estimate was primarily attributable to the acquisitioncontinued improvement in macroeconomic forecasts since the significant economic impact of purchased credit-impaired loans, estimates of cash flows expected to be collected are updated each reporting period based on updated assumptions regarding default rates, loss severities and other factors that are reflective of current market conditions. Subsequent decreasesCOVID-19 in expected cash flows will generally resultearly 2020, partially offset by loan growth primarily in aCustomers' consumer installment loan portfolio. The provision for loan losses. Subsequent increases in expected cash flows will generally result in a reversal of the provisioncredit losses on loans and leases for loan losses to the extent of prior charges. Please see below for additional discussions related to the accounting for purchased credit-impaired loans.
Purchased Credit-Impaired Loans
For certain acquired loans that have experienced a deterioration of credit quality, Customers follows the accounting guidance in ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased credit-impaired loans are loans that were acquired in business combinations or asset purchases with evidence of credit deterioration since origination to the date acquired, and for which it is probable that all contractually required payments will not be collected. Evidence of credit- quality deterioration as of purchase dates may include information such as past-due and non-accrual status, borrower credit scores and recent loan-to-value percentages.
The fair value of loans with evidence of credit deterioration is recorded net of a nonaccretable difference and, if appropriate, an accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is the nonaccretable difference, which is not included in the carrying amount of acquired loans. Subsequent to acquisition, estimates of cash flows expected to be collected are updated each reporting period based on updated assumptions regarding default rates, loss severities, and other factors that are reflective of current market conditions. Subsequent decreases in the estimated cash flows of the loan will generally result in a provision for loan losses. Subsequent increases in cash flows will generally result in a reversal of the provision for loan losses to the extent of prior charges or a reclassification of the difference from nonaccretable to accretable with a positive impact on accretion of interest income in future periods. Further, any excess of cash flows expected at the time of acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of those cash flows.
Purchased credit-impaired loans acquired may be aggregated into one or more pools, provided that the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. On a quarterly basis, Customers re-estimates the total cash flows (both principal and interest) expected to be collected over the remaining life of each pool. These estimates incorporate assumptions regarding default rates, loss severities, the amounts and timing of prepayments and other factors that reflect then-current market conditions. If the timing and/or amounts of expected cash flows on purchased credit-impaired loans are determined not to be reasonably estimable, no interest is accreted, and the loans are reported as non-accrual loans; however, when the timing and amounts of expected cash flows for purchased credit-impaired loans are reasonably estimable, interest is accreted, and the loans are reported as performing loans. Charge-offs are not recorded on purchased credit-impaired loans until actual losses exceed the estimated losses that were recorded as purchase-accounting adjustments at acquisition date.
Deferred Income Taxes
Customers provides for deferred income taxes using the liability method whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities in the financial statements and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the "Act") was enacted into law. The Act contained several key tax provisions including the reduction in the corporate federal tax rate from 35% to 21% effective January 1, 2018. As a result, Customers is required to re-measure, through income tax expense, its deferred tax assets and liabilities using the enacted rate at which it expects them to be recovered or settled. In December 2017, the U.S. Securities and Exchange Commission ("SEC") also issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act "(SAB 118"), which allows companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the Act was passed late in December 2017, and ongoing analysis and interpretation of the other key tax provisions is expected over the next 12 months, Customers considers the deferred tax re-measurements and other items to be provisional in nature. Customers expects to complete its analysis within the measurement periods in accordance with SAB 118. See NOTE 16 - INCOME TAXES to Customers' audited financial statements for additional information.
Unrealized Gains and Losses on Securities Available for Sale and Other-Than-Temporary Impairment Analysis
Customers obtains estimated fair values of debt securities from independent valuation services and brokers. In developing these fair values, the valuation services and brokers use estimates of cash flows based on historical performance of similar instruments in similar rate environments. Debt securities available for sale consist primarily of mortgage-backed securities issued by U.S. government-sponsored agencies. Customers uses various indicators in determining whether a security is other-than-temporarily impaired including, for debt securities, when it is probable that the contractual interest and principal will not be collected, or for equity securities, whether the market value is below its cost for an extended period of time with low expectation of recovery. The debt securities are monitored for changes in credit ratings because adverse changes in credit ratings could indicate a change in the estimated cash flows of the underlying collateral or issuer.
For marketable equity securities, Customers considers the issuer’s financial condition, capital strength and near-term prospects to determine whether an impairment is temporary or other than temporary. Customers also considers the volatility of a security’s price in comparison to the market as a whole and any recoveries or declines in fair value subsequent to the balance sheet date. If management determines that the impairment is other than temporary, the entire amount of the impairment as of the balance sheet date is recognized in earnings even if the decision to sell the security has not been made. The fair value of the security becomes the new amortized cost basis of the investment and is not adjusted for subsequent recoveries in fair value.
Beginning January 1, 2018, changes in the fair value of marketable equity securities classified as available for sale will be recorded in earnings 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.
At December 31, 2017, management evaluated its available-for-sale debt securities for other-than-temporary impairment. The unrealized losses associated with the available-for-sale debt securities were not considered to be other than temporary at December 31, 2017, because the losses were related to changes in interest rates and did not affect the expected cash flows of the underlying collateral or issuer. 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 year ended December 31, 2017,2021 was $27.4 million, for an ending ACL balance of $139.9 million ($137.8 million for loans and leases and $2.1 million for unfunded lending-related commitments) as of December 31, 2021.
To determine the ACL as of December 31, 2021, Customers recorded other-than-temporary impairmentutilized the Moody's December 2021 Baseline forecast to generate its modelled expected losses by loan portfolio in order to reflect management's reasonable expectations of $12.9 million related to its equity holdings in Religare for the full amount of the decline in fair value from the cost basis establishedcurrent and future economic conditions. The Baseline forecast at December 31, 2016, through September 30, 2017, because2021 assumed continued improvement in forecasts of macroeconomic conditions compared to the forecasts of macroeconomic conditions used by Customers no longerin 2020; the Federal Reserve has accelerated its tapering process in the intentfourth quarter of 2021 and the first rate hike is assumed to hold these securities untiloccur in 2022; a continuing U.S. economic recovery in fair value. The fair valuefrom federal spending and abatement of the Religare equity securities at September 30, 2017,COVID-19 pandemic, notwithstanding the impact of the Omicron variant; and the acceleration in consumer prices is expected to peak and moderate in the near-term as the supply chain issues subside. Customers continues to monitor the impact of the ongoing COVID-19 pandemic and monetary policy measures on the economy and, if the pace of the expected recovery is worse than expected, further meaningful provisions for credit losses could be required.
The net increase in our estimated ACL as of December 31, 2020 as compared to January 1, 2020, upon adoption of the CECL standard, was primarily attributable to the significant economic impact of COVID-19 and the related stimulus from the federal government, along with loan growth in Customers' commercial and consumer loan portfolios. The total reserve build for the ACL for the year ended December 31, 2020 was $6.9 million, for an ending balance of $146.5 million ($144.2 million for loans and leases and $2.3 million becamefor unfunded lending-related commitments) as of December 31, 2020. To determine the new cost basisACL as of December 31, 2020, Customers utilized the Moody's December 2020 Baseline forecast to generate its modelled expected losses and considered Moody's other alternative economic forecast scenarios to qualitatively adjust the modelled ACL by loan portfolio in order to reflect management's reasonable expectations of current and future economic conditions. The Moody's Baseline forecast at December 31, 2020 assumed continued improvement in forecasts of macroeconomic conditions compared to the previous forecasts of macroeconomic conditions used by Customers in early 2020; the Federal Reserve maintaining a target range for the fed funds rate at 0% to 0.25% until the second half of 2023; and an additional $908 billion of stimulus from the federal government.
One of the securities. At December 31, 2017,most significant judgments influencing the fair value ofACL is the Religare equity securities was $3.4 million, which resultedmacroeconomic forecasts from Moody's. Changes 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.
Fair Value
Fair value is defined aseconomic forecasts could significantly affect the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, other than in a forced or liquidation sale as of the measurement date (also referred to as an exit price). Management estimates the fair values of financial instruments using a variety of valuation methods. When financial instruments are actively traded and have quoted market prices, the quoted market prices are used for fair value. When the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, Customers estimates fair value using unobservable data. The valuation methods and inputs consider factors such as types of underlying assets or liabilities, rates of estimated credit losses interest rateswhich could potentially lead to materially different allowance levels from one reporting period to the next. Given the dynamic relationship between macroeconomic variables within Customers' modelling framework, it is difficult to estimate the impact of a change in any one individual variable on the ACL. However, to illustrate a hypothetical sensitivity analysis, management calculated a quantitative allowance using a 100% weighting applied to an adverse scenario. This scenario includes assumptions around new infections, hospitalizations and COVID-19 deaths rising sharply once again as compared to the Baseline projections, leading to lower consumer spending, worsening supply chain issues and rising unemployment. Under this scenario, as an example, the unemployment rate is estimated at 7.7% and 8.2% at the end of 2022 and 2023, respectively. These numbers represent a 4.1% and 4.7% higher unemployment estimate than Baseline scenario projections of 3.6% and 3.5%, respectively for the same time periods. To demonstrate the sensitivity to key economic parameters, management calculated the difference between a 100% Baseline weighting and a 100% adverse scenario weighting for modelled results. This would result in an incremental quantitative impact to the ACL of approximately $44.4 million at December 31, 2021. This resulting difference is not intended to represent an expected increase in ACL levels since (i) Customers may use a weighted approach applied to multiple economic scenarios for its ACL process, (ii) the highly uncertain economic environment, (iii) the difficulty in predicting inter-relationships between macroeconomic variables used in various economic scenarios, and (iv) the sensitivity analysis does not account for any qualitative adjustments incorporated by Customers as part of its overall ACL framework.
There is no certainty that Customers' ACL will be appropriate over time to cover losses in our portfolio as economic and market conditions may ultimately differ from our reasonable and supportable forecast. Additionally, events adversely affecting specific customers, industries, or discount rates and collateral. The best estimate of fair value involves assumptions including, but not limited to, various performance indicators,Customers' markets, such as historicalthe current COVID-19 pandemic, could severely impact our current expectations. If the credit quality of Customers' customer base materially deteriorates or the risk profile of a market, industry, or group of customers changes materially, Customers' net income and projected defaultcapital could be materially adversely affected which, in turn could have a material adverse effect on Customers' financial condition and recovery rates, credit ratings,results of operations. The extent to which the current delinquency rates, loan-to-value ratiosCOVID-19 pandemic has and the possibility of obligor refinancing. U.S. GAAP requires the use of fair values in determining the carrying values of certain assetswill continue to negatively impact Customers' businesses, financial condition, liquidity and liabilities, as well as for specific disclosures. The most significant uses of fair values include commercial loans to mortgage banking businesses, residential mortgage loans originatedresults will depend on future developments, which are highly uncertain and cannot be forecasted with an intent to sell, available-for-sale investment securities, derivative assets and liabilities, impaired loans and foreclosed property and the net assets acquired in business combinations. precision at this time.
For additionalmore information, see NOTE 20"NOTE 8 – DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTSLOANS AND LEASES RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES" to Customers' audited financial statements.
Share-Based Compensation
Customers recognizes compensation expense for share-based awards in accordance with ASC 718, Compensation – Stock Compensation. The expense recognized for awards of stock options and restricted stock units is based on the fair value of the awards on the date of grant, with compensation expense recognized over the service period, which is usually the vesting period. For performance-based awards, compensation cost is recognized over the vesting period as long as it remains probable that the performance conditions will be met. If the service or performance conditions are not met, Customers reverses previously recorded compensation expense upon forfeiture. Customers generally utilizes the Black-Scholes option-pricing model to estimate the fair value of each option on the date of grant. The Black-Scholes model takes into consideration the exercise price of the option, the expected life of the option, the current price of the underlying stock and its expected volatility, expected dividends on the stock and the current risk-free interest rate for the expected life of the option. Customers' estimate of the fair value of a stock option is based on expectations derived from its limited historical experience and may not necessarily equate to market value when fully vested. The fair value of the restricted stock units is generally determined based on the closing market price of Customers' common stock on the date of grant.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets of businesses acquired through business combinations accounted for under the acquisition method. Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. Intangible assets that have finite lives, such as customer and university relationship intangibles and non-compete agreements, are amortized over their estimated useful lives and subject to periodic impairment testing. Goodwill and other intangible assets recognized as part of the Disbursement business acquisition in June 2016 were based on a preliminary allocation of the purchase price. At December 31, 2016, Customers recorded adjustments to the estimated fair values of the net assets acquired, which resulted in a $1.0 million increase in goodwill. For more information regarding the net assets acquired and goodwill recorded upon acquisition of the Disbursement business, see NOTE 2 - ACQUISITION ACTIVITY to Customers' audited financial statements.
Goodwill and other intangible assets are reviewed for impairment annually as of October 31 and between annual tests when events and circumstances indicate that impairment may have occurred. Customers early adopted Accounting Standards Update ("ASU") 2017-04, Simplifying the Test for Goodwill Impairment during its annual goodwill impairment review in October 2017. The new rules under this guidance provide that the goodwill impairment charge will be the amount by which the reporting unit's carrying amount exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The same one-step impairment test is applied to goodwill at all reporting units. Customers applies a qualitative assessment for its reporting units to determine if the one-step quantitative impairment test is necessary.
Intangible assets subject to amortization are reviewed for impairment under ASC 360, Property, Plant, and Equipment, which requires that a long-lived asset or asset group be tested for recoverability whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The carrying value of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.
Overview
Like most financial institutions, Customers derives the majority of its income from interest it receives on its interest-earning assets, such as loans and investments. Customers' primary source of funds for making these loans and investments is its deposits and borrowings, on which it pays interest. Consequently, one of the key measures of Customers' success is the amount of its net interest income, or the difference between the income on its interest-earning assets and the expense on its interest-bearing liabilities, such as deposits and borrowings. Another key measure is the spread between the yield earned on these interest-earning assets and the rate paid on these interest-bearing liabilities, which is referred to as net interest margin.
There is credit risk inherent in all loans, so Customers maintains an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. Customers maintains this allowance by charging a provision for loan losses against its operating earnings. Customers has included a detailed discussion of this process, as well as several tables describing its allowance for loan losses, in NOTE 4 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION and NOTE 9 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES to Customers' audited financial statements.
BankMobile, a division of Customers Bank, derives a majority of its revenue from interchange and card revenue. In third quarter 2017, Customers decided that the best strategy for its shareholders to realize the value of BankMobile's business was to divest BankMobile through a spin-off of BankMobile to Customers' shareholders to be followed by a merger of Customers' BankMobile Technologies, Inc. ("BMT") subsidiary 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 BMT into Flagship, with Customers' shareholders first receiving shares of BMT as a dividend in the spin-off and then receiving shares of Flagship common stock in the merger of BMT into Flagship in exchange for the shares of BMT they received in the spin-off. Flagship will separately purchase BankMobile deposits directly from Customers for cash. Customers expects the transactions to close in mid-2018.
At December 31, 2016, BankMobile met the criteria to be classified as held for sale and, accordingly, the assets and liabilities of BankMobile were presented as “Assets held for sale,” “Non-interest bearing deposits held for sale” and “Other liabilities held for sale,” and BankMobile’s operating results and associated cash flows were presented as “Discontinued operations.” Beginning in third quarter 2017, the period in which Customers decided to spin-off BankMobile rather than sell it directly to a third party, BankMobile's assets, liabilities, operating results and cash flows were no longer reported as held for sale or discontinued operations but instead were reported as held and used. Prior reported assets held for sale, non-interest bearing deposits held for sale and other liabilities held for sale have been reclassified to conform with the December 31, 2017 presentation. Amounts previously reported as discontinued operations also have been reclassified to conform with the year ended December 31, 2017 presentation.See NOTE 3 - SPIN-OFF AND MERGER to Customers' audited financial statements.
2018 Economic Outlook
Building off the momentum gained in 2017, the U.S. economy is expected to continue its expansion in 2018. This continued economic growth should result in a tighter labor market and accelerated wage growth. U.S. Real Gross Domestic Product is projected in the 2.50% to 2.75% range in 2018, which will be driven, in part, by the anticipated stimulative impact of the recent tax legislation passed by the U.S. Government. Additionally, while inflation remains below the Federal Reserve's target of 2% on a year-over-year basis, it is expected to stabilize around that level over the medium term. With respect to interest rates, the Federal Reserve is expected to continue to raise the overnight rate, increasing it three times by the end of 2018.
While the economic outlook in the U.S. remains optimistic in the short run, keeping the economy on a sustainable path over the longer term will most likely become more challenging. For example, while the recently passed tax legislation will support growth over the near term, it will increase the longer-term fiscal burden of the country. Other potential concerns for the longer- term economic outlook include the flattening of the yield curve and/or the possibility of an inverted yield curve (which may signal a future recession), the risk of economic overheating over the next few years and concerns surrounding the long-term fiscal position of the U.S. (e.g., the federal deficit, rising debt-service costs and increasing entitlement spending as the Baby Boomers retire). Overall, Customers' management is optimistic that 2018 will generally show a continuation of the improving economic environment experienced in 2017, with continued moderate growth in the Bank's market area and improving unemployment or at least remaining at current levels during the year.
Results of Operations
The following discussion of Customers Bancorp’s consolidated results of operations should be read in conjunction with its consolidated financial statements, including the accompanying notes. Also seePlease refer to Critical Accounting Policies and Estimates in this Management's Discussion and Analysis and NOTE 4 -"NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATIONPRESENTATION" to Customers' audited financial statements for information concerning certain significant accounting policies and estimates applied in determining reported results of operations.
ForThe following table sets forth the condensed statements of income for the years ended December 31, 20172021 and 20162020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | |
| (dollars in thousands) | | 2021 | | 2020 | | Change | | % Change |
| Net interest income | | $ | 685,074 | | | $ | 403,688 | | | $ | 281,386 | | | 69.7 | % |
| Provision for credit losses on loans and leases | | 27,426 | | | 62,774 | | | (35,348) | | | (56.3) | % |
| Total non-interest income | | 77,867 | | | 63,818 | | | 14,049 | | | 22.0 | % |
| Total non-interest expense | | 294,307 | | | 214,976 | | | 79,331 | | | 36.9 | % |
| Income before income tax expense | | 441,208 | | | 189,756 | | | 251,452 | | | 132.5 | % |
| Income tax expense | | 86,940 | | | 46,717 | | | 40,223 | | | 86.1 | % |
| Net income from continuing operations | | 354,268 | | | 143,039 | | | 211,229 | | | 147.7 | % |
| Loss from discontinued operations before income tax expense (benefit) | | (20,354) | | | (13,798) | | | (6,556) | | | 47.5 | % |
| Income tax expense (benefit) from discontinued operations | | 19,267 | | | (3,337) | | | 22,604 | | | (677.4) | % |
| Net loss from discontinued operations | | (39,621) | | | (10,461) | | | (29,160) | | | 278.7 | % |
| Net income | | 314,647 | | | 132,578 | | | 182,069 | | | 137.3 | % |
| Preferred stock dividends | | 11,693 | | | 14,041 | | | (2,348) | | | (16.7) | % |
| Loss on redemption of preferred stock | | 2,820 | | | — | | | 2,820 | | | NM |
| Net income available to common shareholders | | $ | 300,134 | | | $ | 118,537 | | | $ | 181,597 | | | 153.2 | % |
| | | | | | | | |
NetCustomers reported net income available to common shareholders declined $4.8 million, or 7.0%, to $64.4of $300.1 million for the year ended December 31, 2017, when2021, compared to $69.2$118.5 million for the year ended December 31, 2016. The decrease2020. Factors contributing to the change in net income available to common shareholders resulted from increases in non-interest expenses of $37.4 million, preferred stock dividends of $4.9 million and provision for loan losses of $3.7 million, offset in part by increases in non-interest income of $22.5 million and net interest income of $17.8 million and a decrease in tax expense of $0.9 million.
Net interest income increased $17.8 million, or 7.2%, for the year ended December 31, 2017, to $267.3 million, when2021 compared to $249.5the year ended December 31, 2020 were as follows:
Net interest income
Net interest income increased $281.4 million for the year ended December 31, 2016. The increase in net interest income was driven primarily2021 compared to the year ended December 31, 2020 as average interest-earning assets increased by an increase in the average balance of interest-earnings assets of $1.0$3.6 billion, or 11.7%,and NIM increased by 99 basis points to $9.8 billion3.70% for the year ended December 31, 2017, when compared to $8.8 billion2021 from 2.71% for the year ended December 31, 2016,2020. The increase in interest-earning assets was primarily driven by increases in the origination and purchases of the latest round of PPP loans, investment securities, commercial and industrial loans and leases, commercial loans to mortgage companies and consumer installment loans, offset in part by decreases in multi-family loans. The PPP loan forgiveness from the narrowingfirst two rounds and the latest round, which accelerated the recognition of net interest margin (tax equivalent) by 11deferred loan origination fees, drove a 92 basis points (from 2.84%increase in 2016 to 2.73% in 2017). Averagethe yield on total loans outstanding increased $0.6 billion for 2017, particularly multi-family loans increased $0.3 billion and commercialleases and industrial loans increased $0.3 billion as Customers continued its efforts to grow its business. Net interest margin decreased 11 basis points largely duecontributed to the increasedNIM increase. The shift in the mix of interest-earning assets included $3.3 billion ($5.1 billion average balance) of PPP loans yielding 5.46%. The shift in the mix of interest-bearing liabilities in a lower interest rate environment drove a 45 basis point decline in the cost of obtaining deposits to fund the assets of 29 basis points.
The provision for loan losses increased $3.7 million to $6.8 millioninterest-bearing liabilities for the year ended December 31, 2017, when2021 compared to $3.0 millionthe year ended December 31, 2020. The shift in the mix of interest-bearing liabilities included interest-bearing deposits of $12.3 billion ($10.9 billion average balance) costing 0.57%. Customers' total cost of deposits, including interest-bearing and non-interest bearing deposits) were 0.44% and 0.89% for the same period in 2016. years ended December 31, 2021 and 2020, respectively. PPPLF borrowings with $2.6 billion average balance costing 0.35% were fully repaid during the year ended December 31, 2021. Customers' total cost of funds, including non-interest bearing deposits and borrowings, was 0.54% and 0.97% for the years ended December 31, 2021 and 2020, respectively.
Provision for credit losses on loans and leases
The increase$35.3 million decrease in the provision for loan losses during 2017 included $2.3 million for loan-portfolio growth and $5.6 million for impaired loans, offset in part by a $1.1 million release resulting from improved asset quality and lower incurredlease losses than previously estimated. Net charge-offs for 2017 were $6.1 million compared to net charge-offs for 2016 of $1.7 million. There were no significant changes in Customers' methodology for estimating the allowance for loan losses or policies regarding charge-offs in 2017.
Non-interest income increased $22.5 million, or 40.0%, for the year ended December 31, 2017, to $78.9 million, when2021 compared to $56.4the year ended December 31, 2020, reflects the continuing improvement in macroeconomic forecasts since the beginning of the COVID-19 pandemic in first quarter 2020, partially offset by the growth in loans and leases, primarily in consumer installment loans. Upon adoption of the CECL standard on January 1, 2020, the ACL for loans and leases and off-balance sheet credit exposures increased by $79.8 million and $3.4 million, respectively. The ACL on off-balance sheet credit exposures is presented within accrued interest payable and other liabilities in the consolidated balance sheet and the related provision is presented as part of other non-interest expense on the consolidated income statement. The ACL on loans and leases held for investment, represented 1.53% of total loans and leases receivable, excluding PPP loans (non-GAAP measure, please refer to the non-GAAP reconciliation within Loans and Leases, Credit Risk), at December 31, 2021, compared to 1.90% at December 31, 2020.
Net charge-offs for the year ended December 31, 2016.2021 were $33.8 million, or 22 basis points of average total loans and leases, compared to $54.8 million, or 41 basis points of average total loans and leases for the year ended December 31, 2020. The increase in net charge-offs was primarily due to an increase in charge-offs of consumer installment loans coinciding with the growth of the portfolio year-over-year, offset by partial charge-offs of $25.2 million for two commercial real estate collateral dependent loans during the year ended December 31, 2020.
Non-interest income
The $14.0 million increase in non-interest income for the year ended December 31, 2021 compared to the year ended December 31, 2020 resulted primarily from increases of $11.3 million in interchangegains realized from the sale of AFS debt securities, $9.3 million in gains from the sale of SBA and card revenue of $16.8other loans, $7.2 million reflecting a full year of operations of the BankMobile Disbursement business acquired in June 2016, gainsunrealized gain (loss) on sales of investment securities of $8.8derivatives, $3.0 million in commercial lease income, $1.4 million in bank-owned life insurance income, of $2.5$1.3 million andin unrealized gain (loss) on investment securities, $1.3 million in mortgage warehouse transactional fees, $1.2 million in deposit fees, of $2.0 million.and $3.9 million in other non-interest income. These increases were offset in part by an increase in impairment losses of $24.5 million on equity securitiescash flow hedge derivative terminations and $2.8 million on sale of $5.7 million and a decrease in mortgage warehouse transaction fees of $2.2 million resulting from lower transaction volumes.
Non-interest expense increased $37.4 million, or 21.0%, duringforeign subsidiaries for the year ended December 31, 2017, to $215.6 million, when2021 compared to $178.2 million during the year ended December 31, 2016. 2020.
Non-interest expense
The $79.3 million increase in non-interest expense was primarily driven by increases in BankMobile operating expenses of $39.2 million, reflecting a full year of operations for the BankMobile Disbursement businessyear ended December 31, 2021 compared to the year ended December 31, 2020 primarily resulted from increases of $32.9 million in 2017technology, communication, and 6.5 months of BankMobilebank operations, in 2016. The increases in BankMobile expenses included a $10.4$14.1 million increase in salaries and employee benefits, a $20.2$13.1 million increase in technology, communication and bank operation expenses and a $5.4 million increase in professional services. On a consolidated basis, salariesservices, $7.3 million in loan servicing, $6.2 million in deposit relationship adjustment fees, $3.1 million in commercial lease depreciation and employee benefits increased $14.9$7.5 million technology, communications and bank operations increased $19.0 million, professional services increased $7.4 million and occupancy expenses increased $0.8 million.in other non-interest expense. These increases were offset in part by decreases of $2.9 million in loan workout costs, $1.6 million in FDIC assessments, non-income taxes, and regulatory fees of $5.2and $0.9 million other real estate owned expenses of $1.4 million andin merger and acquisition related expenses of $0.8 million.for the year ended December 31, 2021 compared to the year ended December 31, 2020.
Income tax expense declined $0.9
Customers' effective tax rate was 19.7% for the year ended December 31, 2021 compared to 24.6% for the year the ended December 31, 2020. The decrease in the effective tax rate for the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily due to an increase in investment tax credits, the recognition of a deferred tax asset related to the outside basis difference of foreign subsidiaries, excess tax benefits from stock option exercises and state apportionment rates, partially offset by the dilution of the permanent tax differences and other tax benefits as a result of higher pre-tax income from continuing operations and an increase in compensation expense associated with an executive's retirement that exceeded the limit for tax deduction purposes.
Net loss from discontinued operations
On January 4, 2021, Customers Bancorp completed the previously announced divestiture of BMT, the technology arm of its BankMobile segment, to MFAC Merger Sub Inc., an indirect wholly-owned subsidiary of MFAC, pursuant to an Agreement and Plan of Merger, dated August 6, 2020, by and among MFAC, MFAC Merger Sub Inc., BMT, Customers Bank, the sole stockholder of BMT, and Customers Bancorp, the parent bank holding company for Customers Bank (as amended on November 2, 2020 and December 8, 2020). In connection with the closing of the divestiture, MFAC changed its name to “BM Technologies, Inc.” Following the completion of the divestiture of BMT, BankMobile's serviced deposits and loans and the related net interest income have been combined with Customers' financial condition and the results of operations as a single reportable segment.
BMT's historical financial results for periods prior to the divestiture are reflected in Customers Bancorp’s consolidated financial statements as discontinued operations. The assets and liabilities of BMT have been presented as "Assets of discontinued operations" and "Liabilities of discontinued operations" on the consolidated balance sheet at December 31, 2020. BMT's operating results and associated cash flows have been presented as "Discontinued operations" within the accompanying audited financial statements and prior period amounts have been reclassified to conform with the current period presentation.
Customers' loss from discontinued operations, net of income taxes was $39.6 million for the year ended December 31, 2017, to $45.0 million, when2021 compared to $45.9 million in the same period in 2016. The decrease in income tax expense was driven primarily by a tax benefit recognized of $12.0 million as a result of the exercises of employee stock options and vesting of restricted stock units and decreased pre-tax income of $0.7 million in 2017, offset in part by a deferred tax asset re-measurement charge to income tax expense of $5.5 million due to the enactment of the Tax Cuts and Jobs Act in December 2017. Customers' effective tax rate decreased by 0.4% to 36.4% for 2017 from 36.8% for 2016.
Preferred stock dividends increased $4.9 million for 2017, reflecting a full year of dividends paid on the Series E and Series F Preferred Stock issued in April 2016 and September 2016, respectively.
For the years ended December 31, 2016 and 2015
Net income available to common shareholders increased $13.1 million, or 23.3%, to $69.2$10.5 million for the year ended December 31, 2016, when compared2020. The $29.2 million increase primarily resulted from restricted stock awards of BM Technologies' common stock granted to $56.1certain team members of BMT and the effect of the divestiture being treated as a taxable asset sale for tax purposes, offset in part by a tax benefit related to the restricted stock awards in 2021. See "NOTE 3 – DISCONTINUED OPERATIONS" to Customers' audited financial statements for additional information.
Preferred stock dividends and loss on redemption of preferred stock
Preferred stock dividends were $11.7 million and $14.0 million for the years ended December 31, 2021 and 2020, respectively. During the year ended December 31, 2021, Customers redeemed all of the outstanding shares of Series C and Series D Preferred Stock for an aggregate payment of $82.5 million, at a redemption price of $25.00 per share. The redemption price paid in excess of the carrying value of Series C and Series D Preferred Stock of $2.8 million is included as a loss on redemption of preferred stock in the consolidated statement of income for the year ended December 31, 2015. The increased net income available2021. After giving effect to common shareholders resulted from an increase in net interest incomethe redemption, no shares of $53.2 million, an increase in non-interest incomethe Series C and Series D Preferred Stock remained outstanding. There were no changes to the amount of $28.7 million and a decrease in the provision for loan losses of $17.5 million, partially offset by increases in non-interest expense of $63.3 million, tax expense of $16.0 million and preferred stock dividends of $7.0 million.
Net interest income increased $53.2 million, or 27.1%, for the year ended December 31, 2016, to $249.5 million, when compared to $196.3 million for the year ended December 31, 2015. The increase in net interest income was driven by an increase in the average balances of loans and securities of $1.8 billion, from $6.7 billion in 2015 to $8.5 billion in 2016, as well as the expansion of net interest margin by 3 basis points (from 2.81% in 2015 to 2.84% in 2016).
The provision for loan losses decreased $17.5 million to $3.0 million for the year ended December 31, 2016, when compared to $20.6 million for the year ended December 31, 2015. The decrease in the provision for loan losses during 2016 primarily resulted from a provision expense of $9.0 million recorded in 2015 for a fraudulent loan that was charged off in its entirety during 2015, a $2.5 million decrease as a result of greater growth in loans held for investment in 2015 as compared to 2016, a benefit of $0.3 million in 2016 attributable to FDIC loss sharing arrangements versus expense of $3.9 million in 2015 and recoveries totaling $2.7 million in 2016 compared to recoveries of $1.4 million in 2015.
Non-interest income increased $28.7 million, or 103.4%, for the year ended December 31, 2016, to $56.4 million, when compared to $27.7 million for the year ended December 31, 2015. The increase in non-interest income resulted primarily from the acquisition of the Disbursement business in June 2016, which increased interchange and card revenues by $24.1 million, increases in deposit fees of $7.1 million, and other income of $5.8 million driven by increases in university fees and a $2.2 million recovery of a previously recorded loss received in 2016. These increases were offset in part by an other-than-temporary impairment charge of $7.3 million recorded in 2016 on equity securities, and a decrease in bank-owned life insurance income of $2.3 million as a result of a $2.4 million benefit received on a bank-owned life insurance policy in 2015.
Non-interest expense increased $63.3 million, or 55.1%,outstanding during the year ended December 31, 2016,2020. See "NOTE 13 – SHAREHOLDERS EQUITY" to $178.2 million, whenCustomers' audited financial statements for additional information.
On June 15, 2020, the Series C preferred stock became floating at three-month LIBOR plus 5.30% compared to $114.9 million during the year ended December 31, 2015. The increase was primarily driven by increases in salaries and employee benefitsa fixed rate of $21.9 million, technology, communication and bank operation expenses of $16.2 million, FDIC assessments, non-income taxes, and regulatory fees of $2.4 million, professional services of $9.6 million, occupancy expenses of $1.7 million and one-time charges of $1.4 million associated with legal matters. Most of the increased non-interest expense was attributable to the increased level of staff, core processing and technology-related expenses and other operating expenses arising from the acquisition of the Disbursement business in June 2016 as well as the organic growth of the Bank.
Income tax expense increased $16.0 million for the year ended December 31, 2016, to $45.9 million, when compared to $29.9 million in the same period in 2015. The increase in income tax expense was driven primarily by increased pre-tax income of $36.1 million in 2016 partially offset by the early adoption of ASU 2016-09, Improvements to Employee Share-BasedPaymentAccounting, which decreased income tax expense by $4.1 million for the year ended December 31, 2016. Customers' effective tax rate increased by 3.0% to 36.8% for 2016 from 33.8% for 2015.
Preferred stock dividends increased $7.0 million for 2016 due to the issuance of7.00%. On March 15, 2021, the Series D preferred stock became floating at three-month LIBOR plus 5.09%, compared to a fixed rate of 6.50%. On June 15, 2021, the Series E andPreferred Stock became floating at three-month LIBOR plus 5.14%, compared to a fixed rate of 6.45%. On December 15, 2021, the Series F Preferred Stock during 2016 with an aggregate principal balancebecame floating at three-month LIBOR plus 4.762%, compared to a fixed rate of $167.5 million and an average dividend yield of 6.23%6.00%.
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 summarizes Customers' net interest income, and related interest spread, and net interest margin for the years ended December 31, 2017, 2016 and 2015.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | Average balance | | Interest income or expense | | Average yield or cost | | 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 | $ | 296,305 |
| | $ | 3,132 |
| | 1.06 | % | | $ | 225,409 |
| | $ | 1,218 |
| | 0.54 | % | | $ | 271,201 |
| | $ | 718 |
| | 0.26 | % |
| Investment securities (A) | 870,979 |
| | 25,153 |
| | 2.89 | % | | 540,532 |
| | 14,293 |
| | 2.64 | % | | 427,638 |
| | 10,405 |
| | 2.43 | % |
| Loans: | | | | | | | | | | | | | | | | | |
| Commercial loans to mortgage companies | 1,748,575 |
| | 73,513 |
| | 4.20 | % | | 1,985,495 |
| | 70,308 |
| | 3.54 | % | | 1,550,683 |
| | 50,876 |
| | 3.28 | % |
| Multifamily loans | 3,551,683 |
| | 132,263 |
| | 3.72 | % | | 3,223,122 |
| | 122,316 |
| | 3.79 | % | | 2,367,472 |
| | 88,879 |
| | 3.75 | % |
| Commercial and industrial | 1,452,805 |
| | 60,595 |
| | 4.17 | % | | 1,172,655 |
| | 46,257 |
| | 3.94 | % | | 681,722 |
| | 26,758 |
| | 3.93 | % |
| Non-owner occupied commercial real estate | 1,293,173 |
| | 51,212 |
| | 3.96 | % | | 1,188,631 |
| | 45,441 |
| | 3.82 | % | | 1,209,879 |
| | 47,438 |
| | 3.92 | % |
| All other loans | 503,532 |
| | 22,353 |
| | 4.44 | % | | 370,663 |
| | 18,496 |
| | 4.99 | % | | 415,307 |
| | 19,882 |
| | 4.79 | % |
| Total loans (B) | 8,549,768 |
| | 339,936 |
| | 3.98 | % | | 7,940,566 |
| | 302,818 |
| | 3.81 | % | | 6,225,063 |
| | 233,833 |
| | 3.76 | % |
| Other interest-earning assets | 103,710 |
| | 4,629 |
| | 4.46 | % | | 84,797 |
| | 4,210 |
| | 4.96 | % | | 72,693 |
| | 4,894 |
| | 6.73 | % |
| Total interest-earning assets | 9,820,762 |
|
| 372,850 |
| | 3.80 | % | | 8,791,304 |
|
| 322,539 |
| | 3.67 | % | | 6,996,595 |
| | 249,850 |
| | 3.57 | % |
| Non-interest-earning assets | 376,948 |
| | | | | | 310,813 |
| | | | | | 265,936 |
| | | | |
| Total assets | $ | 10,197,710 |
| | | | | | $ | 9,102,117 |
| | | | | | $ | 7,262,531 |
| | | | |
| Liabilities | | | | | | | | | | | | | | | | | |
| Interest checking accounts | $ | 386,819 |
| | 3,157 |
| | 0.82 | % | | $ | 190,279 |
| | 1,069 |
| | 0.56 | % | | 123,527 |
| | 686 |
| | 0.56 | % |
| Money market deposit accounts | 3,339,053 |
| | 34,488 |
| | 1.03 | % | | 3,085,140 |
| | 19,233 |
| | 0.62 | % | | 2,412,958 |
| | 12,548 |
| | 0.52 | % |
| Other savings accounts | 40,791 |
| | 112 |
| | 0.27 | % | | 39,122 |
| | 95 |
| | 0.24 | % | | 36,820 |
| | 111 |
| | 0.30 | % |
| Certificates of deposit | 2,392,095 |
| | 29,825 |
| | 1.25 | % | | 2,633,425 |
| | 27,871 |
| | 1.06 | % | | 2,087,641 |
| | 20,637 |
| | 0.99 | % |
| Total interest-bearing deposits | 6,158,758 |
|
| 67,582 |
| | 1.10 | % | | 5,947,966 |
|
| 48,268 |
| | 0.81 | % | | 4,660,946 |
|
| 33,982 |
| | 0.73 | % |
| Borrowings | 1,875,431 |
| | 37,925 |
| | 2.02 | % | | 1,498,899 |
| | 24,774 |
| | 1.65 | % | | 1,369,841 |
| | 19,578 |
| | 1.43 | % |
| Total interest-bearing liabilities | 8,034,189 |
|
| 105,507 |
| | 1.31 | % | | 7,446,865 |
|
| 73,042 |
| | 0.98 | % | | 6,030,787 |
|
| 53,560 |
| | 0.89 | % |
| Non-interest-bearing deposits | 1,187,324 |
| | | | | | 873,599 |
| | | | | | 692,159 |
| | | | |
| Total deposits and borrowings | 9,221,513 |
| | | | 1.14 | % | | 8,320,464 |
| | | | 0.88 | % | | 6,722,946 |
| | | | 0.80 | % |
| Other non-interest-bearing liabilities | 72,714 |
| | | | | | 84,752 |
| | | | | | 30,394 |
| | | | |
| Total liabilities | 9,294,227 |
| | | | | | 8,405,216 |
| | | | | | 6,753,340 |
| | | | |
| Shareholders’ equity | 903,483 |
| | | | | | 696,901 |
| | | | | | 509,191 |
| | | | |
| Total liabilities and shareholders’ equity | $ | 10,197,710 |
| | | | | | $ | 9,102,117 |
| | | | | | $ | 7,262,531 |
| | | | |
| Net interest earnings | | | 267,343 |
| | | | | | 249,497 |
| | | | | | 196,290 |
| | |
| Tax-equivalent adjustment (C) | | | 645 |
| | | | | | 390 |
| | | | | | 449 |
| | |
| Net interest earnings | | | $ | 267,988 |
| | | | | | $ | 249,887 |
| | | | | | $ | 196,739 |
| | |
| Interest spread | | | | | 2.66 | % | | | | | | 2.79 | % | | | | | | 2.77 | % |
| Net interest margin | | | | | 2.72 | % | | | | | | 2.84 | % | | | | | | 2.81 | % |
| Net interest margin tax equivalent (C) | | | | | 2.73 | % | | | | | | 2.84 | % | | | | | | 2.81 | % |
| |
(A) | For presentation in this table, balances and the corresponding average yield for investment securities are based upon historical cost, adjusted for other-than-temporary impairment and amortization of premiums and accretion of discounts. |
| |
(B) | Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees. |
| |
(C) | Non-GAAP tax-equivalent basis, using a 35% statutory tax rate to approximate interest income as a taxable asset. |
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 years ended December 31, 2021 and 2020. 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.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 2017 vs. 2016 | | 2016 vs. 2015 |
| | Increase (decrease) due to change in | | | | Increase (decrease) due to change in | | |
| | Rate | | Volume | | Total | | Rate | | Volume | | Total |
| (amounts in thousands) | |
| Interest income: | | | | | | | | | | | |
| Interest-earning deposits | $ | 1,440 |
| | $ | 474 |
| | $ | 1,914 |
| | $ | 639 |
| | $ | (139 | ) | | $ | 500 |
|
| Investment securities | 1,422 |
| | 9,438 |
| | 10,860 |
| | 961 |
| | 2,927 |
| | 3,888 |
|
| Loans: | | | | | | | | | | | |
| Commercial loans to mortgage companies | 12,206 |
| | (9,001 | ) | | 3,205 |
| | 4,284 |
| | 15,148 |
| | 19,432 |
|
| Multifamily loans | (2,325 | ) | | 12,272 |
| | 9,947 |
| | 976 |
| | 32,461 |
| | 33,437 |
|
| Commercial and industrial | 2,776 |
| | 11,562 |
| | 14,338 |
| | 134 |
| | 19,365 |
| | 19,499 |
|
| Non-owner occupied commercial real estate | 1,673 |
| | 4,098 |
| | 5,771 |
| | (1,172 | ) | | (825 | ) | | (1,997 | ) |
| All other loans | (2,214 | ) | | 6,071 |
| | 3,857 |
| | 816 |
| | (2,202 | ) | | (1,386 | ) |
| Total loans | 12,116 |
|
| 25,002 |
|
| 37,118 |
|
| 5,038 |
|
| 63,947 |
|
| 68,985 |
|
| Other interest-earning assets | (454 | ) | | 873 |
| | 419 |
| | (1,416 | ) | | 732 |
| | (684 | ) |
| Total interest income | 14,524 |
| | 35,787 |
| | 50,311 |
|
| 5,222 |
| | 67,467 |
| | 72,689 |
|
| Interest expense: | | | | | | | | | | | |
| Interest checking accounts | 636 |
| | 1,452 |
| | 2,088 |
| | 8 |
| | 375 |
| | 383 |
|
| Money market deposit accounts | 13,556 |
| | 1,699 |
| | 15,255 |
| | 2,784 |
| | 3,901 |
| | 6,685 |
|
| Other savings accounts | 13 |
| | 4 |
| | 17 |
| | (23 | ) | | 7 |
| | (16 | ) |
| Certificates of deposit | 4,663 |
| | (2,709 | ) | | 1,954 |
| | 1,538 |
| | 5,696 |
| | 7,234 |
|
| Total interest-bearing deposits | 18,868 |
| | 446 |
| | 19,314 |
|
| 4,307 |
| | 9,979 |
| | 14,286 |
|
| Borrowings | 6,192 |
| | 6,959 |
| | 13,151 |
| | 3,243 |
| | 1,953 |
| | 5,196 |
|
| Total interest expense | 25,060 |
| | 7,405 |
| | 32,465 |
|
| 7,550 |
| | 11,932 |
| | 19,482 |
|
| Net interest income | $ | (10,536 | ) | | $ | 28,382 |
| | $ | 17,846 |
|
| $ | (2,328 | ) | | $ | 55,535 |
| | $ | 53,207 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | For the Years Ended December 31, | | | | | | | |
| 2021 | | 2020 | | 2021 vs. 2020 | | | |
| (dollars 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 | $ | 1,169,416 | | | $ | 1,585 | | | 0.14 | % | | $ | 564,218 | | | $ | 3,301 | | | 0.59 | % | | $ | (3,681) | | | $ | 1,965 | | | $ | (1,716) | | | | | | | | |
Investment securities (1) | 1,753,649 | | | 40,413 | | | 2.30 | % | | 836,815 | | | 24,206 | | | 2.89 | % | | (5,778) | | | 21,985 | | | 16,207 | | | | | | | | |
| Loans and leases: | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial loans to mortgage companies | 2,699,300 | | | 83,350 | | | 3.09 | % | | 2,668,642 | | | 83,043 | | | 3.11 | % | | (574) | | | 881 | | | 307 | | | | | | | | |
| Multi-family loans | 1,501,878 | | | 56,582 | | | 3.77 | % | | 2,020,640 | | | 77,743 | | | 3.85 | % | | (1,585) | | | (19,576) | | | (21,161) | | | | | | | | |
Commercial and industrial loans and leases (2) | 3,068,005 | | | 115,192 | | | 3.75 | % | | 2,581,119 | | | 106,375 | | | 4.12 | % | | (10,096) | | | 18,913 | | | 8,817 | | | | | | | | |
| PPP loans | 5,108,192 | | | 279,158 | | | 5.46 | % | | 3,121,157 | | | 65,508 | | | 2.10 | % | | 152,837 | | | 60,813 | | | 213,650 | | | | | | | | |
| Non-owner occupied commercial real estate loans | 1,349,563 | | | 51,430 | | | 3.81 | % | | 1,368,684 | | | 53,480 | | | 3.91 | % | | (1,326) | | | (724) | | | (2,050) | | | | | | | | |
| Residential mortgages | 339,845 | | | 12,405 | | | 3.65 | % | | 422,696 | | | 16,137 | | | 3.82 | % | | (691) | | | (3,041) | | | (3,732) | | | | | | | | |
| Installment loans | 1,517,165 | | | 138,705 | | | 9.14 | % | | 1,264,255 | | | 109,762 | | | 8.68 | % | | 6,062 | | | 22,881 | | | 28,943 | | | | | | | | |
Total loans and leases (3) | 15,583,948 | | | 736,822 | | | 4.73 | % | | 13,447,193 | | | 512,048 | | | 3.81 | % | | 135,565 | | | 89,209 | | | 224,774 | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Other interest-earning assets | 59,308 | | | 2,064 | | | 3.48 | % | | 85,091 | | | 3,749 | | | 4.41 | % | | (691) | | | (994) | | | (1,685) | | | | | | | | |
| Total interest-earning assets | 18,566,321 | | | $ | 780,884 | | | 4.21 | % | | 14,933,317 | | | $ | 543,304 | | | 3.64 | % | | 93,038 | | | 144,542 | | | 237,580 | | | | | | | | |
| Non-interest-earning assets | 633,615 | | | | | | | 592,770 | | | | | | | | | | | | | | | | | | |
| Assets of discontinued operations | — | | | | | | | 78,714 | | | | | | | | | | | | | | | | | | |
| Total assets | $ | 19,199,936 | | | | | | | $ | 15,604,801 | | | | | | | | | | | | | | | | | | |
| Liabilities | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest checking accounts | $ | 4,006,354 | | | $ | 27,605 | | | 0.69 | % | | $ | 2,098,138 | | | $ | 18,707 | | | 0.89 | % | | $ | (4,966) | | | $ | 13,864 | | | $ | 8,898 | | | | | | | | |
| Money market deposit accounts | 4,933,027 | | | 22,961 | | | 0.47 | % | | 3,657,422 | | | 35,091 | | | 0.96 | % | | (21,756) | | | 9,626 | | | (12,130) | | | | | | | | |
| Other savings accounts | 1,358,708 | | | 7,584 | | | 0.56 | % | | 1,162,472 | | | 16,734 | | | 1.44 | % | | (11,598) | | | 2,448 | | | (9,150) | | | | | | | | |
| Certificates of deposit | 619,859 | | | 4,491 | | | 0.72 | % | | 1,357,688 | | | 21,513 | | | 1.58 | % | | (8,518) | | | (8,504) | | | (17,022) | | | | | | | | |
Total interest-bearing deposits (4) | 10,917,948 | | | 62,641 | | | 0.57 | % | | 8,275,720 | | | 92,045 | | | 1.11 | % | | (53,168) | | | 23,764 | | | (29,404) | | | | | | | | |
| Federal funds purchased | 22,110 | | | 16 | | | 0.07 | % | | 239,481 | | | 443 | | | 0.19 | % | | (175) | | | (252) | | | (427) | | | | | | | | |
| FRB PPP Liquidity Facility | 2,636,925 | | | 9,229 | | | 0.35 | % | | 2,537,744 | | | 8,906 | | | 0.35 | % | | — | | | 323 | | | 323 | | | | | | | | |
| Borrowings | 610,503 | | | 23,924 | | | 3.92 | % | | 1,265,279 | | | 38,222 | | | 3.02 | % | | 9,227 | | | (23,525) | | | (14,298) | | | | | | | | |
| Total interest-bearing liabilities | 14,187,486 | | | $ | 95,810 | | | 0.68 | % | | 12,318,224 | | | $ | 139,616 | | | 1.13 | % | | (62,309) | | | 18,503 | | | (43,806) | | | | | | | | |
Non-interest-bearing deposits (4) | 3,470,788 | | | | | | | 2,052,376 | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| Total deposits and borrowings | 17,658,274 | | | | | 0.54 | % | | 14,370,600 | | | | | 0.97 | % | | | | | | | | | | | | | |
| Other non-interest-bearing liabilities | 304,078 | | | | | | | 148,045 | | | | | | | | | | | | | | | | | | |
| Liabilities of discontinued operations | — | | | | | | | 53,916 | | | | | | | | | | | | | | | | | | |
| Total liabilities | 17,962,352 | | | | | | | 14,572,561 | | | | | | | | | | | | | | | | | | |
| Shareholders’ equity | 1,237,584 | | | | | | | 1,032,240 | | | | | | | | | | | | | | | | | | |
| Total liabilities and shareholders’ equity | $ | 19,199,936 | | | | | | | $ | 15,604,801 | | | | | | | | | | | | | | | | | | |
| Net interest earnings | | | $ | 685,074 | | | | | | | $ | 403,688 | | | | | $ | 155,347 | | | $ | 126,039 | | | $ | 281,386 | | | | | | | | |
Tax-equivalent adjustment (5) | | | 1,147 | | | | | | | 874 | | | | | | | | | | | | | | | | |
| Net interest earnings | | | $ | 686,221 | | | | | | | $ | 404,562 | | | | | | | | | | | | | | | | |
| Interest spread | | | | | 3.66 | % | | | | | | 2.67 | % | | | | | | | | | | | | | |
| Net interest margin | | | | | 3.69 | % | | | | | | 2.70 | % | | | | | | | | | | | | | |
Net interest margin tax equivalent (5) | | | | | 3.70 | % | | | | | | 2.71 | % | | | | | | | | | | | | | |
Net interest margin tax equivalent, excluding PPP loans (6) | | | | | 3.16 | % | | | | | | 2.96 | % | | | | | | | | | | | | | |
(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.
For(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 0.44% and 0.89% for the years ended December 31, 20172021 and 20162020, respectively.
(5)Non-GAAP tax-equivalent basis, using an estimated marginal tax rate of 26% for both the years ended December 31, 2021 and 2020, 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. Please refer to the reconciliation schedule that follows this table.
(6)Non-GAAP tax-equivalent basis, as described in note (5) for the years ended December 31, 2021 and 2020, excluding net interest income from PPP loans and related borrowings, along with the related PPP loan balances and PPP fees receivable from interest-earning assets. 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. Please refer to the reconciliation schedule that follows this table.
Net interest income was $267.3increased $281.4 million for the year ended December 31, 2017,2021 compared to the year ended December 31, 2020 as average interest-earning assets increased by $$3.6 billion, primarily related to PPP loan originations and purchases of the latest round of PPP loans, increases in investment securities, interest-earning deposits, commercial and industrial loans, installment loans and commercial loans to mortgage companies, partially offset by decreases in multi-family loans as the loan mix improved year-over-year. The overall average loans and leases receivable balance fluctuations were the result of Customers' strategic efforts to reduce the lower-yielding loans in the multi-family portfolio and replace them with higher-yielding commercial and industrial and installment loans. Customers plans to grow the multi-family loan portfolio in future periods. The commercial loans to mortgage companies trend has been a function of greater refinance activity due to sharply lower interest rates, an increase of $17.8 million, or 7.2%, when comparedin home purchase volumes and market share gains from other banks since early 2020. The refinancing activity has slowed since reaching its high level in early 2021.
The NIM increased by 99 basis points to net interest income3.70% for the year ended December 31, 2016, of $249.5 million. The increase in net interest income in 2017 was primarily attributable to an increase in the average balance of interest-earning assets of $1.0 billion, or 11.7%, to $9.8 billion2021, from 2.71% for the year ended December 31, 2017, when compared2020 resulting primarily from the PPP loan forgiveness from the first two rounds and the latest round, as well as a shift in the mix of interest-earning assets and interest-bearing liabilities in a lower interest rate environment with the Federal Reserve interest rate cuts of 225 basis points beginning in August 2019. The PPP loan forgiveness from the first two rounds and the latest round, which accelerated the recognition of net deferred loan origination fees, drove a 92 basis points increase in the yield on total loans and leases and contributed to $8.8the NIM increase. The increase in interest-earning assets was primarily driven by increases in the origination and purchases of the latest round of PPP loans, investment securities, commercial and industrial loans and leases, commercial loans to mortgage companies and consumer installment loans, offset in part by decreases in multi-family loans. The shift in the mix of interest-earnings assets included $3.3 billion ($5.1 billion average balance) of PPP loans yielding 5.46%. The shift in the mix of interest-bearing liabilities in a lower interest rate environment drove a 45 basis point decline in the cost of interest-bearing liabilities for the year ended December 31, 2016, offset in part by the narrowing of Customers' net interest margin (tax equivalent) by 11 basis points,2021 compared to 2.73%, for the year ended December 31, 2017, from 2.84%2020. The shift in interest-bearing liabilities included interest-bearing deposits of $12.3 billion ($10.9 billion average balance) costing 0.57%. Customers' total cost of deposits, including interest-bearing and non-interest bearing deposits) were 0.44% and 0.89% for the years ended December 31, 2021 and 2020, respectively. PPPLF borrowings with $2.6 billion average balance costing 0.35% were fully repaid during the year ended December 31, 2016.
For2021. Customers' total cost of funds, including non-interest bearing deposits and borrowings was 0.54% and 0.97% for the years ended December 31, 20162021 and 20152020, respectively.
Customers’ net interest margin tables contain non-GAAP financial measures calculated using non-GAAP amounts. These measures include net interest margin tax equivalent and net interest margin tax equivalent, excluding PPP loans. Management uses these non-GAAP measures to compare the current period presentation to historical periods in prior filings. 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.
NetA reconciliation of net interest income was $249.5 millionmargin tax equivalent and net interest margin tax equivalent, excluding PPP loans for the yearyears ended December 31, 2016, an increase of $53.2 million, or 27.1%, when compared to net interest income for the year ended December 31, 2015, of $196.3 million. The increase in net interest income was primarily attributable to an increase in the average balance of interest-earning assets of $1.8 billion, from $7.0 billion in 2015 to $8.8 billion in 2016, as well as the expansion of Customers' net interest margin (tax equivalent) by 3 basis points to 2.84% for the year ended December 31, 2016 from 2.81% for the year ended December 31, 2015.2021 and 2020 is set forth below.
| | | | | | | | | | | |
| For the Years Ended December 31, |
| (dollars in thousands) | 2021 | | 2020 |
| Net interest income (GAAP) | $ | 685,074 | | | $ | 403,688 | |
| Tax-equivalent adjustment | 1,147 | | | 874 | |
| Net interest income tax equivalent (Non-GAAP) | 686,221 | | | 404,562 | |
| Loans receivable, PPP net interest income | (261,279) | | | (54,583) | |
| Net interest income tax equivalent, excluding PPP loans (Non-GAAP) | $ | 424,942 | | | $ | 349,979 | |
| | | |
| Average total interest-earning assets (GAAP) | $ | 18,566,321 | | | $ | 14,933,317 | |
| Average PPP loans | (5,108,192) | | | (3,121,157) | |
| Adjusted average total interest-earning assets (Non-GAAP) | $ | 13,458,129 | | | $ | 11,812,160 | |
| | | |
| Net interest margin (GAAP) | 3.69 | % | | 2.70 | % |
| Net interest margin tax equivalent (Non-GAAP) | 3.70 | % | | 2.71 | % |
| Net interest margin tax equivalent, excluding PPP loans (Non-GAAP) | 3.16 | % | | 2.96 | % |
PROVISION FOR LOANCREDIT LOSSES
For more information about the provision and allowance for loan lossesCustomers' ACL methodology and Customers' loss experience, see CriticalAccounting Policies, FINANCIAL CONDITION - LOANS, CREDIT RISK and ASSET QUALITY hereinEstimates and NOTE 4"NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATIONPRESENTATION" and "NOTE 8 – LOANS AND LEASES RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES" to Customers' audited financial statements.
Customers maintains an allowance for loan lossesACL to cover estimated probablecurrent expected credit losses incurred as of the balance sheet date on loans and leases held for investment.investment that are not reported at their fair value on a recurring basis. The allowance for loan lossesACL is increased through periodic provisions for loancredit losses on loans and leases that are charged as an expense on the consolidated statements of income and is reduced by charge-offs, net of recoveries. The loan and lease portfolio is reviewed quarterly to evaluate the performance of the portfolio and the adequacy of the allowance for loan losses.ACL. The allowance for loan lossesACL is estimated as of the end of each quarter and compared to the balance recorded in the general ledger, net of charge-offs and recoveries. The allowance is adjusted to the estimated allowance for loan lossesACL balance with a corresponding charge (or debit) to the provision for credit losses on loans and leases.
The provision for credit losses is a charge to earnings to maintain the ACL at a level consistent with management’s assessment of expected lifetime losses in the loan losses.
Forand lease portfolio at the balance sheet date. Customers recorded provision for credit losses for loans and leases of $27.4 million and $62.8 million for the years ended December 31, 20172021 and 2016
During 2017,2020, respectively, utilizing the CECL methodology under ASC 326. Customers recorded a benefit to provision of $0.2 million and $1.1 million of lending-related commitments for the year ended December 31, 2021 and 2020, respectively, utilizing the CECL methodology. The $35.3 million decrease in the provision for loancredit losses was $6.8 million, an increase of $3.7 million from a provision of $3.0 million in 2016. The 2017 provision expense included $2.3 million for loan portfolio growth and $5.6 million for impaired loans, offset in part by a $1.1 million release of the allowance estimate resulting from improved asset quality and lower incurred losses than previously estimated. Of the $6.8 million provision for loan losses recorded in 2017, $5.1 million relatedyear ended December 31, 2021 compared to the commercialyear ended December 31, 2020 reflects the continuing improvement in macroeconomic forecasts since the beginning of COVID-19 pandemic in first quarter 2020, partially offset by the growth in loans and industrial loan portfolio, including owner occupiedleases, primarily in consumer installment loans. Customers adopted ASC 326 on January 1, 2020. Upon adoption, the ACL for loans and leases and lending-related unfunded commitments increased by $79.8 million and $3.4 million, respectively, with the after-tax cumulative effect recorded to retained earnings.
Net charge-offs for the year ended December 31, 2021 were $33.8 million, or 22 basis points of average total loans and leases, compared to $54.8 million, or 41 basis points of average total loans and leases for the year ended December 31, 2020. The increase in net charge-offs primarily relate to the charge-offs in consumer installment loans, partially offset by partial charge-offs of two commercial real estate collateral dependent loans in 2020. The two commercial real estate collateral dependent loans were sold in August 2020 and $0.6 million related to the multi-family loan portfolio. The 2016 provision included a benefit of $0.3 million attributable to FDIC loss sharing arrangements. Recoveries in 2017 totaled $1.1 million compared to recoveries of $2.7 million in 2016. There were no significant changes in Customers' methodology for estimating its allowance for loan losses, or policies regarding charge-offs, in 2017. For more information about the provision and the allowance for loan losses, see NOTE 9 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES to Customers' audited financial statements.January 2021.
For the years ended December 31, 2016 and 2015
During 2016, the provision for loan losses was $3.0 million, a decrease of $17.5 million from a provision of $20.6 million in 2015. The 2015 provision for loan losses included $9.0 million for a fraudulent loan that was charged off in its entirety and reflected greater growth in loans held for investment. The held-for-investment loan portfolio grew approximately $0.7 billion in 2016 compared to $1.1 billion in 2015, resulting in less provision for new loans of approximately $2.5 million. The 2016 provision included a benefit of $0.3 million attributable to FDIC loss sharing arrangements versus expense of $3.9 million in 2015. Recoveries in 2016 totaled $2.7 million compared to recoveries of $1.4 million in 2015. There were no significant changes in Customers' methodology for estimating its allowance for loan losses, or policies regarding charge-offs, in 2016.
NON-INTEREST INCOME
The table below presents the various components of non-interest income for the years ended December 31, 2017, 20162021 and 2015.2020.
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | Change | | % Change |
| (dollars in thousands) | 2021 | | 2020 | | |
| | | | | | | |
| Interchange and card revenue | $ | 336 | | | $ | 646 | | | $ | (310) | | | (48.0) | % |
| Deposit fees | 3,774 | | | 2,526 | | | 1,248 | | | 49.4 | % |
| Commercial lease income | 21,107 | | | 18,139 | | | 2,968 | | | 16.4 | % |
| Bank-owned life insurance | 8,416 | | | 7,009 | | | 1,407 | | | 20.1 | % |
| Mortgage warehouse transactional fees | 12,874 | | | 11,535 | | | 1,339 | | | 11.6 | % |
| Gain (loss) on sale of SBA and other loans | 11,327 | | | 2,009 | | | 9,318 | | | 463.8 | % |
| Loan fees | 7,527 | | | 5,652 | | | 1,875 | | | 33.2 | % |
| Mortgage banking income | 1,536 | | | 1,693 | | | (157) | | | (9.3) | % |
| | | | | | | |
| | | | | | | |
| Gain (loss) on sale of investment securities | 31,392 | | | 20,078 | | | 11,314 | | | 56.4 | % |
| Unrealized gain (loss) on investment securities | 2,720 | | | 1,447 | | | 1,273 | | | 88.0 | % |
| Loss on sale of foreign subsidiaries | (2,840) | | | — | | | (2,840) | | | NM |
| Unrealized gain (loss) on derivatives | 3,208 | | | (3,951) | | | 7,159 | | | (181.2) | % |
| Loss on cash flow hedge derivative terminations | (24,467) | | | — | | | (24,467) | | | NM |
| Other | 957 | | | (2,965) | | | 3,922 | | | (132.3) | % |
| Total non-interest income | $ | 77,867 | | | $ | 63,818 | | | $ | 14,049 | | | 22.0 | % |
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| (amounts in thousands) | |
| Interchange and card revenue | $ | 41,509 |
| | $ | 24,681 |
| | $ | 557 |
|
| Deposit fees | 10,039 |
| | 8,067 |
| | 944 |
|
| Mortgage warehouse transactional fees | 9,345 |
| | 11,547 |
| | 10,394 |
|
| Gain (loss) on sale of investment securities | 8,800 |
| | 25 |
| | (85 | ) |
| Bank-owned life insurance | 7,219 |
| | 4,736 |
| | 7,006 |
|
| Gains on sale of SBA and other loans | 4,223 |
| | 3,685 |
| | 4,047 |
|
| Mortgage banking income | 875 |
| | 969 |
| | 741 |
|
| Impairment loss on investment securities | (12,934 | ) | | (7,262 | ) | | — |
|
| Other | 9,834 |
| | 9,922 |
| | 4,113 |
|
| Total non-interest income | $ | 78,910 |
| | $ | 56,370 |
| | $ | 27,717 |
|
For the years ended December 31, 2017 and 2016
Non-interest income increased $22.5The $1.2 million or 40.0%,increase in deposit fees for the year ended December 31, 2017, to $78.9 million, when2021 compared to $56.4the year ended December 31, 2020 primarily resulted from an increase in account analysis fees from mortgage finance companies due to higher deposit volume. There can be no assurance that Customers will earn deposit fees from mortgage finance companies in 2022 comparable to 2021, given lower refinancing activity in a higher interest rate environment.
Commercial lease income
Commercial lease income represents income earned on commercial operating leases generated by Customers' Equipment Finance Group in which Customers is the lessor. The $3.0 million increase in commercial lease income for the year ended December 31, 2016. The2021 compared to the year ended December 31, 2020 primarily resulted from the continued growth of Customers' equipment finance business.
Bank-owned life insurance
Bank-owned life insurance income represents income earned on life insurance policies owned by Customers including an increase in non-interest income resulted primarily from increasescash surrender value of the policies and any benefits paid by insurance carriers under the policies. The $1.4 million increase in interchange and card revenue of $16.8 million, reflecting a full year of BankMobile Disbursement operations which was acquired in June 2016, gains on sales of investment securities of $8.8 million, bank-owned life insurance income of $2.5 million resulting from increased investment in bank-owned life insurance policies during 2017 and deposit fees of $2.0 million, reflecting a full year of BankMobile Disbursement operations, offset in part by an increase in impairment losses of $5.7 million recognized on equity securities due to further declines in fair value from December 31, 2016 through September 30, 2017 and a decrease in mortgage warehouse transaction fees of $2.2 million driven by a reduction in the volume of warehouse transactions.
For the years ended December 31, 2016 and 2015
Non-interest income increased $28.7 million, or 103.4%, for the year ended December 31, 2016, to $56.4 million, when2021 compared to $27.7the year ended December 31, 2020 resulted from the increase in cash surrender value of existing and new policies purchased and benefits paid by insurance carriers under the policies.
Mortgage warehouse transactional fees
The $1.3 million increase in mortgage warehouse transactional fees for the year ended December 31, 2015. The2021 compared to the year ended December 31, 2020 primarily resulted from an increase in refinancing activity driven by the decline in market interest rates that began in March 2020. There can be no assurance that Customers will earn mortgage warehouse transactional fees in 2022 comparable to 2021, given lower refinancing activity in a higher interest rate environment.
Gain (loss) on sale of SBA and other loans
The $9.3 million increase in gain (loss) on sale of SBA and other loans for the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily resulted from a strategic initiative to sell SBA and consumer installment loans beginning in 2021. There can be no assurance that Customers will realize gains on the sale of loans in 2022 comparable to 2021, given significant uncertainty in the capital markets.
Loan fees
The $1.9 million increase in loan fees for the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily resulted from an increase in fees earned on unused lines of credit and other fees from commercial borrowers.
Gain (loss) on sale of investment securities
The $11.3 million increase in gain (loss) on sale of investment securities for the year ended December 31, 2021 compared to the year ended December 31, 2020 reflects the gains realized from the sale of $689.9 million in AFS debt securities for the year ended December 31, 2021, compared to $387.8 million in AFS debt securities for the year ended December 31, 2020. There can be no assurance that Customers will realize gains on the sale of investment securities in 2022 comparable to 2021, given significant uncertainty in the capital markets which may impact Customers’ investment strategy.
Unrealized gain (loss) on investment securities
The $1.3 million increase in unrealized gain (loss) on investment securities for the year ended December 31, 2021 compared to the year ended December 31, 2020 reflects an increase in the unrealized gain of equity securities issued by a foreign entity that were held by CB Green Ventures Pte Ltd. and CUBI India Ventures Pte Ltd. Customers sold all outstanding shares in CB Green Ventures Pte Ltd. and CUBI India Ventures Pte Ltd. for $3.8 million in June 2021.
Loss on sale of foreign subsidiaries
The $2.8 million increase in loss on sale of foreign subsidiaries for the year ended December 31, 2021 compared to the year ended December 31, 2020 reflects the realized loss from the sale of CB Green Ventures Pte Ltd. and CUBI India Ventures Pte Ltd., which held the equity securities issued by a foreign entity in June 2021. Customers sold all outstanding shares in CB Green Ventures Pte Ltd. and CUBI India Ventures Pte Ltd. for $3.8 million in June 2021.
Unrealized gain (loss) on derivatives
The $7.2 million increase in unrealized gain (loss) on derivatives for the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily resulted from increases of $7.6 million in credit valuation adjustment and credit derivatives due to changes in market interest rates, partially offset by $0.5 million decrease in interest rate swap fees.
Loss on cash flow hedge derivative terminations
The $24.5 million increase in loss on cash flow hedge derivative terminations for the year ended December 31, 2021 compared to the year ended December 31, 2020 reflects the early terminations of derivatives designated in cash flow hedging relationships and reclassification of the realized losses from accumulated other comprehensive income to earnings because the hedged forecasted transactions were no longer probable of occurring.
Other non-interest income
The $3.9 million increase in other non-interest income for the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily resulted primarilyfrom a market value adjustment loss on two commercial real estate collateral dependent loans held for sale of $2.6 million in 2020, and increases of $0.8 million in gain from the acquisitionsales of commercial lease assets and $0.2 million in SERP income.
On January 4, 2021, Customers completed the Disbursement business in June 2016, which increased interchangedivestiture of BMT through a merger with MFAC. Accordingly, BMT's operating results have been presented as "Discontinued operations" within the accompanying consolidated financial statements and card revenues by $24.1 million, increases in deposit fees of $7.1 million and other income of $5.8 million driven primarily by increases in university fees and a $2.2 million recovery of a previously recorded loss received in 2016. These increases were offset in part byprior period amounts have been reclassified to conform with the impairment loss of $7.3 million recorded in 2016 on equity securities and a decrease in bank-owned life insurance income of $2.3 million as a result of a $2.4 million benefit received on a bank-owned life insurance policy in 2015.current period presentation.
NON-INTEREST EXPENSE
The table below presents the various components of non-interest expense for the years ended December 31, 2017, 20162021 and 2015.2020.
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | Change | | % Change |
| (dollars in thousands) | 2021 | | 2020 | | |
| | | | | |
| Salaries and employee benefits | $ | 108,202 | | | $ | 94,067 | | | $ | 14,135 | | | 15.0 | % |
| Technology, communication and bank operations | 83,544 | | | 50,668 | | | 32,876 | | | 64.9 | % |
| Professional services | 26,688 | | | 13,557 | | | 13,131 | | | 96.9 | % |
| Occupancy | 12,143 | | | 11,362 | | | 781 | | | 6.9 | % |
| Commercial lease depreciation | 17,824 | | | 14,715 | | | 3,109 | | | 21.1 | % |
| FDIC assessments, non-income taxes, and regulatory fees | 10,061 | | | 11,661 | | | (1,600) | | | (13.7) | % |
| Loan servicing | 10,763 | | | 3,431 | | | 7,332 | | | 213.7 | % |
| | | | | | | |
| Advertising and promotion | 1,520 | | | 1,796 | | | (276) | | | (15.4) | % |
| Merger and acquisition related expenses | 418 | | | 1,367 | | | (949) | | | (69.4) | % |
| Loan workout | 265 | | | 3,143 | | | (2,878) | | | (91.6) | % |
| Deposit relationship adjustment fees | 6,216 | | | — | | | 6,216 | | | NM |
| | | | | | | |
| Other | 16,663 | | | 9,209 | | | 7,454 | | | 80.9 | % |
| Total non-interest expense | $ | 294,307 | | | $ | 214,976 | | | $ | 79,331 | | | 36.9 | % |
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| (amounts in thousands) | |
| Salaries and employee benefits | $ | 95,518 |
| | $ | 80,641 |
| | $ | 58,777 |
|
| Technology, communication and bank operations | 45,885 |
| | 26,839 |
| | 10,596 |
|
| Professional services | 28,051 |
| | 20,684 |
| | 11,042 |
|
| Occupancy | 11,161 |
| | 10,327 |
| | 8,668 |
|
| FDIC assessments, non-income taxes, and regulatory fees | 7,906 |
| | 13,097 |
| | 10,728 |
|
| Provision for operating losses | 6,435 |
| | 3,517 |
| | 140 |
|
| Loan workout | 2,366 |
| | 2,063 |
| | 1,127 |
|
| Advertising and promotion | 1,470 |
| | 1,549 |
| | 1,475 |
|
| Other real estate owned | 570 |
| | 1,953 |
| | 2,516 |
|
| Merger and acquisition related expenses | 410 |
| | 1,195 |
| | — |
|
| Other | 15,834 |
| | 16,366 |
| | 9,877 |
|
| Total non-interest expense | $ | 215,606 |
| | $ | 178,231 |
| | $ | 114,946 |
|
For the years ended December 31, 2017 and 2016
Non-interest expense was $215.6 million for the year ended December 31, 2017, which was an increase of $37.4 million over non-interest expense of $178.2 million for the year ended December 31, 2016. The increase in non-interest expense was primarily driven by increased BankMobile operating expenses of $39.2 million, reflecting a full year of operations for the BankMobile Disbursement business. The increases in BankMobile expenses included a $10.4$14.1 million increase in salaries and employee benefits a $20.2 million increase in technology, communication and bank operations expenses and a $5.4 million increase in professional services. Excluding the BankMobile-related expenses, non-interest expense of the core bank decreased by $1.8 million in 2017 as a result of management's continued efforts to control expenses.
Salaries and employee benefits, which represent the largest component of non-interest expense, increased $14.9 million, or 18.4%, to $95.5 million for the year ended December 31, 2017,2021 compared to the year ended December 31, 2020 primarily resulted from $80.6an increase in average full-time equivalent team members needed for future growth, annual merit increases, and an increase in incentive accruals tied to Customers' overall performance, increase in stock-based compensation related to new awards and compensation expense associated with an executive's retirement and other one-time benefits.
Technology, communications, and bank operations
The $32.9 million increase in technology, communications, and bank operations expense for the year ended December 31, 2016, reflecting salary2021 compared to the year ended December 31, 2020 primarily resulted from the continued investment in the digital transformation efforts, increases in deposit servicing fees from higher deposits and interchange maintenance fees from higher debit card spend, that were paid to BM Technologies, the successor entity to BMT that was divested on January 4, 2021.
On January 4, 2021, Customers completed the divestiture of BMT through a merger with MFAC. Accordingly, BMT's operating results have been presented as well as"Discontinued operations" within the accompanying consolidated financial statements and prior period amounts have been reclassified to conform with the current period presentation. In connection with the divestiture, we have entered into various agreements with BM Technologies, including a higher average numbertransition services agreement, software license agreement, deposit servicing agreement, non-competition agreement and loan agreement for periods ranging from one to ten years. Customers incurred expenses of full-time equivalent employees, primarily resulting from a full year of BankMobile Disbursement operations.
Technology,$59.5 million to BM Technologies under the deposit servicing agreement, included within the technology, communication and bank operations expenses increased $19.0expense in the income from continuing operations during the year ended December 31, 2021. The deposit service agreement is scheduled to expire on December 31, 2022 and will not be renewed. As of December 31, 2021, Customers held $1.8 billion of deposits serviced by BM Technologies, which are expected to leave Customers Bank by December 31, 2022. The loan agreement with BM Technologies was terminated early in November 2021. The transition services agreement with BM Technologies, as amended, expires on March 31, 2022, except for accounting services which expired on February 15, 2022. For additional information, refer to "NOTE 3 – DISCONTINUED OPERATIONS" to Customers' audited financial statements.
Professional services
The $13.1 million to $45.9 millionincrease in professional services for the year ended December 31, 2017,2021 compared to the year ended December 31, 2020 primarily resulted from $26.8outside professional services used to support the PPP forgiveness process and our participation in the latest round of PPP.
Commercial lease depreciation
The $3.1 million increase in commercial lease depreciation for the year ended December 31, 2016. This increase was primarily attributable2021 compared to increases in the core processing system and conversion-related expenses of $10.6 million. The conversion of Customers' core processing applications is expected to provide a significant cost savings in the future. There were also increases in interchange expenses of $5.5 million, reflecting a full year of BankMobile Disbursement operations and non-capitalizable software development costs of $4.9 million resultingended December 31, 2020 resulted from the continued development and supportgrowth of the BankMobile technology platform asoperating lease arrangements originated by Customers' Equipment Finance Group in which Customers strives to grow and successfully divest BankMobile in 2018. These increases were offset in part by a $3.9 million one-time expense for technology-related expenses in 2016.is the lessor.
FDIC assessments, non-income taxes, and regulatory fees decreased $5.2 million to $7.9 million for the year ended December 31, 2017, from $13.1 million for the year ended December 31, 2016. This decrease was primarily related to a lower insurance assessment charged by the FDIC as the FDIC's Deposit Insurance Fund reached a targeted ratio.
Professional services expense increased by $7.4 million to $28.1 million for the year ended December 31, 2017, from $20.7 million for the year ended December 31, 2016. This increase was primarily driven by increased customer service-related expenses of $4.8 million resulting from a full year of BankMobile Disbursement operations, increased legal expenses of $1.0 million associated with the planned divestment of BankMobile and increased consulting and other professional services to support the ongoing operations of the Bank and BankMobile.
The provision for operating losses increased by $2.9$1.6 million or 83.0%, to $6.4 million for the year ended December 31, 2017, from $3.5 million for the year ended December 31, 2016. The provision for operating losses primarily consists of 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 Disbursement 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. The increase is mainly attributable to the accrual for the estimated liability for a full year of operations of the BankMobile Disbursement businessdecrease in 2017.
Occupancy expense increased by $0.8 million to $11.2 million for the year ended December 31, 2017, from $10.3 million for the year ended December 31, 2016. This increase primarily reflects a full year of operations of the BankMobile Disbursement business, as well as increased business activity in existing and new markets, requiring additional team members and facilities.
For the years ended December 31, 2016 and 2015
Non-interest expense was $178.2 million for the year ended December 31, 2016, which was an increase of $63.3 million over non-interest expense of $114.9 million for the year ended December 31, 2015.
Salaries and employee benefits, which represent the largest component of non-interest expense, increased $21.9 million, or 37.2%, to $80.6 million for the year ended December 31, 2016, from $58.8 million for the year ended December 31, 2015. The increase was primarily related to the additional 225 Higher One employees that manage the Disbursement business and serve its customers. These employees became Customers' employees following the acquisition of the Disbursement business in June 2016.
Technology, communication and bank operations expenses increased $16.2 million to $26.8 million for the year ended December 31, 2016, from $10.6 million for the year ended December 31, 2015. The increase is primarily attributable to the acquisition of the Disbursement business in June 2016 which accounted for $12.7 million of the increase and mainly related to core processing, interchange and software depreciation expenses. The remaining increase related to organic growth of the Bank.
FDIC assessments, non-income taxes, and regulatory fees increased $2.4 million to $13.1 million for the year ended December 31, 2016,2021 compared to the year ended December 31, 2020 primarily resulted from $10.7a decrease in FDIC assessment rates resulting from lower premiums from Customers' improved performance rating.
Loan servicing
The $7.3 million increase in loan servicing for the year ended December 31, 2015. 2021 compared to the year ended December 31, 2020 primarily resulted from servicing fees paid to third party servicers associated with the participation in the latest round of PPP, the PPP forgiveness process, and the growth in consumer installment loans.
Merger and acquisition related expenses
The primary reason for the 2016 increase was an adjustment$0.9 million decrease in 2015 that reduced the Pennsylvania shares tax expense by $2.3 million.
Professional services expense increased by $9.6 million to $20.7 millionmerger and acquisition related expenses for the year ended December 31, 2016,2021 compared to the year ended December 31, 2020 resulted from $11.0the merger of BankMobile Technologies, Inc. and Megalith Financial Acquisition Corp. completed on January 4, 2021.
Loan workout
The $2.9 million decrease in loan workout for the year ended December 31, 2015,2021 compared to the year ended December 31, 2020 primarily attributable to increasesresulted from the workout of two commercial relationships in consulting, lending service2020.
Deposit relationship adjustment fees and other professional services including those associated with the acquisition and operation of the Disbursement business.
The provision for operating losses increased by $3.4$6.2 million to $3.5 millionincrease in deposit relationship adjustment fees for the year ended December 31, 2016,2021 compared to the year ended December 31, 2020 resulted from $0.1a make-whole fee paid to a single high-cost deposit customer to amend a long-term deposit contract as a part of Customers' ongoing initiative to lower its cost of funds.
Other non-interest expenses
The $7.5 million increase in other non-interest expenses for the year ended December 31, 2015. The provision for operating losses primarily consists of 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. The increase was mainly attributable2021 compared to the accrual for the estimated liability for the partial year of operations of the BankMobile Disbursement business in 2016.
Occupancy expense increased by $1.7 million to $10.3 million for the year ended December 31, 2016,2020 primarily resulted from $8.7increases in provision for operating expenses of $1.6 million, forexpenses related to the year ended December 31, 2015. This increase was driven by increased business activityparticipation in existing and new markets, requiring additional team members and facilities. The increase also reflected a partial yearthe latest round of operations of the BankMobile Disbursement business.
Other expense increased by $6.5 million to $16.4 million for the year ended December 31, 2016, from $9.9 million for the year ended December 31, 2015. The increase was primarily attributable to increased staffing, supplies and other activities associated with the acquisition of the Disbursement business, and higher levels of miscellaneous expenses resulting from the organic growth of the Bank. Other expenses in 2016 also included one-time chargesPPP of $1.4 million, associatedlitigation settlement of $1.2 million, $1.0 million in charitable contributions and corporate sponsorships, $0.9 million in provision for credit losses on lending-related unfunded commitments and $0.9 million in directors fees, partially offset by a legal contingency accrual of $1.0 million related to the settlement of the previously disclosed matter with legal matters.the ED in 2020.
INCOME TAXES
ForThe table below presents income tax expense from continuing operations and the effective tax rate for the years ended December 31, 20172021 and 20162020.
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | |
| (dollars in thousands) | 2021 | | 2020 | | Change | | % Change |
| Income before income tax expense | $ | 441,208 | | | $ | 189,756 | | | $ | 251,452 | | | 132.5 | % |
| Income tax expense | 86,940 | | | 46,717 | | | 40,223 | | | 86.1 | % |
| Effective tax rate | 19.7 | % | | 24.6 | % | | | | |
The $40.2 million increase in income tax expense and effective tax rate include both federal and state income taxes. Income tax expense for the year ended December 31, 2017, was $45.0 million and2021 compared to the year ended December 31, 2020 primarily resulted from an increase in anpre-tax income from continuing operations. The decrease in the effective tax rate of 36.36%, compared to income tax expense of $45.9 million and an effective tax rate of 36.83% for the year ended December 31, 2016. Income2021 compared to the year ended December 31, 2020 primarily resulted from an increase in investment tax credits, the recognition of a deferred tax asset related to the outside basis difference of foreign subsidiaries, excess tax benefits from stock option exercises and state apportionment rates, partially offset by the dilution of the permanent tax differences and other tax benefits as a result of higher pre-tax income from continuing operations and an increase in compensation expense was primarily drivenassociated with an executive's retirement that exceeded the limit for tax deduction purposes. For the reconciliation of the effective tax rate and the statutory federal tax rate, refer to "NOTE 16 – INCOME TAXES" to Customers' audited financial statements.
NET LOSS FROM DISCONTINUED OPERATIONS
On January 4, 2021, Customers Bancorp completed the previously announced divestiture of BMT, the technology arm of its BankMobile segment, to MFAC Merger Sub Inc., an indirect wholly-owned subsidiary of MFAC, pursuant to an Agreement and Plan of Merger, dated August 6, 2020, by and among MFAC, MFAC Merger Sub Inc., BMT, Customers Bank, the sole stockholder of BMT, and Customers Bancorp, the parent bank holding company for Customers Bank (as amended on November 2, 2020 and December 8, 2020). In connection with the closing of the divestiture, MFAC changed its name to “BM Technologies, Inc.” Following the completion of the divestiture of BMT, BankMobile's serviced deposits and loans and the related net interest income beforehave been combined with Customers' financial condition and the results of operations as a single reportable segment.
The assets and liabilities of BMT have been presented as "Assets of discontinued operations" and "Liabilities of discontinued operations" on the consolidated balance sheet at December 31, 2020. BMT's operating results and associated cash flows have been presented as "Discontinued operations" within the accompanying audited financial statements and prior period amounts have been reclassified to conform with the current period presentation.
The table below presents the loss from discontinued operations, net of income taxes of $123.9 million and $124.6 million for the years ended December 31, 20172021 and 2016, respectively. In fourth quarter 2017,2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | | | | | |
| (dollars in thousands) | 2021 | | 2020 | | Change | | % Change | | | | | | | | |
| Loss from discontinued operations before income tax expense (benefit) | $ | (20,354) | | | $ | (13,798) | | | $ | (6,556) | | | 47.5 | % | | | | | | | | |
| Income tax expense (benefit) from discontinued operations | 19,267 | | | (3,337) | | | 22,604 | | | (677.4) | % | | | | | | | | |
| Net loss from discontinued operations | $ | (39,621) | | | $ | (10,461) | | | $ | (29,160) | | | 278.7 | % | | | | | | | | |
Customers' loss from discontinued operations of $20 million for the year ended December 31, 2021, compared to loss from discontinued operations of $13.8 million for the year ended December 31, 2020, consisted of restricted stock awards in BM Technologies' common stock distributed to certain team members of BMT in the form of severance payments and compensation costs for the restricted stock units of Customers recordedBancorp previously granted to certain team members of BMT that vested upon completion of the divestiture on January 4, 2021.
Income tax expense from discontinued operations of $19.3 million for the year ended December 31, 2021, compared to an income tax benefit of $3.3 million for the year ended December 31, 2020, resulted from the effect of the divestiture being treated as a taxable asset sale for tax purposes, offset in part by the reversal of a valuation allowance on certain state deferred tax asset re-measurement charge to its income tax expense of $5.5 million, or a 4.44% effective tax rate increase,assets which can be realized as a result of the enactment ofgain from the Tax Cutsdivestiture and Jobs Act of 2017 in December 2017. In 2017, Customers also had an unrecorded basis difference in foreign subsidiaries of $4.5 million, or a 3.65% effectivethe tax rate increase,benefits related to the other-than-temporary impairment charges recorded during 2017 on equity securities held by these foreign subsidiaries. These adjustments were offsetrestricted stock awards in part by the federal tax benefit recognized of $10.7 million, or a 8.67% effective tax rate reduction, resulting from exercises of employeeBM Technologies's common stock options and vesting of restricted stock units.units of Customers currently estimatesBancorp to certain team members of BMT.
In connection with the divestiture, Customers has also entered into various agreements with BM Technologies, including a 2018 effective tax ratetransition services agreement, software license agreement, deposit servicing agreement, non-competition agreement and loan agreement for periods ranging from one to ten years. Customers incurred expenses of approximately 24%.$59.5 million to BM Technologies under the deposit servicing agreement included in technology, communication and bank operations within the income from continuing operations during the year ended December 31, 2021. The decrease from the 2017 effective tax ratedeposit service agreement is duescheduled to the Tax Cuts and Jobs Act of 2017 enactedexpire on December 22, 2017,31, 2022 and will not be renewed. As of December 31, 2021, Customers held $1.8 billion of deposits serviced by BM Technologies, which reduced the corporate federal tax rate from 35%are expected to 21% effective January 1, 2018. For additional information, see NOTE 16 - INCOME TAXESleave Customers Bank by December 31, 2022. The loan agreement with BM Technologies was terminated early in November 2021. The transition services agreement with BM Technologies, as amended, expires on March 31, 2022, except for accounting services which expired on February 15, 2022. Refer to "NOTE 3 – DISCONTINUED OPERATIONS" to Customers' audited financial statements.statements for additional information.
For
PREFERRED STOCK DIVIDENDS AND LOSS ON REDEMPTION OF PREFERRED STOCK
Preferred stock dividends were $11.7 million and $14.0 million for the yearsyear ended December 31, 20162021 and 20152020, respectively. On September 15, 2021, Customers redeemed all of the outstanding shares of Series C and Series D Preferred Stock for an aggregate payment of $82.5 million, at a redemption price of $25.00 per share. The redemption price paid in excess of the carrying value of Series C and Series D Preferred Stock of $2.8 million is included as a loss on redemption of preferred stock in the consolidated statement of income for the year ended December 31, 2021. After giving effect to the redemption, no shares of the Series C and Series D Preferred Stock remained outstanding. There were no changes to the amount of preferred stock outstanding during the year ended December 31, 2020. Refer to "NOTE 13 – SHAREHOLDERS' EQUITY" to Customers' audited financial statements for additional information.
The income tax expense and effective tax rate include both federal and state income taxes. In 2016, income tax expense was $45.9 million with an effective taxOn June 15, 2020, the Series C preferred stock became floating at three-month LIBOR plus 5.30% compared to a fixed rate of 36.83%7.00%. On March 15, 2021, Series D Preferred Stock became floating at three-month LIBOR plus 5.09%, compared to an expense of $29.9 million and an effective taxa fixed rate of 33.80% for 2015. Income tax expense was primarily driven by net income before taxes of $124.6 million and $88.5 million for6.50%. On June 15, 2021, the years ended December 31, 2016 and 2015, respectively. In 2016, the effective tax rate was higher due to state income tax items totaling $4.5 million, or a 3.65% effective tax rate increase, driven by a greater proportion of income producing assets domiciled in New York, particularly in New York City, an unrecorded basis difference in foreign subsidiaries of $2.8 million, or 2.27%Series E Preferred Stock became floating at three-month LIBOR plus 5.14%, related to an other-than-temporary impairment charge recorded on equity securities in fourth quarter 2016, partially offset by an equity-based compensation benefit of $3.7 million or a 2.94% effective tax rate reduction, from the early adoption of ASU No. 2016-09, Improvements to Employee Share-Based Accounting, and a reduction of $1.7 million, or a 1.38% effective tax rate reduction, duecompared to a tax benefit resulting from bank-owned life insurance income. In 2015,fixed rate of 6.45%. On December 15, 2021, the effective tax rate was reduced dueSeries F Preferred Stock became floating at three-month LIBOR plus 4.762%, compared to a tax benefit resulting from bank-owned life insurance incomefixed rate of $2.4 million, or 2.73%6.00%.
FINANCIAL CONDITIONFinancial Condition
GENERALGeneral
Customers reportedCustomers' total assets in excess of $10 billion at June 30, 2017, and September 30, 2017, with total assets reported of $10.9 billion and $10.5 billion, respectively. Customers strategically reduced total assets to under $10were $19.6 billion at December 31, 2017, to improve capital ratios and to continue to maintain its small issuer status under the Durbin Amendment to maximize interchange revenue until the spin-off of BankMobile is completed, or until July 1, 2019. During fourth quarter 2017, Customers reduced total assets by selling $0.2 billion of consumer residential loans, $0.1 billion of multi-family loans, and $0.1 billion of investment securities. Commercial loans to mortgage banking businesses also declined in fourth quarter 2017 by $0.3 billion as a result of normal seasonality.
At December 31, 2017, total assets were $9.8 billion.2021. This represented a $0.5$1.1 billion or 4.9%, increase from total assets of $9.4$18.4 billion at December 31, 2016.2020. The major changeincrease in Customers' financial position occurred astotal assets was primarily driven by increases of $2.6 billion in investment securities and $1.4 billion in loans and leases receivable and a resultdecrease in ACL of organic growth$6.4 million., partially offset by decreases of $1.3 billion in loans receivable, which increased by $0.6mortgage warehouse, at fair value, $1.3 billion or 10.0%, to $6.8in loans receivable, PPP, $175.3 million in cash and cash equivalents and $62.8 million in loans held for sale.
Total liabilities were $18.2 billion at December 31, 2017,2021. This represented a $0.9 billion increase from $6.2$17.3 billion at December 31, 2016. This increase was offset in part by a decline in loans held for sale of $0.2 billion, or 8.4%, from $2.1 billion at December 31, 2016, to $1.9 billion at December 31, 2017.
Total loans outstanding were $8.7 billion at December 31, 2017, compared to $8.3 billion at December 31, 2016, an increase of $0.4 billion, or 5.3%. Multi-family loans increased by $0.4 billion to $3.6 billion at December 31, 2017. Commercial and industrial loans, including owner-occupied commercial real estate, increased by $0.3 billion to $1.6 billion at December 31, 2017. Commercial loans to mortgage banking businesses decreased $0.3 billion to $1.8 billion at December 31, 2017.
Total liabilities were $8.9 billion at December 31, 2017. This represented a $0.4 billion, or 4.6%, increase from total liabilities of $8.5 billion at December 31, 2016.2020. The increase in total liabilities primarily resulted primarily from a higher levelincreases in total deposits of $5.5 billion and other borrowings of $99.0 million, offset in 2017 compared to 2016. FHLB borrowings increasedpart by $0.7decreases in the PPPLF of $4.4 billion, federal funds purchased increased by $72.0of $175.0 million and other borrowings increasedFHLB advances of $150.0 million.
On January 4, 2021, Customers Bancorp completed the previously announced divestiture of BMT, the technology arm of its BankMobile segment, to MFAC Merger Sub Inc., an indirect wholly-owned subsidiary of MFAC, pursuant to an Agreement and Plan of Merger, dated August 6, 2020, by $99.4 million dueand among MFAC, MFAC Merger Sub Inc., BMT, Customers Bank, the sole stockholder of BMT, and Customers Bancorp, the parent bank holding company for Customers Bank (as amended on November 2, 2020 and December 8, 2020). In connection with the closing of the divestiture, MFAC changed its name to “BM Technologies, Inc.” Following the completion of the divestiture of BMT, BankMobile's serviced deposits and loans and the related net interest income have been combined with Customers' financial condition and the results of operations as a single reportable segment.
BMT's historical financial results for periods prior to the issuancedivestiture are reflected in Customers Bancorp’s consolidated financial statements as discontinued operations. The assets and liabilities of BMT have been presented as "Assets of discontinued operations" and "Liabilities of discontinued operations" on the $100 million 3.95% Senior Notes in June 2017. These increases were partially offset by lower levels of deposits. Total deposits decreased by $0.5 billion, or 6.9%, to $6.8 billionconsolidated balance sheet at December 31, 2017, from $7.3 billion at December 31, 2016. Transaction deposits increased by $0.4 billion, or 9.4%,2020. BMT's operating results and associated cash flows have been presented as "Discontinued operations" within the accompanying audited financial statements and prior period amounts have been reclassified to $4.9 billion at December 31, 2017, from $4.5 billion at December 31, 2016,conform with non-interest bearing deposits increasing by $86.1 million. Certificates of deposit accounts decreased by $0.9 billion, or 32.7%, to $1.9 billion at December 31, 2017, from $2.8 billion at December 31, 2016.the current period presentation.
The following table sets forth certain key condensed balance sheet data:
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, | | | | |
| (dollars in thousands) | 2021 | | 2020 | | Change | | % Change |
| | | | | | | |
| | | | | | | |
| Cash and cash equivalents | $ | 518,032 | | | $ | 693,354 | | | $ | (175,322) | | | (25.3) | % |
| Investment securities, at fair value | 3,817,150 | | | 1,210,285 | | | 2,606,865 | | | 215.4 | % |
| Loans held for sale | 16,254 | | | 79,086 | | | (62,832) | | | (79.4) | % |
| Loans receivable, mortgage warehouse, at fair value | 2,284,325 | | | 3,616,432 | | | (1,332,107) | | | (36.8) | % |
| Loans receivable, PPP | 3,250,008 | | | 4,561,365 | | | (1,311,357) | | | (28.7) | % |
| Loans and leases receivable | 9,018,298 | | | 7,575,368 | | | 1,442,930 | | | 19.0 | % |
| Allowance for credit losses on loans and leases | (137,804) | | | (144,176) | | | 6,372 | | | (4.4) | % |
| | | | | | | |
| | | | | | | |
| Bank-owned life insurance | 333,705 | | | 280,067 | | | 53,638 | | | 19.2 | % |
| Other assets | 305,611 | | | 338,438 | | | (32,827) | | | (9.7) | % |
| Assets of discontinued operations | — | | | 62,055 | | | (62,055) | | | (100.0) | % |
| Total assets | 19,575,028 | | | 18,439,248 | | | 1,135,780 | | | 6.2 | % |
| Total deposits | 16,777,924 | | | 11,309,929 | | | 5,467,995 | | | 48.3 | % |
| Federal funds purchased | 75,000 | | | 250,000 | | | (175,000) | | | (70.0) | % |
| FHLB advances | 700,000 | | | 850,000 | | | (150,000) | | | (17.6) | % |
| Other borrowings | 223,086 | | | 124,037 | | | 99,049 | | | 79.9 | % |
| Subordinated debt | 181,673 | | | 181,394 | | | 279 | | | 0.2 | % |
| FRB PPP Liquidity Facility | — | | | 4,415,016 | | | (4,415,016) | | | (100.0) | % |
| | | | | | | |
| | | | | | | |
| Accrued interest payable and other liabilities | 251,128 | | | 152,082 | | | 99,046 | | | 65.1 | % |
| Liabilities of discontinued operations | — | | | 39,704 | | | (39,704) | | | (100.0) | % |
| Total liabilities | 18,208,811 | | | 17,322,162 | | | 886,649 | | | 5.1 | % |
| Total shareholders’ equity | 1,366,217 | | | 1,117,086 | | | 249,131 | | | 22.3 | % |
| Total liabilities and shareholders’ equity | $ | 19,575,028 | | | $ | 18,439,248 | | | $ | 1,135,780 | | | 6.2 | % |
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| (amounts in thousands) | |
| Cash and cash equivalents | $ | 146,323 |
| | $ | 264,709 |
|
| Investment securities available for sale, at fair value | 471,371 |
| | 493,474 |
|
| Loans held for sale (includes $1,795,294 and $2,117,510, respectively, at fair value) | 1,939,485 |
| | 2,117,510 |
|
| Loans receivable | 6,768,258 |
| | 6,154,637 |
|
| Total loans receivable, net of allowance for loan losses | 6,730,243 |
| | 6,117,322 |
|
| Total assets | 9,839,555 |
| | 9,382,736 |
|
| Total deposits | 6,800,142 |
| | 7,303,775 |
|
| Federal funds purchased | 155,000 |
| | 83,000 |
|
| FHLB advances | 1,611,860 |
| | 868,800 |
|
| Other borrowings | 186,497 |
| | 87,123 |
|
| Subordinated debt | 108,880 |
| | 108,783 |
|
| Total liabilities | 8,918,591 |
| | 8,526,864 |
|
| Total shareholders’ equity | 920,964 |
| | 855,872 |
|
| Total liabilities and shareholders’ equity | 9,839,555 |
| | 9,382,736 |
|
CASH AND CASH EQIVALENTS
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 $20.4Cash and due from banks were $35.2 million and $78.1 million at December 31, 2017. This represents a $17.1 million decrease2021 and 2020, respectively. Cash and cash due from $37.5 million at December 31, 2016. Thesebanks balances vary from day to day, primarily due to fluctuationsvariations in customers’ depositsdeposit activities with the Bank.
Interest-earning deposits consist mainly of cash deposited at other banks, primarily the FRB. Interest-earning deposits at the Federal Reserve Bank of Philadelphia. These deposits totaled $125.9were $482.8 million and $615.3 million at December 31, 2017, which was a $101.3 million decrease from $227.2 million at December 31, 2016. This2021 and 2020, respectively. The balance of interest-earning deposits varies from day to day, depending on several factors, such as fluctuations in customers’ deposits with the Bank,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.
In connection with the June 2016 acquisition of the Disbursement business from Higher One, as of The decrease in interest-earning deposits since December 31, 20172020 primarily resulted from managing liquidity as excess funds from the forgiveness of PPP loans and 2016, Customers had $5 million and $20 million, respectively,customers' deposits have been invested in an escrow account restricted in use with a third party to be paid to Higher One upon the first and second anniversaries of the transaction closing. See NOTE 2 - ACQUISITION ACTIVITY to Customers' audited financial statements for additional information related to the acquisition of the Disbursement business. Also, in connection with the planned spin-off and merger of BankMobile, 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 agreement is terminated for reasons described in the Amended and Restated Purchase and Assumption Agreement and Plan of Merger. See NOTE 3 - SPIN-OFF AND MERGER to Customers' audited financial statements for additional information related to this planned transaction.higher interest-earning assets.
INVESTMENT SECURITIESInvestment Securities
The investment securities portfolio is an important source of interest income and liquidity. It consists of mortgage-backed securities (guaranteedand collateralized mortgage obligations guaranteed by an agencyagencies of the United States government), domesticgovernment, U.S. government agency securities, asset-backed securities, collateralized loan obligations, commercial mortgage-backed securities, private label collateralized mortgage obligations, state and political subdivision debt securities, corporate debtnotes 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 maximizeoptimize net interest income given the changes in the economic environment, liquidity position and balance sheet mix.
At December 31, 2017,2021, investment securities were $471.4 milliontotaled $3.8 billion compared to $493.5 million$1.2 billion at December 31, 2016.2020. The decrease wasincrease primarily resulted from the resultpurchases of an $817.3asset-backed securities, collateralized loan obligations, agency-guaranteed mortgage-backed securities, agency-guaranteed collateralized mortgage obligations, private label collateralized mortgage obligations, commercial mortgage-backed securities, corporate notes and equity securities totaling $3.6 billion, partially offset by the sale of $689.9 million reduction inof asset-backed securities, due to sales,U.S. government agencies securities, agency-guaranteed mortgage-backed securities, agency-guaranteed collateralized mortgage obligations and corporate notes and maturities, calls and principal repayments and a $12.9totaling $317.0 million impairment loss on equity securities, offset in part by purchases of higher-yielding securities of $796.6 million as Customers improved its average yield on investment securities to 2.89% for the year ended December 31, 2017, compared to 2.64% for the year ended December 31, 2016.2021.
For financial reporting purposes, available-for-saleAFS debt securities are carried at fair value. Unrealized gains and losses on available-for-saleAFS debt securities, other than credit losses, are included in other comprehensive income (loss) 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 classified as available for sale will bewith a readily determinable fair value and 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.occur.
The following table sets forth the amortized cost of the investment securities at December 31, 2017 and 2016.
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| (amounts in thousands) | |
| Available for Sale | | | |
| Agency-guaranteed residential mortgage-backed securities | $ | 186,221 |
| | $ | 233,002 |
|
| Agency-guaranteed commercial real estate mortgage-backed securities | 238,809 |
| | 204,689 |
|
| Corporate notes (1) | 44,959 |
| | 44,932 |
|
| Equity securities (2) | 2,311 |
| | 15,246 |
|
| | $ | 472,300 |
| | $ | 497,869 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
(1) | Includes subordinated debt issued by other bank holding companies. |
| | | | | |
(2) | Includes equity securities issued by a foreign entity. | | |
| | | |
| | | | | | | |
| | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
The following table sets forth information about the maturities and weighted-average yield of the investment securities portfolio. The weighted-average yield is computed based on a constant effective interest rate over the contractual life of each security adjusted for prepayment estimates, and considers the contractual coupon, amortization of premiums and accretion of discounts. Yields are not reported on a tax-equivalent basis. Yields exclude the impact of related hedging derivatives.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 | | |
| | Amortized Cost | | Fair Value |
| | < 1yr | | 1 -5 years | | 5 -10 years | | After 10 years | | No specific maturity | | Total | | Total |
| (amounts in thousands) | |
| Available for Sale | | | | | | | | | | | | | |
| Residential mortgage-backed securities | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 186,221 |
| | $ | 186,221 |
| | $ | 183,458 |
|
| Yield | | | | | | | | | 2.66 | % | | 2.66 | % | | — |
|
| Commercial real estate mortgage-backed securities | | | | | | | | | 238,809 |
| | $ | 238,809 |
| | 238,472 |
|
| Yield | — |
| | — |
| | — |
| | — |
| | 3.02 | % | | 3.02 | % | | — |
|
| Corporate notes | — |
| | — |
| | 42,959 |
| | 2,000 |
| | — |
| | 44,959 |
| | 46,089 |
|
| Yield | — |
| | — |
| | 5.60 | % | | 5.63 | % | | — |
| | 5.60 | % | | — |
|
| Equity securities | — |
| | — |
| | — |
| | — |
| | 2,311 |
| | 2,311 |
| | 3,352 |
|
| Yield | — |
| | — |
| | — |
| | — |
| | — | % | | — | % | | — |
|
| Total | $ | — |
| | $ | — |
| | $ | 42,959 |
| | $ | 2,000 |
| | $ | 427,341 |
| | $ | 472,300 |
| | $ | 471,371 |
|
| Weighted-Average Yield | — | % | | — | % | | 5.60 | % | | 5.63 | % | | 2.85 | % | | 3.11 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Within one year | | After one but within five years | | After five but within ten years | | | | No
specific
maturity | | Total | | |
| | | | | | | | | | | | | |
| Asset-backed securities | — | % | | — | % | | — | % | | | | 3.23 | % | | 3.23 | % | | |
| | | | | | | | | | | | | |
| Agency-guaranteed residential mortgage-backed securities | — | | | — | | | — | | | | | 1.80 | | | 1.80 | | | |
| Agency-guaranteed commercial mortgage-backed securities | — | | | — | | | — | | | | | 1.77 | | | 1.77 | | | |
| Agency-guaranteed residential collateralized mortgage obligations | — | | | — | | | — | | | | | 1.27 | | | 1.27 | | | |
| Agency-guaranteed commercial collateralized mortgage obligations | — | | | — | | | — | | | | | 0.91 | | | 0.91 | | | |
| Collateralized loan obligations | — | | | — | | | — | | | | | 1.34 | | | 1.34 | | | |
| Commercial mortgage-backed securities | — | | | — | | | — | | | | | 1.37 | | | 1.37 | | | |
| Corporate notes | 3.49 | | | 5.72 | | | 4.64 | | | | | — | | | 5.30 | | | |
| Private label collateralized mortgage obligations | — | | | — | | | — | | | | | 1.62 | | | 1.62 | | | |
| State and political subdivision debt securities | — | | | — | | | 1.50 | | | | | — | | | 1.50 | | | |
| Weighted-average yield | 3.49 | % | | 5.72 | % | | 4.52 | % | | | | 1.59 | % | | 2.15 | % | | |
The agency-guaranteed mortgage-backed securities and collateralized mortgage obligations in the portfolio were issued by Fannie Mae, Freddie Mac, and Ginnie Mae and contain guarantees for the collection of principal and interest on the underlying mortgages. The corporate notes in the portfolio include subordinated notes issued by other bank holding companies.
LOANS AND LEASES
Existing lending relationships are primarily with small and middle market businesses and individual consumers primarily in Bucks,Southeastern Pennsylvania (Bucks, Berks, Chester, Montgomery,Philadelphia and Delaware and Philadelphia Counties, Pennsylvania; Camden and Mercer Counties, New Jersey; and Westchester, Suffolk andCounties); Harrisburg, Pennsylvania (Dauphin County); Rye Brook, New York Counties,(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; Dallas, Texas; Orlando, Florida and the New England area.Wilmington, North Carolina. The portfolioportfolios 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. The BankCustomers continues to focus on small and middle market business loans to grow its commercial lending efforts, expandparticularly its commercial and industrial loan and lease portfolio and its specialty mortgage warehouse lending business and expand its multi-family/commercial real estate lending business. Customers also focuses its lending efforts on local-market mortgage and home equity lending and the origination and purchase of unsecured consumer loans (installment loans), including personal, student loan refinancing, and home improvement loans through arrangements with fintech companies and other market place lenders nationwide. Following the completion of the divestiture of BMT, BankMobile's loans and serviced deposits and the related net interest income were combined with Customers' financial condition and the results of operations as a single reportable segment.
Commercial Lending
Customers' commercial lending is divided into fivesix groups: Business Banking, Small and Middle Market Business Banking, Specialty Banking, Multi-Family and Commercial Real Estate Lending, Mortgage Banking Lending, and Equipment Finance.SBA Lending. 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, thatwhich typically have credit requirements between $0.5 million and $10 million. To further build its franchise and support the growth of its commercial lending initiatives, Customers' added three new verticals during 2021 within its Specialty Banking business which included fund finance, technology and venture capital banking and financial institutions group. These three new verticals provide financing to the private equity industry and cash management services to the alternative investment industry. Prior to adding these new verticals, its Specialty Banking business included lending to mortgage banking companies, equipment finance, warehouse lending, healthcare lending and real estate specialty finance. Customers also launched a pilot digital small balance 7(a) lending within its existing SBA Lending business in 2021.
As of December 31, 2021, Customers had $12.4 billion in commercial loans outstanding, totaling approximately 85.3% of its total loan and lease portfolio, which includes loans held for sale, loans receivable, mortgage warehouse, at fair value and PPP loans, compared to commercial loans outstanding of $14.2 billion, comprising approximately 89.8% of its total loan and lease portfolio, at December 31, 2020. Included in the $12.4 billion and $14.2 billion in commercial loans outstanding as of December 31, 2021 and 2020, respectively, were $3.3 billion and $4.6 billion of PPP loans, respectively. The PPP loans are fully guaranteed by the SBA, provided that the SBA's eligibility criteria are met and earn a fixed interest rate of 1.00%.
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 technology, risk management, product management, marketing, performance tracking and overall strategy. Credit and sales training has been established for Customers' sales force, thus ensuring that it has small business experts in place to provideproviding appropriate financial solutions to the small business owners in its communities. AThe 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, which 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 to
spreads, generate fee income in this business. The goal of the lending to mortgage banking business group is to originate loans that provide liquidity to mortgage banking companies. These loans are primarily used by mortgage banking 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 serveare taken as collateral for Customers' commercial loans.loans to the mortgage companies. As of December 31, 20172021 and 2016,2020, commercial loans to mortgage banking businesses totaled $1.8$2.3 billion and $2.1$3.6 billion, respectively, and are designatedreported as held for sale.loans receivable, mortgage warehouse, at fair value on the consolidated balance sheet.
The goal ofCustomers has been deemphasizing its multi-family loan portfolio, and investing in high credit quality higher-yielding commercial and industrial loans with the multi-family run-off. Customers plans to grow the multi-family loan portfolio in future periods. Customers' multi-family lending group is to buildfocused on retaining a portfolio of high-quality multi-family loans within Customers' covered markets while cross-selling other products and services.markets. 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-lienfirst lien mortgage on the multi-family property, plus an assignment of all leases related to such property. As of December 31, 2017,2021, Customers had multi-family loans of $3.6$1.5 billion outstanding, comprising approximately 41.9%10.2% of the total loan and lease portfolio, compared to $3.2$1.8 billion, or approximately 38.9%11.1% of the total loan and lease portfolio, at December 31, 2016.2020.
The equipment finance groupEquipment 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 December 31, 20172021 and 2016,2020, Customers had $152.5$378.7 million and $89.4$288.4 million, respectively, of equipment finance loans outstanding. As of December 31, 20172021 and 2016,2020, Customers had $26.6$146.5 million and $10.3$108.0 million of equipment finance leases outstanding, respectively. As of December 31, 2017,2021 and 2020, Customers had $22.2$117.4 million and $102.9 million, respectively, of operating leases entered into under this program.program, net of accumulated depreciation of $40.7 million and $28.9 million, respectively.
On March 27, 2020, the CARES Act was signed into law and created funding for a new product called the PPP. The PPP is administered by the SBA and is intended to assist organizations with payroll related expenses. Customers, directly or through fintech partnerships and acquisitions, had not entered into similar operating lease arrangements in 2016.
As$3.3 billion and $4.6 billion of PPP loans outstanding as of December 31, 2017, Customers had $8.4 billion in commercial loans outstanding, composing2021 and 2020, respectively, which are fully guaranteed by the SBA, provided that the SBA's eligibility criteria are met and earn a fixed interest rate of 1.00%. The average loan size of the PPP portfolio from the first two rounds is approximately 96.2% of its total loan portfolio, which includes loans held for sale, compared to $8.0 billion, composing$50 thousand and approximately 96.4% of its total loan portfolio at December 31, 2016.$20 thousand from the latest round.
Consumer Lending
Customers provides unsecured consumer loans, residential mortgage, and home equity and residential mortgage loans to customers. Underwriting standards forcustomers nationwide primarily through relationships with fintech companies. The installment loan portfolio consists largely of originated and purchased personal, student loan refinancing and home equity lendingimprovement loans. None of the loans are conservative, andconsidered sub-prime at the time of origination. Customers has executed digitally over $1 billion in direct personal loan originations. 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 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 December 31, 2017,2021, Customers had $329.7 million$2.1 billion in consumer loans outstanding, or 3.8%14.7% of the total loan and lease portfolio, which includescompared to $1.6 billion, or 10.3% of the total loan and lease portfolio, as of December 31, 2020.
Purchases and sales of loans heldwere as follows for sale.the years ended December 31, 2021, 2020 and 2019:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| (amounts in thousands) | 2021 | | 2020 | | 2019 |
Purchases (1) | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Loans receivable, PPP | $ | 1,536,213 | | | $ | — | | | $ | — | |
| Residential real estate | 92,939 | | | 495 | | | 105,858 | |
| | | | | |
Installment (2) | 278,070 | | | 269,684 | | | 1,058,261 | |
| Total | $ | 1,907,222 | | | $ | 270,179 | | | $ | 1,164,119 | |
Sales (3) | | | | | |
| Multi-family | $ | 36,900 | | | $ | — | | | $ | — | |
Commercial and industrial (4) | 47,142 | | | 6,940 | | | 22,267 | |
Commercial real estate owner occupied (4) | 19,420 | | | — | | | 16,320 | |
| Commercial real estate non-owner occupied | 18,366 | | | 17,600 | | | — | |
| | | | | |
| Residential real estate | 63,932 | | | — | | | 230,285 | |
| | | | | |
| Installment | 212,255 | | | 1,822 | | | — | |
| Total | $ | 398,015 | | | $ | 26,362 | | | $ | 268,872 | |
(1)Amounts reported represent the unpaid principal balance at time of purchase. The purchase price was 100.8%, 100.3% and 100.3% of the loans' unpaid principal balance during the years ended December 31, 2021, 2020 and 2019, respectively.
(2)Installment loan purchases for the years ended December 31, 2021 and 2020 consist of third-party originated unsecured consumer loans. None of the loans are considered sub-prime at the time of origination. Customers plansconsiders sub-prime borrowers to expand its product offeringsbe those with FICO scores below 660.
(3)For the years ended December 31, 2021, 2020 and 2019, loan sales resulted in real-estate-secured consumer lending.net gains of $12.9 million, $2.0 million and $2.8 million, respectively, included in gain (loss) on sale of SBA and other loans and mortgage banking income in the consolidated statements of income.
Customers has launched a community outreach program in Philadelphia to finance homeownership in urban communities. As part(4)Primarily sales 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 homebuyersSBA loans.
Loans Held 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.
Sale
The composition of loans held for sale as of December 31, 2021 and 2020 was as follows:
| | | | | | | | | | | | | | | | | |
| December 31, |
| (amounts in thousands) | 2021 | | 2020 | | | | | | |
| Commercial loans: | | | | | | | | | |
| | | | | | | | | |
| Commercial and industrial loan, at lower of cost or fair value | $ | — | | | $ | 55,683 | | | | | | | |
| Commercial real estate non-owner occupied loan, at lower of cost or fair value | — | | | 17,251 | | | | | | | |
| Total commercial loans held for sale | — | | | 72,934 | | | | | | | |
| Consumer loans: | | | | | | | | | |
| Home equity conversion mortgages, at lower of cost or fair value | 507 | | | 643 | | | | | | | |
| Residential mortgage loans, at fair value | 15,747 | | | 5,509 | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Total consumer loans held for sale | 16,254 | | | 6,152 | | | | | | | |
| Loans held for sale | $ | 16,254 | | | $ | 79,086 | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (amounts in thousands) |
|
| Commercial Loans: | | | | | | | | | |
| Mortgage warehouse loans at fair value | $ | 1,793,408 |
| | $ | 2,116,815 |
| | $ | 1,754,950 |
| | $ | 1,332,019 |
| | $ | 740,694 |
|
| Multi-family loans at lower of cost or fair value | 144,191 |
| | — |
| | 39,257 |
| | 99,791 |
| | — |
|
| Total commercial loans held for sale | 1,937,599 |
| | 2,116,815 |
| | 1,794,207 |
| | 1,431,810 |
| | 740,694 |
|
| Consumer Loans: | | | | | | | | | |
| Residential mortgage loans at fair value | 1,886 |
| | 695 |
| | 2,857 |
| | 3,649 |
| | 6,899 |
|
| Loans held for sale | $ | 1,939,485 |
| | $ | 2,117,510 |
| | $ | 1,797,064 |
| | $ | 1,435,459 |
| | $ | 747,593 |
|
At December 31, 2017,2021, loans held for sale totaled $1.9 billion,$16.3 million, or 22.3%0.1% of the total loan and lease portfolio, and $2.1 billion,$79.1 million, or 25.6%0.5% of the total loan and lease portfolio, at December 31, 2016. Held-for-sale2020. During 2020, Customers transferred $401.1 million of multi-family loans from loans held for sale to loans receivable (held for investment) because it no longer had the intent to sell these loans. Customers transferred these loans at their carrying value, which approximated their fair value at the time of transfer.
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 lossesACL is not recorded on loans that are classified as held for sale.
Because the FDIC loss sharing agreements were terminated in 2016,Total Loans and the balance of covered loans was not significant to Customers' total loan portfolio, the disaggregation between covered and non-covered loans is no longer presented in the disclosures that follow. Additional disaggregation of the commercial real estate loan portfolio between owner occupied commercial real estate and non-owner occupied commercial real estate is presented for 2017, 2016, 2015 and 2014. For 2013, owner occupied commercial real estate and non-owner occupied commercial real estate are presented collectively as commercial real estate loans.Leases Receivable
The composition of total loans and leases receivable (excluding loans held for sale) was as follows:
| | | | | | | | | | | | | | | | | |
| December 31, |
| (amounts in thousands) | 2021 | | 2020 | | | | | | |
| Loans receivable, mortgage warehouse, at fair value | $ | 2,284,325 | | | $ | 3,616,432 | | | | | | | |
| Loans receivable, PPP | 3,250,008 | | | 4,561,365 | | | | | | | |
| Loans and leases receivable: | | | | | | | | | |
| Commercial: | | | | | | | | | |
| Multi-family | 1,486,308 | | | 1,761,301 | | | | | | | |
Commercial and industrial (1) | 3,424,783 | | | 2,289,441 | | | | | | | |
| Commercial real estate owner occupied | 654,922 | | | 572,338 | | | | | | | |
| Commercial real estate non-owner occupied | 1,121,238 | | | 1,196,564 | | | | | | | |
| Construction | 198,981 | | | 140,905 | | | | | | | |
| Total commercial loans and leases receivable | 6,886,232 | | | 5,960,549 | | | | | | | |
| Consumer: | | | | | | | | | |
| Residential real estate | 334,730 | | | 317,170 | | | | | | | |
| Manufactured housing | 52,861 | | | 62,243 | | | | | | | |
| Installment | 1,744,475 | | | 1,235,406 | | | | | | | |
| Total consumer loans receivable | 2,132,066 | | | 1,614,819 | | | | | | | |
| Loans and leases receivable | 9,018,298 | | | 7,575,368 | | | | | | | |
| Allowance for credit losses | (137,804) | | | (144,176) | | | | | | | |
Total loans and leases receivable, net of allowance for credit losses on loans and leases (2) | $ | 14,414,827 | | | $ | 15,608,989 | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (amounts in thousands) | |
| Commercial: | |
| Multi-family | $ | 3,502,381 |
| | $ | 3,214,999 |
| | $ | 2,909,439 |
| | $ | 2,208,405 |
| | $ | 1,064,059 |
|
| Commercial and industrial (a) | 1,633,818 |
| | 1,382,343 |
| | 1,111,400 |
| | 785,669 |
| | 296,595 |
|
| Commercial real estate (b) | 1,218,719 |
| | 1,193,715 |
| | 956,255 |
| | 839,310 |
| | 753,591 |
|
| Construction | 85,393 |
| | 64,789 |
| | 87,240 |
| | 49,718 |
| | 42,917 |
|
| Total commercial loans | 6,440,311 |
| | 5,855,846 |
| | 5,064,334 |
| | 3,883,102 |
| | 2,157,162 |
|
| | | | | | | | | | |
| Consumer: | | | | | | | | | |
| Residential real estate | 234,090 |
| | 193,502 |
| | 271,613 |
| | 297,395 |
| | 163,920 |
|
| Manufactured housing | 90,227 |
| | 101,730 |
| | 113,490 |
| | 126,731 |
| | 139,471 |
|
| Other | 3,547 |
| | 3,483 |
| | 3,708 |
| | 4,433 |
| | 5,437 |
|
| Total consumer loans | 327,864 |
| | 298,715 |
| | 388,811 |
| | 428,559 |
| | 308,828 |
|
| Total loans receivable | 6,768,175 |
| | 6,154,561 |
| | 5,453,145 |
| | 4,311,661 |
| | 2,465,990 |
|
| Deferred costs (fees) and unamortized premiums (discounts), net | 83 |
| | 76 |
| | 334 |
| | 512 |
| | (912 | ) |
| Allowance for loan losses | (38,015 | ) | | (37,315 | ) | | (35,647 | ) | | (30,932 | ) | | (23,998 | ) |
| Loans receivable, net of allowance | $ | 6,730,243 |
| | $ | 6,117,322 |
| | $ | 5,417,832 |
| | $ | 4,281,241 |
| | $ | 2,441,080 |
|
| |
(a) | Includes owner occupied commercial real estate loans for 2017, 2016, 2015 and 2014. |
| |
(b) | Includes non-owner occupied commercial real estate loans for 2017, 2016, 2015 and 2014. For 2013, includes owner occupied and non-owner occupied commercial real estate loans. |
Loans to mortgage banking businesses(1)Includes direct finance leases of $146.5 million and certain residential mortgage and multi-family loans that are expected to be sold are classified as loans held for sale. Loans held for sale totaled $1.9 billion and $2.1 billion$108.0 million at December 31, 20172021 and 2016,2020, respectively.
(2)Includes deferred (fees) costs and unamortized (discounts) premiums, net of $(52.0) million and $(54.6) million at December 31, 2021 and 2020, respectively.
Loans receivable, PPP
On March 27, 2020, the CARES Act was signed into law and created funding for a new product called the PPP. The PPP is administered by the SBA and is intended to assist organizations with payroll related expenses. Customers had $3.3 billion and $4.6 billion of PPP loans outstanding as of December 31, 2021 and 2020, respectively, which are fully guaranteed by the SBA, provided that the SBA's eligibility criteria are met and earn a fixed interest rate of 1.00%. Customers recognized interest income, including origination fees, of $279.2 million and $65.5 million for the years ended December 31, 2021 and 2020, respectively.
Loans receivable, mortgage warehouse, at fair value
The mortgage warehouse product line primarily provides financing to mortgage companies nationwide from the time of loan 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, they do not have an ACL and are therefore excluded from ACL related disclosures. At December 31, 2021, 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 obtaining financial and other relevant information to reduce these risks during the lending period. Loans receivable, mortgage warehouse, at fair value totaled $2.3 billion and $3.6 billion at December 31, 2021 and 2020, respectively.
Loans and leases receivable
Loans and leases receivable (excluding loans held for sale, loans receivable, mortgage warehouse, at fair value, and loans receivable, PPP), net of the ACL, increased by $1.4 billion to $8.9 billion at December 31, 2021, from $7.4 billion at December 31, 2020. The increase in loans and leases receivable, net of the allowance for loan losses, increased by $0.6 billion to $6.7 billion at December 31, 2017, from $6.1 billion at December 31, 2016. The increase in loans receivable, net of the allowance for loan losses,ACL, was attributable to $6.4 million decrease in ACL, as further described below, and higher balances in the multi-family and commercial and industrial, (including owner occupied commercial real estate)estate, construction, consumer installment and residential real estate loan portfolios, with each portfolio having increasedincreasing by $0.3$1.1 billion, $82.6 million, $58.1 million, $509.1 million, and $17.6 million respectively, from December 31, 2016.2020. These increases were partially offset by reductions in the multi-family, non-owner occupied commercial real estate and manufactured housing loan portfolios, with each portfolio decreasing by $275.0 million, $75.3 million and $9.4 million, respectively, from December 31, 2020. The increase in these loan balances wasoverall loans and leases receivable fluctuations were the result of Customers' successful execution of its organic growth strategy.strategic efforts to reduce the lower-yielding loans in the multi-family portfolio and replace them with higher-yielding commercial and industrial and installment loans. Customers plans to grow the multi-family loan portfolio in future periods.
The following table presents Customers' commercial loans receivable (excluding loans held for sale, loans receivable, at fair value, and loans receivable, PPP) as of December 31, 20172021 based on the remaining term to contractual maturity, andmaturity:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (amounts in thousands) | Within one year | | After one but within five years | | After five but within fifteen years | | After fifteen years | | Total |
| Commercial loans: | | | | | | | | | |
| Multi-family | $ | 127,032 | | | $ | 221,435 | | | $ | 1,137,841 | | | $ | — | | | $ | 1,486,308 | |
| Commercial and industrial | 611,263 | | | 2,222,734 | | | 524,857 | | | 65,929 | | | 3,424,783 | |
| Commercial real estate owner occupied | 138,755 | | | 266,378 | | | 174,487 | | | 75,302 | | | 654,922 | |
| Commercial real estate non-owner occupied | 249,761 | | | 549,177 | | | 322,300 | | | — | | | 1,121,238 | |
| Construction | 120,194 | | | 42,601 | | | 36,186 | | | — | | | 198,981 | |
| Total commercial loans | $ | 1,247,005 | | | $ | 3,302,325 | | | $ | 2,195,671 | | | $ | 141,231 | | | $ | 6,886,232 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Consumer loans: | | | | | | | | | |
| Residential real estate | $ | 3,601 | | | $ | 8,186 | | | $ | 9,960 | | | $ | 312,983 | | | $ | 334,730 | |
| Manufactured housing | 247 | | | 2,942 | | | 33,658 | | | 16,014 | | | 52,861 | |
| Installment | 44,856 | | | 1,526,154 | | | 131,688 | | | 41,777 | | | 1,744,475 | |
| Total consumer loans | $ | 48,704 | | | $ | 1,537,282 | | | $ | 175,306 | | | $ | 370,774 | | | $ | 2,132,066 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
The following table presents the amountdistribution of those loans withthat mature in more than one year between predetermined fixed rates and floating or adjustable rates:rates as of December 31, 2021:
| | | | | | | | | | | | | | | | | |
| (amounts in thousands) | Predetermined rates | | Floating or adjustable rates | | Total |
| Commercial loans: | | | | | |
| Multi-family | $ | 258,366 | | | $ | 1,100,910 | | | $ | 1,359,276 | |
| Commercial and industrial | 702,718 | | | 2,110,802 | | | 2,813,520 | |
| Commercial real estate owner occupied | 78,235 | | | 437,932 | | | 516,167 | |
| Commercial real estate non-owner occupied | 358,000 | | | 513,477 | | | 871,477 | |
| Construction | 7,073 | | | 71,714 | | | 78,787 | |
| Total commercial loans | $ | 1,404,392 | | | $ | 4,234,835 | | | $ | 5,639,227 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Consumer loans: | | | | | |
| Residential real estate | $ | 233,901 | | | $ | 97,228 | | | $ | 331,129 | |
| Manufactured housing | 52,614 | | | — | | | 52,614 | |
| Installment | 1,699,619 | | | — | | | 1,699,619 | |
| Total consumer loans | $ | 1,986,134 | | | $ | 97,228 | | | $ | 2,083,362 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | | | | | |
| | Within one year | | After one but within five years | | After five years | | Total |
| (amounts in thousands) | |
| Commercial loans: | | | | | | | |
| Multi-family | $ | 158,018 |
| | $ | 1,497,115 |
| | $ | 1,847,248 |
| | $ | 3,502,381 |
|
| Commercial and industrial (including owner occupied commercial real estate) | 124,287 |
| | 926,263 |
| | 583,268 |
| | 1,633,818 |
|
| Commercial real estate non-owner occupied | 120,869 |
| | 680,634 |
| | 417,216 |
| | 1,218,719 |
|
| Construction | — |
| | 19,083 |
| | 66,310 |
| | 85,393 |
|
| Total commercial loans | $ | 403,174 |
| | $ | 3,123,095 |
| | $ | 2,914,042 |
| | $ | 6,440,311 |
|
| Amount of such loans with: | | | | | | | |
| Predetermined rates | $ | 276,724 |
| | $ | 2,317,200 |
| | $ | 575,850 |
| | $ | 3,169,774 |
|
| Floating or adjustable rates | 126,450 |
| | 805,895 |
| | 2,338,192 |
| | 3,270,537 |
|
| Total commercial loans | $ | 403,174 |
| | $ | 3,123,095 |
| | $ | 2,914,042 |
| | $ | 6,440,311 |
|
CREDIT RISKCredit 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.ACL. Credit losses are chargedcharged-off when they are identified, and provisions are added when it is estimated that a loss has occurred,for current expected credit losses, to the allowance for loan lossesACL at least quarterly. The allowance for loan lossesACL is estimated at least quarterly.
The provision for loancredit losses on loans and leases was $6.8 million, $3.0$27.4 million and $20.6$62.8 million for the years ended December 31, 2017, 20162021 and 2015,2020, respectively. The allowance for loan lossesACL maintained for loans and leases receivable (excluding loans held for sale as estimable credit losses are embedded in theand loans receivable, mortgage warehouse, at fair values at which the loans are reported)value and PPP loans) was $38.0$137.8 million, or 0.56%1.53% of totalloans and leases receivable at December 31, 2021, and $144.2 million, or 1.90% of loans receivable, at December 31, 2017, and $37.3 million, or 0.61% of2020. Excluding loans receivable, PPP from total loans and leases receivable is a non-GAAP measure. 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. Please refer to the reconciliation schedule below.
The decrease in the ACL resulted primarily from lower ACL for the commercial loan portfolio due to continued improvement in macroeconomic forecasts at December 31, 2016. 2021, as compared to the impact of reserve build for the COVID-19 pandemic at December 31, 2020, offset in part by the increase in ACL for the consumer installment loan portfolio due to loan growth. Net charge-offs were $6.1$33.8 million for the year ended December 31, 2017,2021, an increase of $4.4$21.0 million compared to $1.7$54.8 million for the year endingended December 31, 2016. The increase in net charge-offs during 2017 was largely driven by $3.4 million of charge-offs related to two relationships in the commercial and industrial post-2009 originated loan portfolio. Also, in 2017 there was an increase of $0.4 million of net2020. Commercial real estate non-owner occupied charge-offs in 2020 were attributable to the partial charge-off of two collateral dependent loans, which are not indicative of the overall commercial real estate portfolio. Installment charge-offs were attributable to originated and purchased unsecured consumer loan portfolio, largely the result of charge-offs of overdrawn deposit accounts associated with BankMobile deposit relationships.
Customers had no loans that were covered under loss sharingthrough arrangements with fintech companies and other market place lenders, which increased for the FDICyear ended December 31, 2021 compared to the same period in 2020 consistent with the loan growth. Please refer to the table of changes in Customers' ACL for net-charge offs to average loans by loan type for the periods indicated.
A reconciliation of the coverage of ACL for loans and leases held for investment to the ACL for loans and leases held for investment, excluding PPP loans as of December 31, 20172021 and 2016. On July 11, 2016, Customers entered into an agreement to terminate all existing rights and obligations pursuant to the loss sharing agreements with the FDIC. In connection with the termination agreement, Customers paid the FDIC $1.4 million as2020 is set forth below.
final payment under these agreements. The negotiated settlement amount was based on net losses incurred on the covered assets through September 30, 2015, adjusted for cash payments to and receipts from the FDIC as part of the December 31, 2015 and March 31, 2016 certifications. Consequently, loans and other real estate owned previously reported as covered assets pursuant to the loss sharing agreements were no longer presented as covered assets as of June 30, 2016. Customers considered the covered loans in estimating the allowance for loan losses and considered recovery of estimated credit losses from the FDIC in the FDIC indemnification asset. | | | | | | | | | | | |
| December 31, |
| (dollars in thousands) | 2021 | | 2020 |
| Loans and leases receivable (GAAP) | $ | 12,268,306 | | | $ | 12,136,733 | |
| Less: Loans receivable, PPP | 3,250,008 | | | 4,561,365 | |
| Loans and leases held for investment, excluding PPP (Non-GAAP) | $ | 9,018,298 | | | $ | 7,575,368 | |
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| ACL for loans and leases (GAAP) | $ | 137,804 | | | $ | 144,176 | |
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| Coverage of ACL for loans and leases held for investment, excluding PPP (Non-GAAP) | 1.53 | % | | 1.90 | % |
The table below presents changes in Customers' allowance for loan losses, excluding the effects of the FDIC receivable for the periods prior to the termination of the FDIC loss sharing agreement,ACL for the periods indicated.
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| (dollars in thousands) | Multi-family | | Commercial and industrial | | Commercial real estate owner occupied | | Commercial real estate non-owner occupied | | Construction | | Residential real estate | | Manufactured housing | | Installment | | Total |
Ending Balance,
December 31, 2018 | $ | 11,462 | | | $ | 12,145 | | | $ | 3,320 | | | $ | 6,093 | | | $ | 624 | | | $ | 3,654 | | | $ | 145 | | | $ | 2,529 | | | $ | 39,972 | |
Charge-offs (1) | (541) | | | (532) | | | (119) | | | — | | | — | | | (297) | | | — | | | (8,101) | | | (9,590) | |
Recoveries (1) | 7 | | | 1,050 | | | 236 | | | — | | | 136 | | | 27 | | | — | | | 314 | | | 1,770 | |
| Provision for credit losses on loans and leases | (4,771) | | | 2,893 | | | (1,202) | | | 150 | | | 502 | | | (166) | | | 915 | | | 25,906 | | | 24,227 | |
Ending Balance,
December 31, 2019 | $ | 6,157 | | | $ | 15,556 | | | $ | 2,235 | | | $ | 6,243 | | | $ | 1,262 | | | $ | 3,218 | | | $ | 1,060 | | | $ | 20,648 | | | $ | 56,379 | |
| Cumulative effect of change in accounting principle | 2,171 | | | 759 | | | 5,773 | | | 7,918 | | | (98) | | | 1,518 | | | 3,802 | | | 57,986 | | | 79,829 | |
Charge-offs (1) | — | | | (3,158) | | | (78) | | | (25,779) | | | — | | | (60) | | | — | | | (32,661) | | | (61,736) | |
Recoveries (1) | — | | | 3,019 | | | 28 | | | 1,293 | | | 128 | | | 86 | | | — | | | 2,376 | | | 6,930 | |
| Provision for credit losses on loans and leases | 4,292 | | | (3,937) | | | 1,554 | | | 29,777 | | | 4,579 | | | (785) | | | 328 | | | 26,966 | | | 62,774 | |
Ending Balance,
December 31, 2020 | $ | 12,620 | | | $ | 12,239 | | | $ | 9,512 | | | $ | 19,452 | | | $ | 5,871 | | | $ | 3,977 | | | $ | 5,190 | | | $ | 75,315 | | | $ | 144,176 | |
Charge-offs (1) | (1,132) | | | (1,550) | | | (749) | | | (944) | | | — | | | (130) | | | — | | | (35,876) | | | (40,381) | |
Recoveries (1) | — | | | 1,102 | | | 500 | | | 84 | | | 125 | | | 54 | | | — | | | 4,718 | | | 6,583 | |
| Provision for credit losses on loans and leases | (7,011) | | | 911 | | | (6,050) | | | (12,382) | | | (5,304) | | | (1,518) | | | (912) | | | 59,692 | | | 27,426 | |
Ending Balance,
December 31, 2021 | $ | 4,477 | | | $ | 12,702 | | | $ | 3,213 | | | $ | 6,210 | | | $ | 692 | | | $ | 2,383 | | | $ | 4,278 | | | $ | 103,849 | | | $ | 137,804 | |
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| Net Charge-offs to Average Loans | | | | | | | | | | | | | | | | | |
| 2019 | (0.02) | % | | 0.03 | % | | 0.02 | % | | — | % | | 0.22 | % | | (0.04) | % | | — | % | | (1.75) | % | | (0.11) | % |
| 2020 | — | % | | (0.01) | % | | (0.01) | % | | (1.98) | % | | 0.10 | % | | 0.01 | % | | — | % | | (2.40) | % | | (0.75) | % |
| 2021 | (0.08) | % | | (0.02) | % | | (0.04) | % | | (0.07) | % | | 0.07 | % | | (0.03) | % | | — | % | | (2.08) | % | | (0.44) | % |
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| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (amounts in thousands) | |
| Beginning Balance | $ | 37,315 |
| | $ | 35,647 |
| | $ | 30,932 |
| | $ | 23,998 |
| | $ | 25,837 |
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| Loan charge-offs (1) | | | | | | | | | |
| Construction | — |
| | — |
| | 1,064 |
| | 895 |
| | 2,096 |
|
| Commercial and industrial (2) | 4,888 |
| | 2,947 |
| | 11,709 |
| | 1,637 |
| | 1,387 |
|
| Commercial real estate (3) | 486 |
| | 140 |
| | 327 |
| | 1,715 |
| | 3,358 |
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| Residential real estate | 415 |
| | 493 |
| | 276 |
| | 667 |
| | 410 |
|
| Other consumer | 1,338 |
| | 825 |
| | 36 |
| | 33 |
| | 87 |
|
| Total Loan Charge-offs | 7,127 |
| | 4,405 |
| | 13,412 |
| | 4,947 |
| | 7,338 |
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| Loan recoveries (1) | | | | | | | | | |
| Construction | 164 |
| | 1,854 |
| | 204 |
| | 13 |
| | — |
|
| Commercial and industrial (2) | 685 |
| | 381 |
| | 562 |
| | 736 |
| | 391 |
|
| Commercial real estate (3) | — |
| | 130 |
| | | | 801 |
| | 42 |
|
| Residential real estate | 72 |
| | 367 |
| | 575 |
| | 265 |
| | 2 |
|
| Other consumer | 138 |
| | 11 |
| | 92 |
| | 8 |
| | 9 |
|
| Total Recoveries | 1,059 |
| | 2,743 |
| | 1,433 |
| | 1,823 |
| | 444 |
|
| Total net charge-offs | 6,068 |
| | 1,662 |
| | 11,979 |
| | 3,124 |
| | 6,894 |
|
| Provision for loan losses (4) | 6,768 |
| | 3,330 |
| | 16,694 |
| | 10,058 |
| | 5,055 |
|
| Ending Balance | $ | 38,015 |
| | $ | 37,315 |
| | $ | 35,647 |
| | $ | 30,932 |
| | $ | 23,998 |
|
| Net charge-offs as a percentage of average loans receivable | 0.09 | % | | 0.03 | % | | 0.26 | % | | 0.09 | % | | 0.37 | % |
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(1) | Charge-offs and recoveries on purchased credit-impaired loans that are accounted for in pools are recognized on a net basis when the pool matures. |
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(2) | Includes owner occupied commercial real estate loans for 2017, 2016, 2015 and 2014. |
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(3) | Includes non-owner occupied commercial real estate loans for 2017, 2016, 2015 and 2014. For 2013, includes owner occupied and non-owner occupied commercial real estate loans. |
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(4) | The provision amounts exclude the (cost)/benefit of the FDIC loss sharing arrangements of $0.3 million, $(3.9) million, $(4.7) million and $2.8 million, for the years ended December 31, 2016, 2015, 2014 and 2013, respectively. | | | | | | | | |
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The allowance for loan lossesACL is based on a quarterly evaluation of the loan and lease portfolio and is maintained at a level that management considers adequate to absorb probableexpected losses incurred as of the balance sheet date. All commercial loans, with the exception of PPP loans and 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.ACL. Refer to Critical Accounting Policies and Estimates herein and NOTE 4"NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATIONPRESENTATION" to Customers' audited financial statements for further discussion onCustomers' adoption of CECL and management's methodology for estimating the allowance for loan losses.ACL.
Approximately 85%50% of the Bank’sCustomers’ 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”). The Bank’s 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 the Bank’sCustomers' 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, impaired326, individually assessed loans, consisting primarily of non-accrual and restructured loans, are considered in the methodology for determining the allowance for credit losses. ImpairedACL. Individually assessed 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 saleoperation or operationsale of such collateral. Shortfalls in the underlying collateral value for loans or leases determined to be collateral dependent are charged off immediately. Subsequent to an appraisal or other fair value estimate, management will assess whether there was a further decline in the value of the collateral based on changes in market conditions or property use that would require additional impairment to be recorded to reflect the particular situation, thereby increasing the ACL on loans and leases.
The following table shows the allowance for loan lossesACL by various loan portfolios as of December 31, 2017, 2016, 2015, 20142021 and 2013:2020:
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| | December 31, |
| | 2021 | | 2020 | | | | | | |
| (dollars in thousands) | ACL | | Percent of loans in each category to loans and leases receivable | | ACL | | Percent of loans in each category to loans and leases receivable | | | | | | | | | | | | |
| Multi-family | $ | 4,477 | | | 16.5 | % | | $ | 12,620 | | | 23.3 | % | | | | | | | | | | | | |
| Commercial and industrial | 12,702 | | | 38.0 | % | | 12,239 | | | 30.2 | % | | | | | | | | | | | | |
| Commercial real estate owner occupied | 3,213 | | | 7.3 | % | | 9,512 | | | 7.5 | % | | | | | | | | | | | | |
| Commercial real estate non-owner occupied | 6,210 | | | 12.4 | % | | 19,452 | | | 15.8 | % | | | | | | | | | | | | |
| Construction | 692 | | | 2.2 | % | | 5,871 | | | 1.9 | % | | | | | | | | | | | | |
| Total commercial loans and leases | 27,294 | | | 76.4 | % | | 59,694 | | | 78.7 | % | | | | | | | | | | | | |
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| Residential real estate | 2,383 | | | 3.7 | % | | 3,977 | | | 4.2 | % | | | | | | | | | | | | |
| Manufactured housing | 4,278 | | | 0.6 | % | | 5,190 | | | 0.8 | % | | | | | | | | | | | | |
| Installment | 103,849 | | | 19.3 | % | | 75,315 | | | 16.3 | % | | | | | | | | | | | | |
| Total consumer loans | 110,510 | | | 23.6 | % | | 84,482 | | | 21.3 | % | | | | | | | | | | | | |
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| Loans and leases receivable | $ | 137,804 | | | 100.0 | % | | $ | 144,176 | | | 100.0 | % | | | | | | | | | | | | |
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| | December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| | Allowance for loan losses | | Percent of loans in each category to total loans | | Allowance for loan losses | | Percent of loans in each category to total loans | | Allowance for loan losses | | Percent of loans in each category to total loans | | Allowance
for loan
losses | | Percent of loans in each category to total loans | | Allowance
for loan
losses | | Percent of loans in each category to total loans |
| (amounts in thousands) | |
| Multi-family | $ | 12,168 |
| | 51.7 | % | | $ | 11,602 |
| | 52.2 | % | | $ | 12,016 |
| | 53.4 | % | | $ | 8,493 |
| | 51.2 | % | | $ | 4,227 |
| | 43.1 | % |
| Commercial and industrial (a) | 14,150 |
| | 24.1 | % | | 13,233 |
| | 22.5 | % | | 10,212 |
| | 20.4 | % | | 9,120 |
| | 18.2 | % | | 2,674 |
| | 12.0 | % |
| Commercial real estate (b) | 7,437 |
| | 18.0 | % | | 7,894 |
| | 19.4 | % | | 8,420 |
| | 17.5 | % | | 9,198 |
| | 19.5 | % | | 11,478 |
| | 30.6 | % |
| Construction | 979 |
| | 1.3 | % | | 840 |
| | 1.1 | % | | 1,074 |
| | 1.6 | % | | 1,047 |
| | 1.2 | % | | 2,385 |
| | 1.7 | % |
| Total Commercial Loans | 34,734 |
| | 95.2 | % | | 33,569 |
| | 95.1 | % | | 31,722 |
| | 92.9 | % | | 27,858 |
| | 90.1 | % | | 20,764 |
| | 87.5 | % |
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| Residential real estate | 2,929 |
| | 3.5 | % | | 3,342 |
| | 3.1 | % | | 3,298 |
| | 5.0 | % | | 2,698 |
| | 6.9 | % | | 2,490 |
| | 6.6 | % |
| Manufactured housing | 180 |
| | 1.3 | % | | 286 |
| | 1.7 | % | | 494 |
| | 2.1 | % | | 262 |
| | 2.9 | % | | 614 |
| | 5.7 | % |
| Other consumer | 172 |
| | 0.1 | % | | 118 |
| | 0.1 | % | | 133 |
| | 0.1 | % | | 114 |
| | 0.1 | % | | 130 |
| | 0.2 | % |
| Total Consumer Loans | 3,281 |
| | 4.8 | % | | 3,746 |
| | 4.9 | % | | 3,925 |
| | 7.1 | % | | 3,074 |
| | 9.9 | % | | 3,234 |
| | 12.5 | % |
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| Total Loans Receivable | $ | 38,015 |
| | 100.0 | % | | $ | 37,315 |
| | 100.0 | % | | $ | 35,647 |
| | 100.0 | % | | $ | 30,932 |
| | 100.0 | % | | $ | 23,998 |
| | 100.0 | % |
(a) Includes owner occupied commercial real estate loans for 2017, 2016, 2015 and 2014.
(b) Includes non-owner occupied commercial real estate loans for 2017, 2016, 2015 and 2014. For 2013, includes owner occupied and non-owner occupied commercial real estate loans.
ASSET QUALITYAsset 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 defining characteristic generally defining a shared characteristic with other loans or leases in the same group. Customers' originated loans were subject to the current underwriting standards that were put in place in mid-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 lossesCharge-offs from originated and acquired loans and leases are absorbed by the allowance for loan losses. Credit losses from acquired loans are absorbedACL. Section 4013 of the CARES Act, as amended by the allowanceCAA, gives entities temporary relief from the accounting and disclosure requirements for TDRs. In addition, on April 7, 2020, certain regulatory banking agencies issued an interagency statement that offers practical expedients for evaluating whether loan losses, nonaccretable difference fair value marksmodifications in response to the COVID-19 pandemic are TDRs. For COVID-19 related loan modifications which met the loan modification criteria under either the CARES Act, as amended, or the criteria specified by the regulatory agencies, Customers elected to suspend TDR accounting for such loan modifications. At December 31, 2021, there were no commercial deferments related to COVID-19. At December 31, 2021, consumer deferments related to COVID-19 were $6.1 million. At December 31, 2020, commercial and cash reserves. As described below, the allowance for loan losses isconsumer deferments related to absorb only those losses estimated to have been incurred after acquisition; whereas the fair value markCOVID-19 were $202.1 million and cash reserves absorb losses estimated to have been embedded in the acquired loans at acquisition.$16.4 million, respectively. The schedule that follows includes both loans held for sale and loans held for investment. Customers had no pending commercial loan deferment requests as of December 31, 2021.
Asset Quality at December 31, 20172021
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| (dollars in thousands) | Total Loans and Leases | | Current | | 30-89 Days Past Due | | 90 Days or More Past Due and Accruing | | Non-accrual/NPL (a) | | OREO and Repossessed Assets (b) | | NPA (a)+(b) | | NPL to Loan and Lease Type (%) | | NPA to Loans and Leases + OREO and Repossessed Assets (%) |
| Loan and Lease Type | | | | | | | | | | | | | | | | | |
| Multi-family | $ | 1,486,308 | | | $ | 1,461,972 | | | $ | 1,682 | | | $ | — | | | $ | 22,654 | | | $ | — | | | $ | 22,654 | | | 1.52 | % | | 1.52 | % |
| Commercial and industrial | 3,424,783 | | | 3,413,229 | | | 5,458 | | | — | | | 6,096 | | | — | | | 6,096 | | | 0.18 | % | | 0.18 | % |
| Commercial real estate owner occupied | 654,922 | | | 652,447 | | | — | | | — | | | 2,475 | | | — | | | 2,475 | | | 0.38 | % | | 0.38 | % |
| Commercial real estate non-owner occupied | 1,121,238 | | | 1,118,423 | | | — | | | — | | | 2,815 | | | — | | | 2,815 | | | 0.25 | % | | 0.25 | % |
| Construction | 198,981 | | | 198,981 | | | — | | | — | | | — | | | — | | | — | | | — | % | | — | % |
| Total commercial loans and leases receivable | 6,886,232 | | | 6,845,052 | | | 7,140 | | | — | | | 34,040 | | | — | | | 34,040 | | | 0.49 | % | | 0.49 | % |
| Residential | 334,730 | | | 322,484 | | | 4,519 | | | — | | | 7,727 | | | 35 | | | 7,762 | | | 2.31 | % | | 2.32 | % |
| Manufactured housing | 52,861 | | | 44,837 | | | 3,075 | | | 1,386 | | | 3,563 | | | 105 | | | 3,668 | | | 6.74 | % | | 6.93 | % |
| Installment | 1,744,475 | | | 1,729,048 | | | 11,644 | | | — | | | 3,783 | | | — | | | 3,783 | | | 0.22 | % | | 0.22 | % |
| Total consumer loans receivable | 2,132,066 | | | 2,096,369 | | | 19,238 | | | 1,386 | | | 15,073 | | | 140 | | | 15,213 | | | 0.71 | % | | 0.71 | % |
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Loans and leases receivable (1) | 9,018,298 | | | 8,941,421 | | | 26,378 | | | 1,386 | | | 49,113 | | | 140 | | | 49,253 | | | 0.54 | % | | 0.55 | % |
Loans receivable, PPP (2) | 3,250,008 | | | 3,250,008 | | | — | | | — | | | — | | | — | | | — | | | — | % | | — | % |
| Loans receivable, mortgage warehouse, at fair value | 2,284,325 | | | 2,284,325 | | | — | | | — | | | — | | | — | | | — | | | — | % | | — | % |
| Total loans held for sale | 16,254 | | | 15,747 | | | — | | | — | | | 507 | | | — | | | 507 | | | 3.12 | % | | 3.12 | % |
| Total portfolio | $ | 14,568,885 | | | $ | 14,491,501 | | | $ | 26,378 | | | $ | 1,386 | | | $ | 49,620 | | | $ | 140 | | | $ | 49,760 | | | 0.34 | % | | 0.34 | % |
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| Loan Type | Total Loans | | Current | | 30-90 Days | | Greater than 90 Days 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 | $ | 3,499,760 |
| | $ | 3,494,860 |
| | $ | 4,900 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | — | % | | — | % |
| Commercial & Industrial (1) | 1,546,109 |
| | 1,527,528 |
| | 103 |
| | — |
| | 18,478 |
| | 667 |
| | 19,145 |
| | 1.20 | % | | 1.24 | % |
| Commercial Real Estate Non-Owner Occupied | 1,199,053 |
| | 1,199,053 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — | % | | — | % |
| Residential | 107,742 |
| | 103,564 |
| | 2,672 |
| | — |
| | 1,506 |
| | — |
| | 1,506 |
| | 1.40 | % | | 1.40 | % |
| Construction | 85,393 |
| | 85,393 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — | % | | — | % |
| Other Consumer | 1,292 |
| | 1,257 |
| | 35 |
| | — |
| | — |
| | — |
| | — |
| | — | % | | — | % |
| Total Originated Loans | 6,439,349 |
| | 6,411,655 |
| | 7,710 |
| | — |
| | 19,984 |
|
| 667 |
| | 20,651 |
| | 0.31 | % | | 0.32 | % |
| Loans Acquired | | | | | | | | | | | | | | | | | |
| Bank Acquisitions | 149,400 |
| | 140,465 |
| | 3,517 |
| | 946 |
| | 4,472 |
| | 782 |
| | 5,254 |
| | 2.99 | % | | 3.50 | % |
| Loan Purchases | 179,426 |
| | 167,300 |
| | 6,245 |
| | 3,922 |
| | 1,959 |
| | 277 |
| | 2,236 |
| | 1.09 | % | | 1.24 | % |
| Total Loans Acquired | 328,826 |
| | 307,765 |
| | 9,762 |
| | 4,868 |
| | 6,431 |
| | 1,059 |
| | 7,490 |
| | 1.96 | % | | 2.27 | % |
| Deferred costs and unamortized premiums, net | 83 |
| | 83 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | | | |
| Total Loans Receivable | 6,768,258 |
| | 6,719,503 |
| | 17,472 |
| | 4,868 |
| | 26,415 |
| | 1,726 |
| | 28,141 |
| | 0.39 | % | | 0.42 | % |
| Total Loans Held for Sale | 1,939,485 |
| | 1,939,485 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | | | |
| Total Portfolio | $ | 8,707,743 |
| | $ | 8,658,988 |
| | $ | 17,472 |
| | $ | 4,868 |
| | $ | 26,415 |
| | $ | 1,726 |
| | $ | 28,141 |
| | 0.30 | % | | 0.32 | % |
Asset Quality at December 31, 20172021 (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | Total Loans and Leases | | Non-accrual/NPL | | ACL | | | | | | Reserves to Loans and Leases (%) | | Reserves to NPLs (%) |
| Loan and Lease Type | |
| Multi-family | $ | 1,486,308 | | | $ | 22,654 | | | $ | 4,477 | | | | | | | 0.30 | % | | 19.76 | % |
| Commercial and industrial | 3,424,783 | | | 6,096 | | | 12,702 | | | | | | | 0.37 | % | | 208.37 | % |
| Commercial real estate owner occupied | 654,922 | | | 2,475 | | | 3,213 | | | | | | | 0.49 | % | | 129.82 | % |
| Commercial real estate non-owner occupied | 1,121,238 | | | 2,815 | | | 6,210 | | | | | | | 0.55 | % | | 220.60 | % |
| Construction | 198,981 | | | — | | | 692 | | | | | | | 0.35 | % | | — | % |
| Total commercial loans and leases receivable | 6,886,232 | | | 34,040 | | | 27,294 | | | | | | | 0.40 | % | | 80.18 | % |
| Residential | 334,730 | | | 7,727 | | | 2,383 | | | | | | | 0.71 | % | | 30.84 | % |
| Manufactured housing | 52,861 | | | 3,563 | | | 4,278 | | | | | | | 8.09 | % | | 120.07 | % |
| Installment | 1,744,475 | | | 3,783 | | | 103,849 | | | | | | | 5.95 | % | | 2,745.15 | % |
| Total consumer loans receivable | 2,132,066 | | | 15,073 | | | 110,510 | | | | | | | 5.18 | % | | 733.17 | % |
| | | | | | | | | | | | | |
Loans and leases receivable (1) | 9,018,298 | | | 49,113 | | | 137,804 | | | | | | | 1.53 | % | | 280.59 | % |
Loans receivable, PPP (2) | 3,250,008 | | | — | | | — | | | | | | | — | % | | — | % |
| Loans receivable, mortgage warehouse, at fair value | 2,284,325 | | | — | | | — | | | | | | | — | % | | — | % |
| Total loans held for sale | 16,254 | | | 507 | | | — | | | | | | | — | % | | — | % |
| Total portfolio | $ | 14,568,885 | | | $ | 49,620 | | | $ | 137,804 | | | | | | | 0.95 | % | | 277.72 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Loan Type | Total Loans | | NPL | | ALLL | | Cash Reserve | | Total Credit Reserves | | Reserves to Loans (%) | | Reserves to NPLs (%) |
| (amounts in thousands) | |
| Originated Loans | | | | | | | | | | | | | |
| Multi-Family | $ | 3,499,760 |
| | $ | — |
| | $ | 12,169 |
| | $ | — |
| | $ | 12,169 |
| | 0.35 | % | | — | % |
| Commercial & Industrial (1) | 1,546,109 |
| | 18,478 |
| | 13,369 |
| | — |
| | 13,369 |
| | 0.86 | % | | 72.35 | % |
| Commercial Real Estate | 1,199,053 |
| | — |
| | 4,564 |
| | — |
| | 4,564 |
| | 0.38 | % | | — | % |
| Residential | 107,742 |
| | 1,506 |
| | 2,119 |
| | — |
| | 2,119 |
| | 1.97 | % | | 140.70 | % |
| Construction | 85,393 |
| | — |
| | 979 |
| | — |
| | 979 |
| | 1.15 | % | | — | % |
| Other Consumer | 1,292 |
| | — |
| | 77 |
| | — |
| | 77 |
| | 5.96 | % | | — | % |
| Total Originated Loans | 6,439,349 |
| | 19,984 |
|
| 33,277 |
|
| — |
| | 33,277 |
| | 0.52 | % | | 166.52 | % |
| Loans Acquired | | | | | | | | | | | | | |
| Bank Acquisitions | 149,400 |
| | 4,472 |
| | 4,558 |
| | — |
| | 4,558 |
| | 3.05 | % | | 101.92 | % |
| Loan Purchases | 179,426 |
| | 1,959 |
| | 180 |
| | 645 |
| | 825 |
| | 0.46 | % | | 42.11 | % |
| Total Loans Acquired | 328,826 |
| | 6,431 |
| | 4,738 |
| | 645 |
| | 5,383 |
| | 1.64 | % | | 83.70 | % |
| Deferred costs and unamortized premiums, net | 83 |
| | — |
| | — |
| | — |
| | — |
| | | | |
| Total Loans Held for Investment | 6,768,258 |
| | 26,415 |
| | 38,015 |
| | 645 |
| | 38,660 |
| | 0.57 | % | | 146.36 | % |
| Total Loans Held for Sale | 1,939,485 |
| | — |
| | — |
| | — |
| | — |
| | | | |
| Total Portfolio | $ | 8,707,743 |
| | $ | 26,415 |
| | $ | 38,015 |
| | $ | 645 |
| | $ | 38,660 |
| | 0.44 | % | | 146.36 | % |
(1) Commercial & industrialExcluding loans including owner occupied commercial real estate.
Originated Loans
Post 2009 originated loans (excluding held-for-sale loans) totaled $6.4 billion, or 95.1%, ofreceivable, PPP from total loans heldand leases receivable is a non-GAAP measure. 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 investmentresults 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. Please refer to the reconciliation schedules that follow this table.
(2)The tables exclude PPP loans of $3.3 billion, of which $6.3 million were 30-59 days past due and $21.8 million were 60 days or more past due as of December 31, 2021. PPP loans of $4.6 billion, were all current as of December 31, 2020. Claims for guarantee payments are submitted to the SBA for eligible PPP loans more than 60 days past due.
Customers’ asset quality table contains non-GAAP financial measures which exclude loans receivable, PPP from their calculations. Management uses these non-GAAP measures to compare the current period presentation to historical periods in prior filings. 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.
A reconciliation of loans and leases receivable, excluding loans receivable, PPP and other related amounts, at December 31, 2017, compared2021, is set forth below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | Total Loans and Leases | | Current | | 30-89 Days Past Due | | 90 Days or More Past Due and Accruing | | Non-accrual/NPL (a) | | OREO and Repossessed Assets (b) | | NPA (a)+(b) | | NPL to Loan and Lease Type (%) | | NPA to Loans and Leases + OREO and Repossessed Assets (%) |
| Loans and leases receivable (GAAP) | $ | 12,268,306 | | | $ | 12,191,429 | | | $ | 26,378 | | | $ | 1,386 | | | $ | 49,113 | | | $ | 140 | | | $ | 49,253 | | | 0.40 | % | | 0.40 | % |
Less: Loans receivable, PPP (1) | 3,250,008 | | | 3,250,008 | | | — | | | — | | | — | | | — | | | — | | | — | % | | — | % |
| Loans receivable, excluding loans receivable, PPP (Non-GAAP) | $ | 9,018,298 | | | $ | 8,941,421 | | | $ | 26,378 | | | $ | 1,386 | | | $ | 49,113 | | | $ | 140 | | | $ | 49,253 | | | 0.54 | % | | 0.55 | % |
| | | | | | | | | | | | | | | | | |
| Add: Loans held for sale | 16,254 | | | | | | | | | 507 | | | | | | | | | |
| Loans receivable, excluding loans receivable, PPP (Non-GAAP) | $ | 9,034,552 | | | | | | | | | $ | 49,620 | | | | | | | 0.55 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands) | Total Loans and Leases | | Non-accrual / NPL | | ACL | | | | | | Reserves to Loans and Leases (%) | | Reserves to NPLs (%) |
| Loans and leases receivable (GAAP) | $ | 12,268,306 | | | $ | 49,113 | | | $ | 137,804 | | | | | | | 1.12 | % | | 280.59 | % |
Less: Loans receivable, PPP (1) | 3,250,008 | | | — | | | — | | | | | | | — | % | | — | % |
| Loans receivable, excluding loans receivable, PPP (Non-GAAP) | $ | 9,018,298 | | | $ | 49,113 | | | $ | 137,804 | | | | | | | 1.53 | % | | 280.59 | % |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
(1)Loans and leases receivable include PPP loans that are past due, as claims for guarantee payments are submitted to $5.8the SBA for eligible PPP loans more than 60 days past due.
The total loan and lease portfolio was $14.6 billion or 94.8%, at December 31, 2016. The management team adopted new underwriting standards that management believes better limit risks of loss in 20092021 compared to $15.8 billion at December 31, 2020 and has worked to continue to monitor these standards. Only $20.0$49.6 million, or 0.31%,0.34% of the post 2009 loans and leases, were non-performing at December 31, 2017,2021 compared to $10.5$70.5 million, or 0.18%,0.45% of the post 2009 loans that were non-performingand leases, at December 31, 2016.2020. The post 2009 originated loans wereloan and lease portfolio was supported by an allowance for loan lossesACL of $33.3$137.8 million (0.52%(277.72% of post 2009 originated loans)NPLs and $31.80.95% of total loans and leases) and $144.2 million (0.55%(204.48% of post 2009 originated loans)NPLs and 0.91% of total loans and leases), at December 31, 20172021 and 2016, respectively.
Loans Acquired
At December 31, 2017, Customers reported $0.3 billion of acquired loans, which was 4.9% of total loans held for investment, compared to $0.3 billion, or 5.2% of total loans held for investment, at December 31, 2016. Non-performing acquired loans totaled $6.4 million at December 31, 2017, and $7.3 million at December 31, 2016. 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, $51.9 million were supported by a $0.6 million cash reserve at December 31, 2017, compared to $57.6 million supported by a cash reserve of $1.0 million at December 31, 2016. The cash reserve was created as part of the purchase transaction to absorb losses and is maintained in a demand deposit account at Customers. All current losses and delinquent interest are absorbed by this reserve. For the manufactured housing loans purchased in 2012, Tammac has an obligation to pay Customers 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 December 31, 2017, $31.4 million of these loans were outstanding, compared to $36.6 million at December 31, 2016.
Many of the acquired loans were purchased at a discount. The price paid 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. There is a Special Assets Group 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 $5.4 million (1.64% of total acquired loans) and $6.5 million (2.03% of total acquired loans) at December 31, 2017 and 2016, respectively.
Held-for-Sale Loans
At December 31, 2017, loans held for sale were $1.9 billion, or 22.3% of the total loan portfolio, compared to $2.1 billion, or 25.6% of the total loan portfolio at December 31, 2016. The loans held-for-sale portfolio at December 31, 2017, included $1.8 billion of loans to mortgage banking businesses, $144.2 million of multi-family loans and $1.9 million of residential mortgage loans, compared to $2.1 billion of loans to mortgage banking businesses and $0.7 million of residential mortgages loans at December 31, 2016. Held-for-sale loans are carried on Customers' balance sheet at either fair value (due to the election of the fair value option) or at the lower of cost of fair value. An allowance for loan losses is not recorded on loans that are classified held for sale.
Customers manages its credit risk through the diversification of the loan portfolio and the application of policies and procedures designed to foster sound credit standards and monitoring practices. While various degrees of credit risk are associated with substantially all investing activities, the lending function carries the greatest degree of potential loss. At December 31, 2017 and 2016, non-performing loans to total loans was 0.30% and 0.22%, respectively. Total reserves to non-performing loans was 146.4% and 215.3% at December 31, 2017 and 2016,2020, respectively.
The tables below set forth non-accrual loans, non-performing assetsNPAs and asset quality ratios:
| | | | | | | | | | | | | | | | | |
| December 31, |
| (amounts in thousands) | 2021 | | 2020 | | | | | | |
Loans 90+ days delinquent still accruing (1) | $ | 1,386 | | | $ | 1,951 | | | | | | | |
| | | | | | | | | |
| Non-accrual loans | $ | 49,620 | | | $ | 70,508 | | | | | | | |
| OREO and repossessed assets | 140 | | | 667 | | | | | | | |
| Total non-performing assets | $ | 49,760 | | | $ | 71,175 | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (amounts in thousands) | |
| Loans 90+ days delinquent still accruing (1) | $ | 2,743 |
| | $ | 2,813 |
| | $ | 2,805 |
| | $ | 4,388 |
| | $ | 3,772 |
|
| | | | | | | | | | |
| Non-accrual loans | $ | 26,415 |
| | $ | 17,792 |
| | $ | 10,771 |
| | $ | 11,733 |
| | $ | 19,163 |
|
| OREO | 1,726 |
| | 3,108 |
| | 5,057 |
| | 15,371 |
| | 12,265 |
|
| Total non-performing assets | $ | 28,141 |
| | $ | 20,900 |
| | $ | 15,828 |
| | $ | 27,104 |
| | $ | 31,428 |
|
| |
(1) | Excludes purchased credit-impaired loans. |
| | | | | | | | | | | | | | | | | |
| | December 31, |
| 2021 | | 2020 | | | | | | |
Non-accrual loans and leases to loans and leases receivable (1) | 0.54 | % | | 0.69 | % | | | | | | |
| Non-accrual loans to total loans and leases | 0.34 | % | | 0.45 | % | | | | | | |
| Non-performing assets to total assets | 0.25 | % | | 0.39 | % | | | | | | |
| Non-accrual loans and loans 90+ days delinquent to total assets | 0.26 | % | | 0.39 | % | | | | | | |
| Allowance for credit losses on loans and leases to: | | | | | | | | | |
Loans and leases receivable (1) | 1.53 | % | | 1.90 | % | | | | | | |
| Non-accrual loans | 277.72 | % | | 204.48 | % | | | | | | |
(1)Excludes loans held for sale, loans receivable, mortgage warehouse, at fair value, and loans receivable, PPP. Excluding loans receivable, PPP from total loans and leases receivable is a non-GAAP measure. 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. Please refer to the reconciliation schedules above that precedes this table.
The asset quality ratios related to NPAs, including non-accrual loans improved at December 31, 2021 as compared to December 31, 2020 primarily due to the sale of a multi-family loan in 2021, which was classified as held for sale at December 31, 2020. Please refer to Credit Risk above for information about the decrease in ACL affecting the related asset quality ratios at December 31, 2021 as compared to December 31, 2020.
|
| | | | | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| Non-accrual loans to total loans receivable | 0.39 | % | | 0.29 | % | | 0.20 | % | | 0.27 | % | | 0.78 | % |
| Non-accrual loans to total loans | 0.30 | % | | 0.22 | % | | 0.15 | % | | 0.20 | % | | 0.60 | % |
| Non-performing assets to total assets | 0.29 | % | | 0.22 | % | | 0.19 | % | | 0.40 | % | | 0.76 | % |
| Non-accrual loans and loans 90+ days delinquent to total assets | 0.30 | % | | 0.22 | % | | 0.16 | % | | 0.24 | % | | 0.55 | % |
| Allowance for loan losses to: | | | | | | | | | |
| Total loans receivable | 0.56 | % | | 0.61 | % | | 0.65 | % | | 0.72 | % | | 0.97 | % |
| Non-accrual loans | 143.91 | % | | 209.73 | % | | 330.95 | % | | 263.63 | % | | 125.23 | % |
The table below sets forth loans that were non-performing at December 31, 2017, 2016, 2015, 20142021 and 2013.2020.
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 | | 2015 | | 2014 | | 2013 |
| (amounts in thousands) | |
| Commercial and industrial (1) | $ | 17,392 |
| | $ | 8,443 |
| | $ | 1,973 |
| | $ | 2,513 |
| | $ | 125 |
|
| Commercial real estate (2) | 1,453 |
| | 2,039 |
| | 2,700 |
| | 2,514 |
| | 11,615 |
|
| Commercial real estate non-owner occupied | 160 |
| | 2,057 |
| | 1,307 |
| | 1,460 |
| | — |
|
| Construction | — |
| | — |
| | — |
| | 2,325 |
| | 5,431 |
|
| Residential real estate | 5,420 |
| | 2,959 |
| | 2,202 |
| | 1,855 |
| | 1,533 |
|
| Manufactured housing | 1,959 |
| | 2,236 |
| | 2,449 |
| | 931 |
| | 459 |
|
| Other consumer | 31 |
| | 58 |
| | 140 |
| | 135 |
| | — |
|
| Total non-performing loans | $ | 26,415 |
| | $ | 17,792 |
| | $ | 10,771 |
| | $ | 11,733 |
| | $ | 19,163 |
|
| |
(1) | Includes owner occupied commercial real estate loans for 2017, 2016, 2015 and 2014. |
| |
(2) | Includes non-owner occupied commercial real estate loans for 2017, 2016, 2015 and 2014. For 2013, includes owner occupied and non-owner occupied commercial real estate loans. |
Customers seeks to manage credit risk through the diversification of the loan portfolio and the application of credit underwriting policies and procedures designed to foster sound credit standards and monitoring practices. While various degrees of credit risk are associated with substantially all investing activities, the lending function carries the greatest degree of potential loss. | | | | | | | | | | | | | | | | | |
| | December 31, |
| (amounts in thousands) | 2021 | | 2020 | | | | | | |
| Multi-family | $ | 22,654 | | | $ | 21,728 | | | | | | | |
| Commercial and industrial | 6,096 | | | 8,453 | | | | | | | |
| Commercial real estate owner occupied | 2,475 | | | 3,411 | | | | | | | |
| Commercial real estate non-owner occupied | 2,815 | | | 2,356 | | | | | | | |
| | | | | | | | | |
| Residential real estate | 7,727 | | | 9,911 | | | | | | | |
| Manufactured housing | 3,563 | | | 2,969 | | | | | | | |
| Installment | 3,783 | | | 3,211 | | | | | | | |
| Total non-performing loans | $ | 49,113 | | | $ | 52,039 | | | | | | | |
Asset quality assurance activities include careful monitoring of borrower payment status and the periodic review of borrower current financial information to ensure ongoing financial strength and borrower cash flow viability. Customers has established credit policies and procedures, seeks the consistent application of those policies and procedures across the organization and adjusts policies as appropriate for changes in market conditions and applicable regulations.
Problem Loan Identification and Management
To facilitate the monitoring of credit quality within the commercial and industrial, multi-family, commercial real estate and construction portfolioportfolios and for purposes of analyzing historical loss rates used in the determination of the allowanceACL for loan losses for the respective portfolio segment,individually assessed loans, Customers utilizes the following categories of risk ratings: pass (there are six risk ratings for pass loans), special mention, substandard, doubtful or loss. The risk-rating categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated regularly thereafter. Pass 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, generally 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 the loans.loans and leases. PPP loans are excluded as these loans are fully guaranteed by the SBA.
Customers assigns a special mention rating to loans and leases that have potential weaknesses that deserve management’s close attention. If not addressed, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the loan and lease and Customers' financial position. At December 31, 20172021 and 2016,2020, special mention loans and leases were $99.3$230.1 million and $56.9$250.6 million, respectively.respectively, and are considered performing loans and are therefore not included in the tables above.
Risk ratings are not established for residential real estate, home equity loans, installment loans and other consumerinstallment 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 on aggregate payment history through the monitoring of delinquency levels and trends.
A regular reporting and review process is in place to provide for proper portfolio oversight and control and to monitor those loans and leases identified as problem credits by management. This process is designed to assess Customers' progress in working toward a solution and to assist in determining an appropriate allowance for loan losses.ACL. All loan work-out situations involve the active participation of management and are reported regularly to the Board of Directors. When a loan or lease becomes delinquent for 90 days or more, or earlier if considered appropriate, the loan is assigned to Customers’ Special Asset Group (“SAG”)SAG for workout or other resolution.
Loan and lease charge-offs are determined on a case-by-case basis. Loans and leases are generally charged offcharged-off when principal is likely to be unrecoverable and after appropriate collection steps have been taken. Loan and lease charge-offs are proposed by the SAG and approved by the Board of Directors.
Loan and lease policies and procedures are reviewed internally for possible revisions and changes on a regular basis. In addition, these policies and procedures, together with the loan and lease portfolio, are reviewed on a periodic basis by various regulatory agencies and by our internal, external and loan review auditors, as part of their examination and audit procedures.
Troubled Debt Restructurings (TDRs)
At December 31, 2017, 20162021, 2020 and 2015,2019, there were $20.4$16.5 million, $16.4$16.1 million and $11.4$13.3 million, respectively, in loans categorized as a troubled debt restructuring (“TDR”).TDR. TDRs are reported as impaired loans in the period 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 the borrower satisfies a minimum six-month performance requirement; however, it will remain classified as impaired. Generally, Customers requires sustained performance for nine months before returning a TDR to accrual status.
Modification of purchased credit-impairedPCD loans that are accounted for within loan pools in accordance with the accounting standards for purchased credit-impairedPCD loans does not result in the removal of these loans from the pool even if the modification 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 expectation of cash flows, modifications of loans within such pools are not reported as TDRs.
TDR modifications primarily involve interest-rate concessions, extensions of term, deferrals of principal and other modifications. Other modifications typically reflect other nonstandard terms which Customers would not offer in non-troubled situations. During the years ended December 31, 2017, 20162021, 2020 and 2015,2019, loans aggregating $8.1$3.5 million, $6.6$3.7 million and $7.5$1.4 million, respectively, were modified in troubled debt restructurings.TDRs. TDR modifications of loans within the commercial and industrial category were primarily interest-rate concessions,extensions of term, deferrals of principal and other modifications; modifications of commercial real estate loans were primarily deferrals of principal, extensions of term and other modifications; and modifications of residential real estate loans were primarily interest-rateextensions of term and deferrals of principal; and modifications of manufactured housing loans were primarily interest rate concessions, extensions of term and deferrals of principal. As of December 31, 2017, except for one commercial2021, 2020 and industrial loan with an outstanding commitment of $2.1 million,2019, there were no other commitments to lend additional funds to debtors whose loans have been modified in TDRs. There were no commitments to lend additional funds to debtors whose terms have been modified in TDRs at December 31, 2016 and 2015, respectively.
As of December 31, 2017, five2021, 21 installment loans totaling $263 thousand, two manufactured housing loans totaling $0.2 million$71 thousand and one residential real estate loan for $121 thousand that were modified in troubled debt restructuringsTDRs within the past 12twelve months defaulted on payments. As of December 31, 2016, eight2020, 15 installment loans totaling $226 thousand, six manufactured housing loans totaling $0.2 million, one commercial real estate non-owner occupied loan of $1.8 million$236 thousand and onethree residential real estate loan of $0.1 million,loans totaling $152 thousand that were modified in troubled debt restructuringsTDRs within the related past 12twelve months defaulted on payments. As of December 31, 2015, there were eleven2019, three manufactured housing loans totaling $0.3 million$73 thousand and one residential real estate loan for $81 thousand that were modified in troubled debt restructuringsTDRs within the related past 12twelve months defaulted on payments.
Loans modified in troubled debt restructuringsTDRs are evaluated for impairment. The nature and extent of impairment of TDRs, including those that have experienced a subsequent default, is considered in the determination of an appropriate level of allowance for credit losses. There were no specific allowances resulting from TDR modifications during 2017 and 2016. There were three specific allowances resulting from TDR modifications during 2015 that totaled $0.2 million for two commercial and industrial loans and $0.1 million for one commercial real estate non-owner occupied loan.ACL.
FDIC LOSS SHARING RECEIVABLE AND CLAWBACK LIABILITY
On July 11, 2016, Customers entered into an agreement to terminate all existing rights and obligations pursuant to the loss sharing agreements with the FDIC. In connection with the termination agreement, Customers paid the FDIC $1.4 million as final payment under these agreements. The negotiated settlement amount was based on net losses incurred on the covered assets through September 30, 2015, adjusted for cash payments to and receipts from the FDIC as part of the December 31, 2015 and March 31, 2016 certifications. Consequently, loans and other real estate owned previously reported as covered assets pursuant to the loss sharing agreements were no longer presented as covered assets as of June 30, 2016.
ACCRUED INTEREST RECEIVABLE
AccruedAt December 31, 2021, accrued interest receivable increased by $3.3totaled $92.2 million or 14.1%,compared to $27.0$80.4 million at December 31, 2017,2020. The increase primarily resulted from $23.7 million at December 31, 2016. This increase was primarily associated with thean increase in total loansoutstanding balances of $0.4 billion to $8.7 billion at December 31, 2017, from $8.3 billion at December 31, 2016.
interest-earning assets.
BANK PREMISES AND EQUIPMENT AND OTHER ASSETS
BankAt December 31, 2021, bank premises and equipment, net of accumulated depreciation and amortization, totaled $12.0$8.9 million and $12.8compared to $11.2 million at December 31, 2017 and 2016, respectively.2020. The decrease inprimarily resulted from purchases of bank premises and equipment net of accumulated depreciation and amortization, resulted from$0.6 million, partially offset by depreciation and amortization expenses totaling $2.8 million recorded in 2017 for information technology equipment, leasehold improvements and furniture and fixtures offset in part by purchases of information technology equipment, leasehold improvements and furniture and fixtures of $2.1$2.3 million. For additional information, see NOTE 10 - BANK PREMISES AND EQUIPMENT to Customers' audited financial statements.
At December 31, 2021, Customers Bank’s restricted stock holdings totaled $64.6 million compared to $71.4 million at December 31, 2017 and 2016, were $105.9 million and $68.4 million, respectively.2020. These holdings consist of stock of the Federal Reserve Bank,FRB, the Federal Home Loan BankFHLB and Atlantic Community Bankers Bank and are required as part of our relationship with these banks.
Other assets atAt December 31, 2017 and 2016, totaled $131.5 million and $102.6 million, respectively and consisted primarily of deferred taxes, assets leased under operating leases, prepaid expenses, cash pledged for collateral and mark-to-market adjustments for interest-rate swaps. During 2017, Customers Bank leased various types of equipment to customers within its commercial and industrial loan portfolio. The net carrying value of2021, the leased assets was $21.7 million, which includes accumulated depreciation of $0.5 million, as of December 31, 2017. Customers had not entered into similar operating lease arrangements in 2016.
The cash surrender value of bank-owned life insurance ("BOLI") increased by $96.2BOLI totaled $333.7 million compared to $257.7$280.1 million at December 31, 2017, from $161.5 million at December 31, 2016. The increase in BOLI in 2017 primarily resulted from additional purchases of life insurance policies totaling $90.0 million.2020. Presented within BOLI on the consolidated balance sheet is the cash surrender value of the Supplemental Executive Retirement Plan (“SERP”)SERP balances of $3.3$11.5 million and $2.9$4.3 million at December 31, 20172021 and 2016,2020, respectively. Customers purchased additional BOLI and entered into the 2021 SERPs during the year ended December 31, 2021. For additional information, see NOTE"NOTE 14 - EMPLOYEE BENEFIT PLANSPLANS" to Customers' audited financial statements.
At December 31, 2021 and 2020, other assets totaled $305.6 million and $338.4 million, respectively. Other assets consist primarily of cash pledged for swaps, ROU lease assets, operating leases through Customers' Equipment Finance Group (net investment in operating leases of $118.3 million at December 31, 2021 compared to $103.9 million at December 31, 2020), mark-to-market adjustments for interest-rate swaps, investments in affordable housing projects, deferred tax assets, net, origination fees receivable from the SBA on certain PPP loans and prepaid expenses.
DEPOSITS
The BankCustomers offers a variety of deposit accounts, including checking, savings, money market deposit accounts (“MMDA”)MMDA and time deposits. Deposits are primarily obtained from the Bank'sCustomers' geographic service area and nationwide through branchless digital banking, our white label relationship, deposit brokers, listing services and other relationships. In 2021, Customers began accepting non-interest bearing demand deposits from new customers on the TassatPay instant blockchain payments platform which launched in October 2021. Customers Bank provides blockchain-based digital payments via CBIT, which allows clients to make instant payments in U.S. dollars. CBIT may only be created by, transferred to and redeemed by commercial customers of Customers Bank on the instant B2B payments platform by maintaining U.S. dollars in non-interest bearing deposits at Customers Bank. As of December 31, 2021, Customers Bank held $1.9 billion of deposits from new customers participating in CBIT. For additional information, see "NOTE 11 - DEPOSITS" to Customers' audited financial statements.
The components of deposits at December 31, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, | | | | | | |
| (dollars in thousands) | 2021 | | 2020 | | | | Change | | % Change |
| | | | | | | | |
| Demand, non-interest bearing | $ | 4,459,790 | | | $ | 2,356,998 | | | | | $ | 2,102,792 | | | 89.2 | % |
| Demand, interest bearing | 6,488,406 | | | 2,384,691 | | | | | 4,103,715 | | | 172.1 | % |
| Savings, including MMDA | 5,322,390 | | | 5,916,309 | | | | | (593,919) | | | (10.0) | % |
| Non-time deposits | 16,270,586 | | | 10,657,998 | | | | | 5,612,588 | | | 52.7 | % |
| | | | | | | | | |
| | | | | | | | | |
| Time deposits | 507,338 | | | 651,931 | | | | | (144,593) | | | (22.2) | % |
| Total deposits | $ | 16,777,924 | | | $ | 11,309,929 | | | | | $ | 5,467,995 | | | 48.3 | % |
Total deposits were $6.8$16.8 billion at December 31, 2017, a decrease2021, an increase of $0.5$5.5 billion, or 6.9%48.3%, from $7.3$11.3 billion at December 31, 2016. Transaction2020. Non-time deposits increased by $0.4$5.6 billion, or 9.4%52.7%, to $4.9$16.3 billion at December 31, 2017,2021, from $4.5$10.7 billion at December 31, 2016, with non-interest bearing deposits increasing by $86.1 million. Interest-bearing demand deposits increased by $184.5 million, or 54.3%, to $523.8 million at December 31, 2017, from $339.4 million at December 31, 2016. Savings, including MMDA, totaled $3.3 billion at December 31, 2017, an increase of $151.9 million, or 4.8%, from $3.2 billion at December 31, 2016.2020. This increase was primarily attributeddriven by Customers' initiative to an increaseimprove its net interest margin by expanding its sources of lower-cost funding. These efforts led to increases in money market deposit accounts,non-interest bearing demand deposits of $2.1 billion and interest bearing demand deposits of $4.1 billion. These increases were offset in part by decreases in savings, including accounts held by statesMMDA, of $593.9 million, or 10.0% and municipalities. time deposits of $144.6 million, or 22.2%.
At December 31, 2017,2021 the Bank had $1.8 billion$480.5 million in state and municipal deposits to which it had pledged $475.3 million of available borrowing capacity through the FHLB to the depositordepositors through a letter of credit arrangement. State
The total amount of estimated uninsured deposits totaled $12.1 billion and municipal deposits under this program decreased $326.7 million, or 22.5% from December 31, 2016. Total time deposits decreased $0.9 billion, or 32.7%, to $1.9$7.3 billion at December 31, 2017, from $2.8 billion at December 31, 2016.
The components of deposits at December 31, 2017, 20162021 and 2015, were as follows:
|
| | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 | | 2015 |
| (amounts in thousands) | |
| Demand, non-interest bearing | $ | 1,052,115 |
| | $ | 966,058 |
| | $ | 653,679 |
|
| Demand, interest bearing | 523,848 |
| | 339,398 |
| | 127,215 |
|
| Savings, including MMDA | 3,318,486 |
| | 3,166,557 |
| | 2,781,010 |
|
| Time, $100,000 and over | 1,284,855 |
| | 2,106,905 |
| | 1,624,562 |
|
| Time, other | 620,838 |
| | 724,857 |
| | 723,035 |
|
| Total deposits | $ | 6,800,142 |
| | $ | 7,303,775 |
| | $ | 5,909,501 |
|
2020, respectively. Time deposits greater than the FDIC limit of $250,000 totaled $0.8 billion, $1.2 billion$259.0 million and $0.9 billion$297.7 million at December 31, 2017, 2016,2021, and 2015,2020, respectively. At December 31, 2021, the scheduled maturities of uninsured time deposits were as follows:
| | | | | |
| (amounts in thousands) | December 31, 2021 |
|
| 3 months or less | $ | 106,766 | |
| Over 3 through 6 months | 38,479 | |
| Over 6 through 12 months | 50,723 | |
| Over 12 months | 63,056 | |
| Total | $ | 259,024 | |
Average deposit balances by type and the associated average rate paid are summarized below:
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Years ended December 31, |
| | 2017 | | 2016 | | 2015 |
| | Average Balance | | Average Rate Paid | | Average Balance | | Average Rate Paid | | Average Balance | | Average Rate Paid |
| (amounts in thousands) | |
| Demand, non-interest bearing | $ | 1,187,324 |
| | 0.00 | % | | $ | 873,599 |
| | 0.00 | % | | $ | 692,159 |
| | 0.00 | % |
| Demand, interest-bearing | 386,819 |
| | 0.82 | % | | 190,279 |
| | 0.56 | % | | 123,527 |
| | 0.56 | % |
| Savings, including MMDA | 3,379,844 |
| | 1.02 | % | | 3,124,262 |
| | 0.62 | % | | 2,449,778 |
| | 0.52 | % |
| Time deposits | 2,392,095 |
| | 1.25 | % | | 2,633,425 |
| | 1.06 | % | | 2,087,641 |
| | 0.99 | % |
| Total | $ | 7,346,082 |
| | | | $ | 6,821,565 |
| | | | $ | 5,353,105 |
| | |
At December 31, 2017, the scheduled maturities of time deposits greater than $100,000 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| 2021 | | 2020 | | |
| (dollars in thousands) | Average
Balance | | Average
Rate Paid | | Average
Balance | | Average
Rate Paid | | | | |
| | | | | | | | | | |
| Demand, non-interest bearing | $ | 3,470,788 | | | 0.00 | % | | $ | 2,052,376 | | | 0.00 | % | | | | |
| Demand, interest-bearing | 4,006,354 | | | 0.69 | % | | 2,098,138 | | | 0.89 | % | | | | |
| Savings, including MMDA | 6,291,735 | | | 0.49 | % | | 4,819,894 | | | 1.08 | % | | | | |
| Time deposits | 619,859 | | | 0.72 | % | | 1,357,688 | | | 1.58 | % | | | | |
| Total | $ | 14,388,736 | | | 0.44 | % | | $ | 10,328,096 | | | 0.89 | % | | | | |
|
| | | |
| | December 31, 2017 |
| (amounts in thousands) | |
| 3 months or less | $ | 239,244 |
|
| Over 3 through 6 months | 527,449 |
|
| Over 6 through 12 months | 199,032 |
|
| Over 12 months | 319,130 |
|
| Total | $ | 1,284,855 |
|
For additional information, see NOTE 11 - DEPOSITS to Customers' audited financial statements.
FHLB ADVANCES andAND OTHER BORROWINGS
Borrowed funds from various sources are generally used to supplement deposit growth and meet other operating needs. Customers strategically viewsCustomers' borrowings generally include short-term and long-term advances from the short-term FHLB, advancesFRB, including from the PPPLF, federal funds purchased, senior unsecured notes and subordinated debt. Subordinated debt is also considered as funding the commercial loansTier 2 capital for certain regulatory calculations. See "NOTE 12 – BORROWINGS" to the mortgage banking businesses.
Customers' audited financial statements for additional information on Customers' borrowings.
Short-term debt
Short-term debt at December 31, 2017, 20162021 and 2015,2020 was as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2017 | | 2016 | | 2015 |
| | Amount | | Rate | | Amount | | Rate | | Amount | | Rate |
| (amounts in thousands) | |
| FHLB advances | $ | 1,611,860 |
| | 1.47 | % | | $ | 688,800 |
| | 0.85 | % | | $ | 1,365,300 |
| | 0.48 | % |
| Federal funds purchased | 155,000 |
| | 1.50 | % | | 83,000 |
| | 0.74 | % | | 70,000 |
| | 0.56 | % |
| Total short-term borrowings | $ | 1,766,860 |
| | | | $ | 771,800 |
| | | | $ | 1,435,300 |
| | |
For additional information on Customers' short-term debt, see NOTE 12 – BORROWINGS to Customers' audited financial statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | |
| (dollars in thousands) | Amount | | Rate | | Amount | | Rate | | | | |
| | | | | | | | | | |
| FHLB advances | $ | 700,000 | | | 0.26 | % | | $ | 850,000 | | | 1.19 | % | | | | |
| Federal funds purchased | 75,000 | | | 0.05 | % | | 250,000 | | | 0.09 | % | | | | |
| Total short-term borrowings | $ | 775,000 | | | | | $ | 1,100,000 | | | | | | | |
Long-term debt
FHLB and FRB Advances
Long-term FHLB and FRB advances at December 31, 2021 and 2020, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, |
| 2021 | | 2020 |
| (dollars in thousands) | Amount | | Rate | | Amount | | Rate |
| | | | | | |
| | | | | | | |
| FRB PPP Liquidity Facility advances | $ | — | | | — | % | | $ | 4,415,016 | | | 0.35 | % |
| Total long-term FHLB and FRB advances | $ | — | | | | | $ | 4,415,016 | | | |
There were no long-term advances outstanding with the FHLB or FRB at December 31, 2021 and 2020, respectively.
Beginning in second quarter 2020, Customers began participating in the PPPLF, in which Federal Reserve Banks extend non-recourse loans to institutions that are eligible to make PPP loans. Only PPP loans that are guaranteed by the SBA under the PPP, with respect to both principal and interest that are originated or purchased by an eligible institution, may pledge as collateral to the Federal Reserve Banks. During the year ended December 31, 2021, Customers repaid the PPPLF advances. No new advances are available from the PPPLF after July 30, 2021.
The maximum borrowing capacity with the FHLB and FRB at December 31, 2021 and 2020, was as follows:
| | | | | | | | | | | |
| December 31, |
| (amounts in thousands) | 2021 | | 2020 |
| | |
| Total maximum borrowing capacity with the FHLB | $ | 2,973,635 | | | $ | 2,729,516 | |
Total maximum borrowing capacity with the FRB (1) | 183,052 | | | 223,299 | |
Qualifying loans serving as collateral against FHLB and FRB advances (1) | 3,594,339 | | | 3,363,364 | |
(1)Amounts reported in the above table exclude borrowings under the PPPLF, which are limited to the unpaid principal balance of the loans originated under the PPP. At December 31, 2016,2021, Customers had $180.0 millionno borrowings under the PPPLF. At December 31, 2020, Customers had $4.4 billion of long-term FHLB advances at an average rate of 1.32% that mature in 2018, of which $170.0 million are fixed rate.borrowings under the PPPLF.
Senior notesNotes and Subordinated Debt
In June 2017, Customers Bancorp issued $100 million ofLong-term senior notes and subordinated debt at 99.775% of face value. The price to purchasers represents a yield-to-maturity of 4.0% on the fixed coupon rate of 3.95%. December 31, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, | | | | | | | | | | |
| (dollars in thousands) | | 2021 | | 2020 | | | | | | | | | | |
| Issued by | | Ranking | | Carrying
Amount | | Carrying
Amount | | Rate | | Issued Amount | | Date Issued | | Maturity | | Price |
| Customers Bancorp | | Senior (1) | | $ | 98,642 | | | $ | — | | | 2.875 | % | | $ | 100,000 | | | August 2021 | | August 2031 | | 100.000 | % |
| Customers Bancorp | | Senior | | 24,672 | | | 24,552 | | | 4.500 | % | | 25,000 | | | September 2019 | | September 2024 | | 100.000 | % |
| Customers Bancorp | | Senior | | 99,772 | | | 99,485 | | | 3.950 | % | | 100,000 | | | June 2017 | | June 2022 | | 99.775 | % |
| | | | | | | | | | | | | | | | |
| Total other borrowings | | $ | 223,086 | | | $ | 124,037 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| Customers Bancorp | | Subordinated (2)(3) | | 72,403 | | | 72,222 | | | 5.375 | % | | $ | 74,750 | | | December 2019 | | December 2034 | | 100.000 | % |
| Customers Bank | | Subordinated (2)(4) | | 109,270 | | | 109,172 | | | 6.125 | % | | 110,000 | | | June 2014 | | June 2029 | | 100.000 | % |
| Total subordinated debt | | $ | 181,673 | | | $ | 181,394 | | | | | | | | | | | |
(1)The senior notes mature in June 2022. The net proceedswill bear an annual fixed rate of 2.875% until August 15, 2026. From August 15, 2026 until maturity, the notes will bear an annual interest rate equal to Customers after deductinga benchmark rate. which is expected to be the underwriting discount and estimated offering expenses were approximately $98.6 million. The net proceeds were contributed to Customers Bank for purposes of its working capital needs and the funding of its organic growth.
On June 26, 2014,three-month term SOFR, plus 0.0235 basis points. Customers Bancorp closed a private-placement transaction in which it issued $25.0 million of 4.625%has the ability to call the senior notes, due June 2019. Interest is paid semi-annually in arrearswhole, or in June and December.part, at a redemption price equal to100% of the principal balance at certain times on or after August 15, 2026.
In July and August 2013, Customers Bancorp issued $63.3 million in aggregate principal amount of senior notes due July 2018. The notes bear interest at 6.375% per year which is payable on March 15, June 15, September 15 and December 15. The notes are unsecured obligations of Customers Bancorp, Inc. and rank equally with all of its secured and unsecured senior indebtedness.
Subordinated debt
On June 26, 2014, Customers Bank closed a private-placement transaction in which it issued $110.0 million of fixed-to-floating rate subordinated notes due 2029. (2)The subordinated notes qualify as Tier 2 capital for regulatory capital purposes.
(3)Customers Bancorp has the ability to call the subordinated notes, in whole, or in part, at a redemption price equal to 100% of the principal balance at certain times on or after December 30, 2029.
(4)The subordinated notes will bear interest at an annual fixed rate of 6.125% until June 26, 2024, and interest is paid semiannually.2024. From June 26, 2024 until maturity, the subordinated notes will bear an annual interest rate equal to the three-month LIBOR plus 344.3 basis points until maturity on June 26, 2029.points. Customers Bank has the ability to call the subordinated notes, in whole, or in part, at a redemption price equal to 100% of the principal balance at certain times on or after June 26, 2024. The subordinated notes qualify as Tier 2 capital for regulatory capital purposes.
SHAREHOLDERS’ EQUITY
Shareholders’The components of shareholders’ equity were as follows at the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, | | | | |
| (dollars in thousands) | 2021 | | 2020 | | Change | | % Change |
| Preferred stock | $ | 137,794 | | | $ | 217,471 | | | $ | (79,677) | | | (36.6) | % |
| Common stock | 34,722 | | | 32,986 | | | 1,736 | | | 5.3 | % |
| Additional paid in capital | 542,391 | | | 455,592 | | | 86,799 | | | 19.1 | % |
| Retained earnings | 705,732 | | | 438,581 | | | 267,151 | | | 60.9 | % |
| Accumulated other comprehensive income (loss), net | (4,980) | | | (5,764) | | | 784 | | | (13.6) | % |
| Treasury stock | (49,442) | | | (21,780) | | | (27,662) | | | 127.0 | % |
| Total shareholders' equity | $ | 1,366,217 | | | $ | 1,117,086 | | | $ | 249,131 | | | 22.3 | % |
Shareholders' equity increased by $65.1$249.1 million, or 7.6%22.3%, to $921.0 million$1.4 billion at December 31, 2017, from $855.9 million2021, when compared to shareholders' equity of $1.1 billion at December 31, 2016.2020. The primary componentsincrease primarily resulted from increases in retained earnings of $267.2 million, additional paid in capital of $86.8 million and accumulated other comprehensive income (loss), net of $0.8 million, offset by a decrease in preferred stock of $79.7 million and an increase in treasury stock of $27.7 million.
The decrease in preferred stock resulted from redemption of all of the net increase were as follows:
net incomeoutstanding shares of $78.8Series C and Series D Preferred Stock for an aggregate payment of $82.5 million forduring the year ended December 31, 2017;2021. Refer to "NOTE 13 – SHAREHOLDERS' EQUITY" to Customers' audited financial statements for additional information on the redemption of Series C and Series D Preferred Stock.
other comprehensive incomeThe increase in additional paid in capital primarily resulted from the sale of $4.5BMT that was accounted for as a sale of non-controlling interest and the merger between BMT and MFAC was accounted for as a reverse recapitalization of $31.9 million, formerger related expense of $19.6 million in the year ended December 31, 2017, arising primarilyform of restricted stock awards in BM Technologies' common stock to certain team members of BMT, $13.9 million from unrealized gains on available-for-sale securities and cash flow hedges; and
share-based compensation expense of $6.1and $21.5 million for from the year ended December 31, 2017.
These increases were offset in part by:
preferred stock dividends of $14.5 million for the year ended December 31, 2017; and
issuance of common stock under share-based compensation arrangements of $11.0 millionfor the year ended December 31, 2017.2021. Refer to "NOTE 3 – DISCONTINUED OPERATIONS" to Customers' audited financial statements for additional information on the divestiture of BMT.
Shareholders’ equity increased by $302.0 million to $855.9 million at December 31, 2016,The increase in retained earnings primarily resulted from $553.9 million at December 31, 2015. The primary components of the net increase were as follows:
net income of $78.7$314.6 million for the year ended December 31, 2016;
other comprehensive income2021, partially offset by $33.0 million of $3.1special dividends in connection with the divestiture of BMT, preferred stock dividends of $11.7 million and a loss of $2.8 million for the redemption price paid in excess of the carrying value of all of the outstanding shares of Series C and Series D Preferred Stock and for the year ended December 31, 2016, arising2021.
The increase in accumulated other comprehensive income (loss), net primarily resulted from unrealized gains on available-for-sale securities;
share-based compensation expensean increase of $6.2$12.3 million forand income tax effect of $3.2 million in the fair value of cash flow hedges due to changes in market interest rates and reclassification of $27.0 million in losses and income tax effect of $7.0 million from the termination of derivatives designated as cash flow hedges of forecasted transactions that are deemed no longer probable of occurring during the year ended December 31, 2016;
issuance2021, partially offset by unrealized losses of 6,700,000 shares$6.8 million on AFS debt securities and income tax effect of preferred stock,$1.8 million and reclassification of $31.4 million in gains and income tax effect of $8.2 million resulting in an increases to shareholders' equityfrom the sales of $161.9 million; and
issuance of 2,641,677 shares of common stock, resulting in an increases to shareholders' equity of $64.0 million.
These increases were offset in part by:
preferred stock dividends of $9.5 million forAFS debt securities during the year ended December 31, 2016; and2021. Refer to "NOTE 21 – DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" to Customers' audited financial statements for additional information on the termination of cash flow hedges.
issuanceThe increase treasury stock resulted from repurchase of 527,789 shares of common stock under share-based compensation arrangements of $4.0for $27.7 million forpursuant to the Share Repurchase Program during the year ended December 31, 2016.
For more information regarding2021. On August 25, 2021, the issuanceBoard of preferred andDirectors of Customers Bancorp authorized the Share Repurchase Program to repurchase up to 3,235,326 shares of the Company's common stock (representing 10% of the Company’s outstanding shares of common stock on June 30, 2021). The term of the Share Repurchase Program will extend for one year from September 27, 2021, unless earlier terminated. Purchases of shares under the Share Repurchase Program may be executed through open market purchases, privately negotiated transactions, through the use of Rule 10b5-1 plans, or otherwise. The exact number of shares, timing for such purchases, and dividends paidthe price and terms at and on which such purchases are to preferred shareholders, see NOTEbe made will be at the discretion of the Company and will comply with all applicable regulatory limitations. Refer to "NOTE 13 -– SHAREHOLDERS' EQUITYEQUITY" to Customers' audited financial statements.statements for additional information on the repurchase of common shares.
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 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.position that is sufficient to meet Customers' short-term and long-term needs, commitments and contractual obligations.
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 sheet.
With commitments to extend credit, exposure 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 and lease, these financial instruments are subject to the Bank’s credit policy and other underwriting standards. See "NOTE 18 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK" to Customers' audited financial statements.As described in "NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION" to Customers' audited financial statements, ACL on lending related commitments is a liability account, calculated in accordance with ASC 326, representing expected credit losses over the contractual period for which Customers is exposed to credit risk resulting from a contractual obligation to extend credit. No ACL is recognized if Customers have the unconditional right to cancel the obligation. Off-balance-sheet credit commitments primarily consist of amounts available under outstanding lines of credit and letters of credit disclosed above. For the period of exposure, the estimate of expected credit losses considers both the likelihood that funding will occur and the amount expected to be funded over the estimated remaining life of the commitment or other off-balance-sheet exposure. Customers estimates the expected credit losses for undrawn or unfunded commitments using a usage given default calculation. The lifetime loss rates for off-balance sheet credit exposures are calculated in the same manner as on-balance sheet credit exposures, using the same models and economic forecasts, adjusted for the estimated likelihood that funding will occur. Customers recorded $3.4 million of ACL for lending related commitments upon its adoption of ASC 326 and recognized a benefit to credit losses of $1.1 million during the year ended December 31, 2020 resulting in an ACL of $2.3 million as of December 31, 2020. Customers recognized a benefit to credit losses of $0.2 million during the year ended December 31, 2021 resulting in an ACL of $2.1 million as of December 31, 2021. The ACL on lending-related commitments is recorded in accrued interest payable and other liabilities in the consolidated balance sheet and the credit loss expense is recorded as a provision for credit losses within other non-interest expense in the consolidated income statement.
Customers' contractual obligations and other commitments representing required and potential cash outflows include operating leases, demand deposits, time deposits, federal funds purchased, short-term advances from FHLB, unsecured senior notes, subordinated debt, loan and other commitments as of December 31, 2021. See "NOTE 9 – LEASES", "NOTE 11 – DEPOSITS", "NOTE 12 – BORROWINGS" and "NOTE 18 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK" to Customers' audited financial statements for additional information.
Customers' investment portfolio provides periodic cash flows through regular maturities and receipts of periodic paymentsamortization and can be used as collateral to secure additional liquidity funding. OurCustomers' principal sources of funds are proceeds from common and preferred stock issuances, deposits, debt issuances,borrowings, principal and interest payments on loans and leases, other funds from operations.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 FHLB and FRB. As of December 31, 2017,2021, Customers' borrowing capacity with the Federal Home Loan BankFHLB was $4.3$3.0 billion, of which $1.6$700.0 million was utilized in borrowings and commitments and $475.3 million of available capacity was utilized to collateralize state and municipal deposits. As of December 31, 2020, Customers' borrowing capacity with the FHLB was $2.7 billion, of which $854.2 million was utilized in borrowings and commitments; and $1.8$1.2 billion of available capacity was used to collateralize state and municipal deposits. As of December 31, 2016,2021 and 2020, Customers' borrowing capacity with the FRB was $183.1 million and $223.3 million, respectively.
Beginning in second quarter 2020, Customers began participating in the PPPLF, in which Federal Home Loan Bank was $4.1 billion, of which $0.9 billion was utilized in borrowingsReserve Banks extend non-recourse loans to institutions that are eligible to make PPP loans. Only PPP loans that are guaranteed by the SBA under the PPP, with respect to both principal and commitments; and $1.7 billion of available capacity was usedinterest that are originated or purchased by an eligible institution, may be pledged as collateral to collateralize state and municipal deposits.the Federal Reserve Banks. As of December 31, 20172021, Customers had no borrowings under the PPPLF. As of December 31, 2020, Customers had $4.4 billion in borrowings under the PPPLF. No new advances are available from the PPPLF after July 30, 2021.
In October 2021, Customers Bank launched CBIT on the TassatPay blockchain-based instant B2B payments platform, which serves a growing array of B2B clients who want the benefit of instant payments: including key over-the-counter desks, exchanges, liquidity providers, market makers, funds, and 2016,B2B verticals such as trading operations, real estate, manufacturing, and logistics. CBIT may only be created by, transferred to and redeemed by commercial customers of Customers Bank on the instant B2B payments platform by maintaining U.S. dollars in non-interest bearing deposits at Customers Bank. CBIT is not listed or traded on any digital currency exchange. As of December 31, 2021, Customers Bank held $1.9 billion of deposits from new customers participating in CBIT.
The principal source of the Bancorp's liquidity is the dividends it receives from the Bank, which may be impacted by the following: bank-level capital needs, laws and regulations, corporate policies, contractual restrictions and other factors. The Bank has generated sufficient positive cash flows from operations to pay dividends to the Bancorp. However, there are statutory and regulatory limitations on the ability of the Bank to pay dividends or make other capital distributions or to extend credit to the Bancorp or its non-bank subsidiaries.
The table below summarizes Customers' borrowing capacity withcash flows from continuing operations for the Federal Reserve Bank of Philadelphia was $142.5 million and $158.6 million, respectively.years indicated:
Net cash | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | | | | | |
| (dollars in thousands) | | 2021 | | 2020 | | | | Change | | % Change |
| Net cash provided by (used in) continuing operating activities | | $ | 295,540 | | | $ | 133,418 | | | | | $ | 162,122 | | | 121.5 | % |
| Net cash provided by (used in) continuing investing activities | | (1,201,261) | | | (6,424,895) | | | | | 5,223,634 | | | (81.3) | % |
| Net cash provided by (used in) continuing financing activities | | 754,775 | | | 6,772,793 | | | | | (6,018,018) | | | (88.9) | % |
| Net increase (decrease) in cash and cash equivalents from continuing operations | | $ | (150,946) | | | $ | 481,316 | | | | | $ | (632,262) | | | (131.4) | % |
| | | | | | | | | | |
Cash flows provided by (used in) continuing operating activities
Cash provided by continuing operating activities were $385.6of $295.5 million for the year ended December 31, 2017, compared to2021 resulted from net cash flows usedincome of $354.3 million, an increase of $103.0 million in accrued interest payable and other liabilities and a decrease of $46.7 million in accrued interest receivable and other assets, partially offset by non-cash operating adjustments of $208.4 million.
Cash provided by continuing operating activities of $270.5$133.4 million for the year ended December 31, 2016. Proceeds2020 resulted from the salenet income of loans held for sale$143.0 million, non-cash operating adjustments of $48.1 million and an increase of $50.4 million in excessaccrued interest payable and other liabilities, partially offset by an increase of funds required to originate loans held for sale contributed $322.9$108.1 million to cashin accrued interest receivable and other assets.
Cash flows provided by operating(used in) continuing investing activities
Cash used in continuing investing activities of $1.2 billion for the year ended December 31, 2017. Originations of loans held for sale in excess of the proceeds2021 primarily resulted from the sales of loans held for sale required $358.8 million of cash flows used in operating activities for the year ended December 31, 2016.
Net cash flows used in investing activities were $888.5 million for the year ended December 31, 2017, compared to the net cash flows used in investing activities of $599.7 million for the year ended December 31, 2016. Purchasespurchases of investment securities available for sale totaled $796.6 million forof $3.6 billion and purchases of loans of $1.9 billion, partially offset by a net decrease in loans and leases, excluding mortgage warehouse loans, of $1.7 billion, primarily from the year ended December 31, 2017, compared to $5.0 million for the year ended December 31, 2016. Proceedsforgiveness of PPP loans, net of originations and
purchases, net repayments of mortgage warehouse loans of $1.3 billion, proceeds from sales of investment securities available for sale were $769.2of $689.9 million, proceeds from sales of loans of $398.0 million and proceeds from maturities, calls and principal repayments on investment securities of $317.0 million.
Cash used in continuing investing activities of $6.4 billion for the year ended December 31, 2020 primarily resulted from a net increase in loans and leases, excluding mortgage warehouse loans of $4.2 billion primarily related to PPP loan originations, net originations of mortgage warehouse loans of $1.4 billion, purchases of investment securities available for sale of $1.2 billion and purchases of loans of $271.0 million, partially offset by proceeds from sales of investment securities available for sale of $387.8 million, proceeds from maturities, calls and principal repayments on investment securities of $236.1 million and proceeds from sales of loans of $26.4 million.
Cash flows provided by (used in) continuing financing activities
Cash provided by continuing financing activities of $754.8 million for the year ended December 31, 2017, compared2021 primarily resulted from net increase of $5.5 billion in deposits and $98.8 million from issuance of 2.875% fixed-to-floating rate senior notes, partially offset by net decreases in long-term borrowed funds from the PPPLF of $4.4 billion, net federal funds purchased of $175.0 million, net short-term borrowed funds from the FHLB of $150.0 million, redemption of the Series C and Series D Preferred Stock of $82.5 million and purchases of treasury stock of $27.7 million. Customers fully repaid the borrowings from the PPPLF during the year ended December 31, 2021 due to $2.9increased PPP loan forgiveness and funding from deposits. For additional information on the redemption of preferred stock and purchases of treasury stock, refer to "NOTE 11 – SHAREHOLDERS' EQUITY" to Customers' unaudited consolidated financial statements.
Cash provided by continuing financing activities of $6.8 billion for the year ended December 31, 2020 primarily resulted from increases in borrowed funds from the PPPLF of $4.4 billion primarily to finance the PPP loan originations and deposits of $2.7 billion, partially offset by an decrease in net federal funds purchased of $288.0 million.
Cash flows from discontinued operations
On January 4, 2021, Customers Bancorp completed the previously announced divestiture of BMT. BMT's operating results and associated cash flows have been presented as "Discontinued operations" within the consolidated financial statements and prior period amounts have been reclassified to conform with the current period presentation. In connection with the divestiture, Customers entered into various agreements with BM Technologies, including a transition services agreement, software license agreement, deposit servicing agreement, non-competition agreement and loan agreement for periods ranging from one to ten years. The deposit service agreement is scheduled to expire on December 31, 2022 and will not be renewed. As of December 31, 2021, Customers held $1.8 billion of deposits serviced by BM Technologies, which are expected to leave Customers Bank by December 31, 2022. The loan agreement with BM Technologies was terminated early in November 2021. For additional information, refer to "NOTE 3 – DISCONTINUED OPERATIONS" to Customers' audited financial statements.
The table below summarizes Customers' cash flows from discontinued operations for the years indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, | | | | |
| (dollars in thousands) | 2021 | | 2020 | | Change | | % Change |
| Net cash provided by (used in) discontinued operating activities | $ | (24,376) | | | $ | 18,605 | | | $ | (42,981) | | | (231.0) | % |
| Net cash provided by (used in) discontinued investing activities | — | | | (72) | | | 72 | | | (100.0) | % |
| Net cash provided by (used in) discontinued financing activities | — | | | (19,000) | | | 19,000 | | | (100.0) | % |
| Net increase (decrease) in cash and cash equivalents from discontinued operations | $ | (24,376) | | | $ | (467) | | | $ | (23,909) | | | 5,119.7 | % |
Cash flows provided by (used in) discontinued operating activities
Cash used in discontinued operating activities of $24.4 million for the year ended December 31, 2016. Purchases2021 resulted from a net loss of loans held for investment and bank owned life insurance policies totaled $262.6$39.6 million and $90.0a decrease in accrued interest payable and other liabilities of $40.7 million, respectively, for the year ended December 31, 2017. There were no purchasesoffset in part by non-cash operating adjustments of loans held for investment nor bank owned life insurance policies for the year ended December 31, 2016. Proceeds from sales$20.3 million and a decrease in other assets of loans held for investment totaled $462.5$35.6 million.
Cash provided by discontinued operating activities of $18.6 million for the year ended December 31, 2017, compared to $133.12020 resulted from a net loss of $10.5 million, offset in part by a decrease in other assets of $21.1 million an increase in accrued interest payable and other liabilities of $7.0 million and non-cash operating adjustments of $1.0 million.
Cash flows provided by (used in) discontinued financing activities
Cash used in discontinued financing activities of $19.0 million for the year ended December 31, 2016. Net cash flows used to fund new loans held for investment totaled $960.42020 resulted from partial repayment of $40.0 million and $795.0 million for the years ended December 31, 2017 and 2016, respectively. Proceeds from maturities, calls and principal repayments of investment securities available for sale totaled $48.1 million for the year ended December 31, 2017, compared to $64.7 million for the year ended December 31, 2016.
Net cash flows provided by financing activities were $384.5 million for the year ended December 31, 2017, compared to $870.2 million for the year ended December 31, 2016. For the year ended December 31, 2017, net increases in short-term borrowed fundsborrowings from the FHLB provided $743.1Bank in 2019. The remaining balance of $21.0 million proceedsin borrowings from the issuance of five-year senior notes provided $98.6 million and proceeds from federal funds purchased provided $72.0 millionBank was fully repaid by BM Technologies in net cash flows, offset in part by a net decrease in deposits of $503.6 million and preferred stock dividends paid of $14.5 million. For the year ended December 31, 2016, an increase in deposits provided $1.4 billion, net proceeds from the issuance of preferred stock provided $161.9 million, proceeds from long-term FHLB advances provided $75.0 million and proceeds from federal funds purchased provided $13.0 million, offset in part by net repayments of short-term borrowed funds from the FHLB of $831.5 million and preferred stock dividends paid of $9.1 million. These financing activities provided sufficient cash flows to support Customers' investing and operating activities.
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.
2021.
CAPITAL ADEQUACY
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 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.
In first quarter 2020, U.S federal banking regulatory agencies permitted banking organizations to phase-in, for regulatory capital purposes, the day-one impact of the new CECL accounting rule on retained earnings over a period of three years. As part of its response to the impact of COVID-19, on March 31, 2020, the U.S. federal banking regulatory agencies issued an interim final rule that provided the option to temporarily delay certain effects of CECL on regulatory capital for two years, followed by a three-year transition period. The interim final rule allows banking organizations to delay for two years 100% of the day-one impact of adopting CECL and 25% of the cumulative change in the reported allowance for credit losses since adopting CECL. Customers has elected to adopt the interim final rule, which is reflected in the regulatory capital data presented below.
In April 2020, the U.S. federal banking regulatory agencies issued an interim final rule that permits banks to exclude the impact of participating in the SBA PPP program in their regulatory capital ratios. Specifically, PPP loans are zero percent risk weighted and a bank can exclude all PPP loans pledged as collateral to the PPPLF from its average total consolidated assets for purposes of calculating the Tier 1 capital to average assets ratio (i.e. leverage ratio). Customers applied this regulatory guidance in the calculation of its regulatory capital ratios presented below.
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 December 31, 20172021 and 2016,2020, the Bank and the Bancorp met all capital adequacy requirements to which they were subject to.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 basedrisk-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 | |
| December 31, 2017 | | | | | | | | | | | | | | | | |
| (dollars in thousands) | | (dollars in thousands) | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| December 31, 2021 | | December 31, 2021 | | | | | | | | | | | | | | | |
| Common equity Tier 1 (to risk-weighted assets) | | | | | | | | | | | | | | | | Common equity Tier 1 (to risk-weighted assets) | |
| Customers Bancorp, Inc. | $ | 689,494 |
| | 8.805 | % | | $ | 352,368 |
| | 4.500 | % | | N/A |
| | N/A |
| | $ | 450,248 |
| | 5.750 | % | Customers Bancorp, Inc. | $ | 1,291,270 | | | 9.981 | % | | $ | 582,179 | | | 4.500 | % | | N/A | | N/A | | $ | 905,611 | | | 7.000 | % |
| Customers Bank | $ | 1,023,564 |
| | 13.081 | % | | $ | 352,122 |
| | 4.500 | % | | $ | 508,621 |
| | 6.500 | % | | $ | 449,934 |
| | 5.750 | % | Customers Bank | $ | 1,526,583 | | | 11.825 | % | | $ | 580,943 | | | 4.500 | % | | $ | 839,140 | | | 6.500 | % | | $ | 903,689 | | | 7.000 | % |
| Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | | 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 Bancorp, Inc. | $ | 1,429,063 | | | 11.046 | % | | $ | 776,238 | | | 6.000 | % | | N/A | | N/A | | $ | 1,099,671 | | | 8.500 | % |
| Customers Bank | $ | 1,023,564 |
| | 13.081 | % | | $ | 469,496 |
| | 6.000 | % | | $ | 625,994 |
| | 8.000 | % | | $ | 567,307 |
| | 7.250 | % | Customers Bank | $ | 1,526,583 | | | 11.825 | % | | $ | 774,591 | | | 6.000 | % | | $ | 1,032,788 | | | 8.000 | % | | $ | 1,097,337 | | | 8.500 | % |
| Total capital (to risk-weighted assets) | | | | | | | | | | | | | | | | 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 Bancorp, Inc. | $ | 1,667,395 | | | 12.888 | % | | $ | 1,034,984 | | | 8.000 | % | | N/A | | N/A | | $ | 1,358,417 | | | 10.500 | % |
| Customers Bank | $ | 1,170,666 |
| | 14.961 | % | | $ | 625,994 |
| | 8.000 | % | | $ | 782,493 |
| | 10.000 | % | | $ | 723,806 |
| | 9.250 | % | Customers Bank | $ | 1,692,512 | | | 13.110 | % | | $ | 1,032,788 | | | 8.000 | % | | $ | 1,290,985 | | | 10.000 | % | | $ | 1,355,534 | | | 10.500 | % |
| Tier 1 capital (to average assets) | | | | | | | | | | | | | | | | 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 Bancorp, Inc. | $ | 1,429,063 | | | 7.413 | % | | $ | 771,084 | | | 4.000 | % | | N/A | | N/A | | $ | 771,084 | | | 4.000 | % |
| Customers Bank | $ | 1,023,564 |
| | 10.092 | % | | $ | 405,701 |
| | 4.000 | % | | $ | 507,126 |
| | 5.000 | % | | $ | 405,701 |
| | 4.000 | % | Customers Bank | $ | 1,526,583 | | | 7.925 | % | | $ | 770,528 | | | 4.000 | % | | $ | 963,160 | | | 5.000 | % | | $ | 770,528 | | | 4.000 | % |
| December 31, 2016 | | | | | | | | | | | | | | | | |
| December 31, 2020 | | December 31, 2020 | |
| Common equity Tier 1 (to risk-weighted assets) | | | | | | | | | | | | | | | | Common equity Tier 1 (to risk-weighted assets) | |
| Customers Bancorp, Inc. | $ | 628,139 |
| | 8.487 | % | | $ | 333,049 |
| | 4.500 | % | | N/A |
| | N/A |
| | $ | 379,306 |
| | 5.125 | % | Customers Bancorp, Inc. | $ | 954,839 | | | 8.079 | % | | $ | 531,844 | | | 4.500 | % | | N/A | | N/A | | $ | 827,312 | | | 7.000 | % |
| Customers Bank | $ | 857,421 |
| | 11.626 | % | | $ | 331,879 |
| | 4.500 | % | | $ | 479,380 |
| | 6.500 | % | | $ | 377,973 |
| | 5.125 | % | Customers Bank | $ | 1,254,082 | | | 10.615 | % | | $ | 531,639 | | | 4.500 | % | | $ | 767,923 | | | 6.500 | % | | $ | 826,994 | | | 7.000 | % |
| Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | | Tier 1 capital (to risk-weighted assets) | |
| Customers Bancorp, Inc. | $ | 844,755 |
| | 11.414 | % | | $ | 444,065 |
| | 6.000 | % | | N/A |
| | N/A |
| | $ | 490,322 |
| | 6.625 | % | Customers Bancorp, Inc. | $ | 1,172,310 | | | 9.919 | % | | $ | 709,125 | | | 6.000 | % | | N/A | | N/A | | $ | 1,004,594 | | | 8.500 | % |
| Customers Bank | $ | 857,421 |
| | 11.626 | % | | $ | 442,505 |
| | 6.000 | % | | $ | 590,006 |
| | 8.000 | % | | $ | 488,599 |
| | 6.625 | % | Customers Bank | $ | 1,254,082 | | | 10.615 | % | | $ | 708,852 | | | 6.000 | % | | $ | 945,136 | | | 8.000 | % | | $ | 1,004,207 | | | 8.500 | % |
| Total capital (to risk-weighted assets) | | | | | | | | | | | | | | | | Total capital (to risk-weighted assets) | |
| Customers Bancorp, Inc. | $ | 966,097 |
| | 13.053 | % | | $ | 592,087 |
| | 8.000 | % | | N/A |
| | N/A |
| | $ | 638,343 |
| | 8.625 | % | Customers Bancorp, Inc. | $ | 1,401,119 | | | 11.855 | % | | $ | 945,500 | | | 8.000 | % | | N/A | | N/A | | $ | 1,240,969 | | | 10.500 | % |
| Customers Bank | $ | 1,003,609 |
| | 13.608 | % | | $ | 590,006 |
| | 8.000 | % | | $ | 737,508 |
| | 10.000 | % | | $ | 636,101 |
| | 8.625 | % | Customers Bank | $ | 1,424,791 | | | 12.060 | % | | $ | 945,136 | | | 8.000 | % | | $ | 1,181,421 | | | 10.000 | % | | $ | 1,240,492 | | | 10.500 | % |
| Tier 1 capital (to average assets) | | | | | | | | | | | | | | | | Tier 1 capital (to average assets) | |
| Customers Bancorp, Inc. | $ | 844,755 |
| | 9.067 | % | | $ | 372,652 |
| | 4.000 | % | | N/A |
| | N/A |
| | $ | 372,652 |
| | 4.000 | % | Customers Bancorp, Inc. | $ | 1,172,310 | | | 8.597 | % | | $ | 545,485 | | | 4.000 | % | | N/A | | N/A | | $ | 545,485 | | | 4.000 | % |
| Customers Bank | $ | 857,421 |
| | 9.233 | % | | $ | 371,466 |
| | 4.000 | % | | $ | 464,333 |
| | 5.000 | % | | $ | 371,466 |
| | 4.000 | % | Customers Bank | $ | 1,254,082 | | | 9.208 | % | | $ | 544,758 | | | 4.000 | % | | $ | 680,947 | | | 5.000 | % | | $ | 544,758 | | | 4.000 | % |
The capital ratios above reflect the capital requirements under "Basel III" effective during first quarter 2015 and theBasel III Capital Rules require that we maintain a 2.500% capital conservation buffer effective Januarywith respect to each of CET1, Tier 1 2016. Failureand total capital to maintainrisk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. A financial institution with a conservation buffer of less than the required capital conservation buffer will result inamount is subject to limitations on capital distributions, including dividend payments and onstock repurchases, and certain discretionary bonusesbonus payments to executive officers. As of December 31, 2017,2021, the Bank and Customers Bancorp were in compliance with the Basel III requirements. See NOTE"NOTE 19 -– REGULATORY MATTERSCAPITAL" to Customers' audited financial statements for additional discussion regarding regulatory capital requirements.
Capital Ratios
Customers continued to build its capital during 2017.2021 and 2020. In 2019, Customers decided to cross the $10.0 billion asset threshold at year-end, with total assets of $11.5 billion at December 31, 2019, resulted in lower capital ratios when compared to December 31, 2018. In general, for the past few years, Customers Bancorp capital growth has been achieved by retained earnings increases in capital from salesand issuances of common stock under share-based compensation arrangements, offset in part by the repurchase of common shares. Customers Bancorp did not repurchase any common shares under a stock repurchase plan in 2020. In 2021, Customers repurchased 527,789 shares of common stock for $27.7 million pursuant to the Share Repurchase Program. During 2021 and issuance of preferred stock and subordinated debt. During 2017,2020, Customers Bancorp did not issue any preferred stock or common stock other than in public offerings. During 2016,connection with share-based compensation agreements. In 2021, Customers Bancorp issued non-cumulative perpetual preferred stock, which meets$100 million in fixed-to-floating rate senior notes, and utilized the definitionproceeds to redeem all of Tier 1the outstanding shares of Series C and Series D Preferred Stock. Customers Bank capital per regulatory guidelines,growth for the past few years has been achieved primarily by retained earnings and common stock. The netcapital contributions from Customers Bancorp from proceeds received from issuances of these offerings is included in the Bancorp's Tier 1 capital ratios presented above.senior and subordinated notes. For more information relating to preferred and common stock, offerings in 2016, see NOTE"NOTE 13 -– SHAREHOLDERS' EQUITYEQUITY" to Customers' audited financial statements.
Customers is unaware of any current recommendations by the regulatory authorities which, if they were to be implemented, would have a material effect on its liquidity, capital resources, or operations.
The maintenance of appropriate levels of capital is an important objective of Customers' asset and liability management process. Through its initial capitalization and subsequent offerings, Customers believes it has continued to maintain a strong capital position. Since first quarter 2015, Customers Bank's board of directors has declared a quarterly cash dividend to the Bank's sole shareholder, Customers Bancorp. Cash dividends declared by the Bank and paid to Customers Bancorp during 20172021 and 2016,2020, include the following:
•$5.120.0 million declared on January 20, 2016,22, 2020, and paid on March 10, 2016;2020;
•$6.020.0 million declared on April 27, 2016,22, 2020, and paid on June 27, 2016;10, 2020;
•$6.55.0 million declared on July 27, 2016,22, 2020, and paid on September 12, 2016;10, 2020;
•$7.820.0 million declared on October 26, 2016, and paid on December 12, 2016;31, 2020;
•$7.830.0 million declared on January 25, 2017, and paid on March 13, 2017;
$7.8 million declared on April 26, 2017,June 23, 2021, and paid on June 12, 2017;24, 2021;
•$11.355.0 million declared on July 26, 2017,September 22, 2021, and paid on September 11, 2017;23, 2021; and
•$11.355.0 million declared on October 25, 2017, and paid on December 11, 2017;21, 2021.
Effect of Government Monetary Policies
Our earnings are and
$11.3 million declared on January 24, 2018, will be affected by domestic economic conditions and payable on March 10, 2018.
OFF-BALANCE-SHEET ARRANGEMENTS
Customers is involved with financial instrumentsthe monetary 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 needsfiscal policies of the Bank's customers. These financial instruments include commitments to extend credit, including unused portions of lines of creditUnited States government and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excessits agencies. An important function of the amount recognized onFederal Reserve Board is to regulate the balance sheets.
With commitmentsmoney supply and interest rates. Among the instruments used to extend credit, exposures to credit lossimplement those objectives are open market operations 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 policiesUnited States government securities and changes in reserve requirements against member bank deposits. These instruments are used in making commitmentsvarying combinations to influence overall growth and conditional obligations as are used for on-balance-sheet instruments. Because they involve credit risk similar to extending a loan, these financial instruments are subject to the Bank’s credit policy and other underwriting standards.
Asdistribution of December 31, 2017 and 2016, the following off-balance-sheet commitments, financial instruments and other arrangements were outstanding:
|
| | | | | | | |
| | December 31, |
| | 2017 | | 2016 |
| (amounts in thousands) | |
| Commitments to fund loans | $ | 333,874 |
| | $ | 244,784 |
|
| Unfunded commitments to fund mortgage warehouse loans | 1,567,139 |
| | 1,230,596 |
|
| Unfunded commitments under lines of credit | 485,345 |
| | 480,446 |
|
| Letters of credit | 39,890 |
| | 40,223 |
|
| Other unused commitments | 6,679 |
| | 5,310 |
|
Commitments to fund loans, unfunded commitments to fund mortgage warehouse loans, unfunded commitments under lines of credit and letters of credit are agreements to extend credit to or for the benefit of a customer in the ordinary course of the Bank's business.
Commitments to fundbank loans and unfunded commitments under lines of creditleases, investments, and deposits, and their use 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 having been drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration datesalso affect rates charged on loans and leases 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 to be necessary upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.paid for deposits.
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 or VA, or they 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 facilities to customers.
CONTRACTUAL OBLIGATIONS
The following table sets forth contractual obligations and other commitments representing required and potential cash outflows as of December 31, 2017. Interest on subordinated notes and senior notes was calculated using then current contractual interest rates.
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| | | | | | | | | | | | | | | | | | | |
| | Total | | Within one year | | After one but within three years | | After three but within five years | | More than five years |
| (amounts in thousands) | |
| Operating leases | $ | 27,557 |
| | $ | 5,499 |
| | $ | 9,029 |
| | $ | 6,598 |
| | $ | 6,431 |
|
| Benefit plan commitments | 4,500 |
| | 300 |
| | 600 |
| | 600 |
| | 3,000 |
|
| Contractual maturities of time deposits | 1,905,693 |
| | 1,453,519 |
| | 340,623 |
| | 111,442 |
| | 109 |
|
| Subordinated notes | 110,000 |
| | — |
| | — |
| | — |
| | 110,000 |
|
| Interest on subordinated notes | 77,406 |
| | 6,738 |
| | 13,475 |
| | 13,475 |
| | 43,718 |
|
| Loan commitments | 2,386,358 |
| | 1,964,040 |
| | 87,891 |
| | 86,392 |
| | 248,035 |
|
| Senior notes | 188,250 |
| | 63,250 |
| | 25,000 |
| | 100,000 |
| | — |
|
| Interest on senior notes | 21,848 |
| | 7,458 |
| | 8,465 |
| | 5,925 |
| | — |
|
| Other commitments (1) | 6,679 |
| | — |
| | 6,679 |
| | — |
| | — |
|
| Standby letters of credit | 39,890 |
| | 34,935 |
| | 3,286 |
| | 1,669 |
| | — |
|
| Total | $ | 4,768,181 |
| | $ | 3,535,739 |
| | $ | 495,048 |
| | $ | 326,101 |
| | $ | 411,293 |
|
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(1) | Represents commitments funding in approximately one-to-three years that are subject to unscheduled requests for payment. |
NEW ACCOUNTING PRONOUNCEMENTS
For information about the impact that recently adopted or issued accounting guidance will have on us, refer to NOTE 4 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION to Customers' audited financial statements.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Interest-RateInterest Rate Sensitivity
The largest component of Customers' net income is net interest income, and the majority of its financial instruments are interest-rateinterest rate sensitive assets and liabilities with various term structures and maturities. One of the primary objectives of management is to maximize net interest income while minimizing interest-rateinterest rate risk. Interest-rateInterest 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-rateinterest rate sensitive assets and interest-rateinterest rate sensitive liabilities.
Customers uses two complementary methods to analyze and measure interest-rateinterest rate sensitivity as part of the overall management of interest-rateinterest rate risk; they are income simulation modeling and estimates of economic value of equity.EVE. The combination of these two methods provides a reasonably comprehensive summary of the levels of interest-rateinterest rate risk of Customers' exposure to time factors and changes in interest-rateinterest rate environments.
Income simulationscenario modeling is used to measure interest-rateinterest rate sensitivity and manage interest-rateinterest rate risk. Income simulationscenario considers not only the impact of changing market interest rates upon forecasted net interest income but also other factors such as yield-curveyield curve relationships, the volume and mix of assets and liabilities, customer preferences and general market conditions.
Through the use of income simulationscenario modeling, Customers has estimated the net interest income for the year ending December 31, 2018,2022 and 2021, based upon the assets, liabilities and off-balance-sheetoff-balance sheet financial instruments in existence at December 31, 2017.2021 and 2020. Customers has also estimated changes to that estimated net interest income based upon interest rates rising or falling immediately (“("rate shocks”shocks"). For upward rate shocks modeling a rising rate environment at December 31, 2021, current market interest rates were increased immediately by 100, 200 and 300 basis points. For downwardIn the current interest rate shocks modeling a falling rate environment,
current market particularly for short term rates, were only decreased immediately bythe Down 100 to Down 300 basis pointspoint scenarios are not shown due to the limitationsunrealistic and/or negative yield nature of the current low-interest-rate environment that renders the down-200 and 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.results. The following table reflects the estimated percentage change in estimated net interest income for the year ending December 31, 2018,2022 and 2021, resulting from changes in interest rates.
Net change in net interest income
| | | | | | | | | | | |
| % Change December 31, |
| Rate Shocks | 2021 | | 2020 |
| Up 3% | 16.0% | | (2.7)% |
| Up 2% | 10.8% | | (1.6)% |
| Up 1% | 5.7% | | (0.8)% |
| | | |
| | | |
| | | |
|
| | |
Rate Shocks | %
Change
|
Up 3% | (10.7 | )% |
Up 2% | (4.5 | )% |
Up 1% | (0.9 | )% |
Down 1% | (4.4 | )% |
The net changes in net interest income in all scenarios are within Customers Bank’s interest-rate risk policy guidelines.
Economic value of equity (“EVE”)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 at December 31, 2021, 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 basis points dueDue to the limitations of the current low-interest-ratelow interest rate environment, that renders the down-200Down 100, 200 and down-300300 basis point rate shocks impractical.are deemed impractical and not presented below. The downward rate shocks modeled will be revisited in the future if necessary and will be contingent upon additional Federal Reserve interest-rateinterest 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 December 31, 2017,2021 and 2020, resulting from the referenced shocks to interest rates.
| | | | | | | | | | | |
| From Base December 31, |
| Rate Shocks | 2021 | | 2020 |
| Up 3% | 100.7% | | (18.9)% |
| Up 2% | 79.8% | | (12.2)% |
| Up 1% | 51.5% | | (6.1)% |
| | | |
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| | |
Rate Shocks | From base |
Up 3% | (24.6 | )% |
Up 2% | (14.0 | )% |
Up 1% | (5.7 | )% |
Down 1% | 0.1 | % |
The net changes in economic value of equity in all scenarios are within Customers Bank’s interest-rate risk policy guidelines.
The matching of assets and liabilities may also be analyzed by examining the extent to which such assets and liabilities are interest-rate sensitive and by monitoring a bank’s interest-rate sensitivity “gap.” An asset or liability is considered interest-rate sensitive within a specific time period if it will mature or reprice within that time period. The interest-rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that time period.
The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2017, that are anticipated, based upon certain assumptions, to reprice or mature in each of the future time periods shown. Except as stated below, the amount of assets and liabilities shown that reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at December 31, 2017, on the basis of contractual maturities, anticipated prepayments and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be repaid and/or repriced as a result of contractual amortization and anticipated prepayments of adjustable and fixed-rate loans and as a result of contractual-rate adjustments on adjustable-rate loans.
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| Balance Sheet Gap Analysis at December 31, 2017 | | | | | | | | | | | | | |
| | 3 months
or less | | 3 to 6
months | | 6 to 12
months | | 1 to 3
years | | 3 to 5
years | | Over 5
years | | Total |
| (dollars in thousands) | |
| Assets | | | | | | | | | | | | | |
| Interest-earning deposits and federal funds sold | $ | 125,935 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 125,935 |
|
| Investment securities | 12,154 |
| | 11,798 |
| | 22,623 |
| | 97,082 |
| | 74,377 |
| | 243,906 |
| | 461,940 |
|
| Loans (a) | 3,356,615 |
| | 201,023 |
| | 408,842 |
| | 2,446,023 |
| | 1,979,297 |
| | 273,894 |
| | 8,665,694 |
|
| Other interest-earning assets | — |
| | — |
| | — |
| | 109,767 |
| | — |
| | — |
| | 109,767 |
|
| Total interest-earning assets | 3,494,704 |
| | 212,821 |
| | 431,465 |
| | 2,652,872 |
| | 2,053,674 |
| | 517,800 |
| | 9,363,336 |
|
| Non interest-earning assets | — |
| | — |
| | — |
| | — |
| | — |
| | 443,256 |
| | 443,256 |
|
| Total assets | 3,494,704 |
| | 212,821 |
| | 431,465 |
| | 2,652,872 |
| | 2,053,674 |
| | 961,056 |
| | $ | 9,806,592 |
|
| Liabilities | | | | | | | | | | | | | |
| Other interest-bearing deposits | $ | 200,948 |
| | $ | 190,905 |
| | $ | 353,699 |
| | $ | 1,102,795 |
| | $ | 591,423 |
| | $ | 1,414,085 |
| | $ | 3,853,855 |
|
| Time deposits | 398,592 |
| | 717,389 |
| | 349,553 |
| | 331,012 |
| | 109,147 |
| | — |
| | 1,905,693 |
|
| Other borrowings | 1,661,860 |
| | 105,000 |
| | — |
| | — |
| | — |
| | — |
| | 1,766,860 |
|
| Subordinated debt | — |
| | — |
| | — |
| | — |
| | — |
| | 108,880 |
| | 108,880 |
|
| Total interest-bearing liabilities | 2,261,400 |
| | 1,013,294 |
| | 703,252 |
| | 1,433,807 |
| | 700,570 |
| | 1,522,965 |
| | 7,635,288 |
|
| Non-interest-bearing liabilities | 28,979 |
| | 27,826 |
| | 52,372 |
| | 453,153 |
| | 124,039 |
| | 448,428 |
| | 1,134,797 |
|
| Shareholders’ equity | — |
| | — |
| | — |
| | — |
| | — |
| | 1,036,507 |
| | 1,036,507 |
|
| Total liabilities and shareholders’ equity | 2,290,379 |
| | 1,041,120 |
| | 755,624 |
| | 1,886,960 |
| | 824,609 |
| | 3,007,900 |
| | $ | 9,806,592 |
|
| Interest sensitivity gap | $ | 1,204,325 |
| | $ | (828,299 | ) | | $ | (324,159 | ) | | $ | 765,912 |
| | $ | 1,229,065 |
| | $ | (2,046,844 | ) | | |
| Cumulative interest sensitivity gap | | | $ | 376,026 |
| | $ | 51,867 |
| | $ | 817,779 |
| | $ | 2,046,844 |
| | $ | — |
| | |
| Cumulative interest sensitivity gap to total assets | 12.3 | % | | 3.8 | % | | 0.5 | % | | 8.3 | % | | 20.9 | % | | 0.0 | % | | |
| Cumulative interest-earning assets to cumulative interest-bearing liabilities | 154.5 | % | | 113.2 | % | | 104.0 | % | | 125.5 | % | | 144.7 | % | | 122.6 | % | | |
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(a) | Includes loans held for sale | | | | | | | | | | | | |
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As shown above, Customers has a positive cumulative gap (cumulative interest-sensitive assets are higher than cumulative interest-sensitive liabilities) within the next year, which generally indicates that an increase in rates may lead to an increase in net interest income, and a decrease in rates may lead to a decrease in net interest income. Interest-rate-sensitivity gap analysis measures whether assets or liabilities may reprice but does not capture the ability to reprice or the range of potential repricing on assets or liabilities. Thus, indications based on a negative or positive gap position need to be analyzed in conjunction with other interest-rate risk management tools.
Management believes that the assumptions and combination of methods utilized in evaluating estimated net interest income are reasonable. However, the interest-rateinterest rate sensitivity of our assets, liabilities and off-balance-sheetoff-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 were to beare used or actual experience were to differdiffers from the assumptions used in the model.
Item 8. Financial Statements and Supplementary Data
Customers Bancorp, Inc.Financial statements for the three years ended
December 31, 2017, 20162021, 2020 and 20152019
INDEX TO CUSTOMERS BANCORP, INC. FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
Customers Bancorp, Inc.
Wyomissing,West Reading, Pennsylvania
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Customers Bancorp, Inc. and its subsidiaries (the “Company”"Company") and subsidiaries as of December 31, 20172021 and 2016,2020, the related consolidated statements of income, comprehensive income (loss), changes in shareholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2017,2021, and the related notes (collectively referred to as the “consolidated"consolidated financial statements”statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries atas of December 31, 20172021 and 2016,2020, and the results of theirits operations and theirits cash flows for each of the three years in the period ended December 31, 2017,2021, in conformity with accounting principles generally accepted in the United States of America.
We have also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the Company's internal control over financial reporting as of December 31, 2017,2021, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 23, 201828, 2022, expressed an unqualified opinion thereon.on the Company's internal control over financial reporting.
Change in Accounting Principle
As described in Notes 2 and 8 to the consolidated financial statements, the Company changed its method for estimating the allowance for credit losses on January 1, 2020 due to the adoption of Financial Instruments – Credit Losses (Topic 326).
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’sCompany's consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses – Refer to Notes 2 and 8 to the consolidated financial statements
Critical Audit Matter Description
Management’s estimate of expected credit losses in the Company’s loan and lease portfolios are recorded in the allowance for loan and lease losses (the “ACL”). The ACL is a valuation account that is deducted from the loans or leases' amortized cost basis to present the net amount expected to be collected on the loans and leases.
The ACL on collectively assessed loans and leases is measured over the expected life of the loan or lease using lifetime loss rate models which consider historical loan performance, loan or borrower attributes, and forecasts of future economic conditions in addition to information about past events and current conditions. Significant loan/borrower attributes utilized in the models include origination date, maturity date, collateral property type, internal risk rating, delinquency status, borrower state and FICO score at origination. Customers uses external sources in the creation of its forecasts, including current economic conditions and forecasts for macroeconomic variables over its reasonable and supportable forecast period (e.g., GDP growth rate, unemployment rate, BBB spread, commercial real estate and home price indices). After the reasonable and supportable forecast period, which ranges from two to five years, the models revert the forecasted macroeconomic variables to their historical long-term trends, without specific predictions for the economy, over the expected life of the pool. The Company estimates its ACL on a quarterly basis and qualitatively adjusts model results for risk factors that are not considered within the models, but which are relevant in assessing the expected credit losses within the loan and lease pools.
The ACL for loans or leases is measured individually if it does not share similar risk characteristics with other financial assets. The ACL is generally determined using the present value of expected future cash flows discounted at the loan’s original effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. The fair value of the collateral is measured based on the value of the collateral securing the loans, less estimated costs to liquidate the collateral.
Given the size of the loan and lease portfolios and the subjective nature of estimating the ACL, including the estimated impact of the COVID-19 pandemic, auditing the ACL involved a high degree of auditor judgment and an increased extent of effort.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the ACL for the loan and lease portfolios included the following, among others:
•We tested the effectiveness of controls over the (i) selection and weighting of the macroeconomic forecasts, (ii) execution and monitoring of the loss rate models, (iii) calibration of the loss rate models to peer and industry information, (iv) measurement of the qualitative allowance, (v) the monitoring, identification, and valuation of collateral dependent loans, particularly those industries affected by the COVID-19 pandemic, and (vi) overall calculation and disclosure of the ACL.
•We used our credit and valuation specialists to assist us in evaluating the reasonableness of the loss rate models and valuation of collateral dependent loans.
•We (i) evaluated the reasonableness of the loss rate models and related assumptions, (ii) assessed the reasonableness of design, theory, and logic of the loss rate models for estimating expected credit losses, (iii) tested the accuracy of the data input into the loss rate models, and (iv) assessed the reasonableness of the models’ calculations of loss rates derived from the loss rate models.
•We (i) assessed the reasonableness of the methodologies and appraisals used by management to estimate collateral values on collateral dependent loans, particularly those loans in industry sectors that are affected by the COVID-19 pandemic, (ii) tested the arithmetic accuracy of the reserves or charge-offs, and (iii) considered available information subsequent to December 31, 2021 that provides additional evidence about conditions that existed at the balance sheet date.
•We (i) evaluated the reasonableness of management’s forecast selection, (ii) evaluated the appropriateness and relevance of the qualitative factors, including forecast weighting, and related quantitative measures included in the qualitative allowance, (iii) tested the accuracy and evaluated the relevance and reliability of the data, including third party data, used to calibrate the loss rate models to peer and industry information, and (iv) tested the arithmetic accuracy of the calculation of the qualitative allowance.
•We tested the arithmetic accuracy of the calculation of the overall ACL and assessed the reasonableness of the related disclosures.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 28, 2022
We have served as the Company's auditor since 2013.2019.
/s/ BDO USA, LLP
Philadelphia, PennsylvaniaREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
February 23, 2018
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
of Customers Bancorp, Inc.
Wyomissing, Pennsylvania
Opinion on Internal Control over Financial Reporting
We have audited Customers Bancorp, Inc.’s (the “Company’s”)the internal control over financial reporting of Customers Bancorp, Inc. and its subsidiaries (the “Company”) as of December 31, 2017,2021, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”)(COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2021, based on the COSO criteria. established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the consolidated balance sheets of Customers Bancorp, Inc. (the “Company”) and subsidiariesfinancial statements as of December 31, 2017 and 2016,for the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the periodyear ended December 31, 2017, and2021, of the related notesCompany, and our report dated February 23, 201828, 2022, expressed an unqualified opinion thereon.on those consolidated financial statements and included an explanatory paragraph regarding the Company’s adoption of FASB ASC Topic 326, Financial Instruments- Credit Losses, effective January 1, 2020.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Management’s Annual Report on Internal Control over Financial Reporting”.Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also includedrisk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ BDO USA,Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 23, 201828, 2022
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share data)
| | | | | | | | December 31, |
| | December 31, | | 2021 | | 2020 |
| | 2017 | | 2016 | | | | |
| ASSETS | | | | ASSETS | |
| Cash and due from banks | $ | 20,388 |
| | $ | 37,485 |
| Cash and due from banks | $ | 35,238 | | | $ | 78,090 | |
| Interest earning deposits | 125,935 |
| | 227,224 |
| Interest earning deposits | 482,794 | | | 615,264 | |
| Cash and cash equivalents | 146,323 |
| | 264,709 |
| Cash and cash equivalents | 518,032 | | | 693,354 | |
| Investment securities available for sale, at fair value | 471,371 |
| | 493,474 |
| |
| Loans held for sale (includes $1,795,294 and $2,117,510, respectively, at fair value) | 1,939,485 |
| | 2,117,510 |
| |
| Loans receivable | 6,768,258 |
| | 6,154,637 |
| |
| Allowance for loan losses | (38,015 | ) | | (37,315 | ) | |
| Total loans receivable, net of allowance for loan losses | 6,730,243 |
| | 6,117,322 |
| |
| Investment securities, at fair value | | Investment securities, at fair value | 3,817,150 | | | 1,210,285 | |
| Loans held for sale (includes $15,747 and $5,509, respectively, at fair value) | | Loans held for sale (includes $15,747 and $5,509, respectively, at fair value) | 16,254 | | | 79,086 | |
| Loans receivable, mortgage warehouse, at fair value | | Loans receivable, mortgage warehouse, at fair value | 2,284,325 | | | 3,616,432 | |
| Loans receivable, PPP | | Loans receivable, PPP | 3,250,008 | | | 4,561,365 | |
| Loans and leases receivable | | Loans and leases receivable | 9,018,298 | | | 7,575,368 | |
| Allowance for credit losses on loans and leases | | Allowance for credit losses on loans and leases | (137,804) | | | (144,176) | |
| Total loans and leases receivable, net of allowance for credit losses on loans and leases | | Total loans and leases receivable, net of allowance for credit losses on loans and leases | 14,414,827 | | | 15,608,989 | |
| FHLB, Federal Reserve Bank, and other restricted stock | 105,918 |
| | 68,408 |
| FHLB, Federal Reserve Bank, and other restricted stock | 64,584 | | | 71,368 | |
| Accrued interest receivable | 27,021 |
| | 23,690 |
| Accrued interest receivable | 92,239 | | | 80,412 | |
| Bank premises and equipment, net | 11,955 |
| | 12,769 |
| Bank premises and equipment, net | 8,890 | | | 11,225 | |
| Bank-owned life insurance | 257,720 |
| | 161,494 |
| Bank-owned life insurance | 333,705 | | | 280,067 | |
| Other real estate owned | 1,726 |
| | 3,108 |
| |
| | Goodwill and other intangibles | 16,295 |
| | 17,621 |
| Goodwill and other intangibles | 3,736 | | | 3,969 | |
| | Other assets | 131,498 |
| | 102,631 |
| Other assets | 305,611 | | | 338,438 | |
| Assets of discontinued operations | | Assets of discontinued operations | — | | | 62,055 | |
| Total assets | $ | 9,839,555 |
| | $ | 9,382,736 |
| Total assets | $ | 19,575,028 | | | $ | 18,439,248 | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
| Liabilities: | | | | Liabilities: | |
| Deposits: | | | | Deposits: | |
| Demand, non-interest bearing | $ | 1,052,115 |
| | $ | 966,058 |
| Demand, non-interest bearing | $ | 4,459,790 | | | $ | 2,356,998 | |
| Interest bearing | 5,748,027 |
| | 6,337,717 |
| Interest bearing | 12,318,134 | | | 8,952,931 | |
| Total deposits | 6,800,142 |
| | 7,303,775 |
| Total deposits | 16,777,924 | | | 11,309,929 | |
| Federal funds purchased | 155,000 |
| | 83,000 |
| Federal funds purchased | 75,000 | | | 250,000 | |
| FHLB advances | 1,611,860 |
| | 868,800 |
| FHLB advances | 700,000 | | | 850,000 | |
| Other borrowings | 186,497 |
| | 87,123 |
| Other borrowings | 223,086 | | | 124,037 | |
| Subordinated debt | 108,880 |
| | 108,783 |
| Subordinated debt | 181,673 | | | 181,394 | |
| | FRB PPP Liquidity Facility | | FRB PPP Liquidity Facility | — | | | 4,415,016 | |
| Accrued interest payable and other liabilities | 56,212 |
| | 75,383 |
| Accrued interest payable and other liabilities | 251,128 | | | 152,082 | |
| Liabilities of discontinued operations | | Liabilities of discontinued operations | — | | | 39,704 | |
| Total liabilities | 8,918,591 |
| | 8,526,864 |
| Total liabilities | 18,208,811 | | | 17,322,162 | |
| Commitments and contingencies (NOTE 18) |
| |
| |
| Commitments and contingencies (NOTE 22) | | Commitments and contingencies (NOTE 22) | 0 | | 0 |
| Shareholders’ equity: | | | | 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 December 31, 2017 and 2016 | 217,471 |
| | 217,471 |
| |
| Common stock, par value $1.00 per share; 200,000,000 shares authorized; 31,912,763 and 30,820,177 shares issued as of December 31, 2017 and 2016; 31,382,503 and 30,289,917 shares outstanding as of December 31, 2017 and 2016 | 31,913 |
| | 30,820 |
| |
| Preferred stock, par value $1.00 per share; liquidation preference $25.00 per share; 100,000,000 shares authorized, 5,700,000 and 9,000,000 shares issued as of December 31, 2021 and 2020; 5,700,000 and 9,000,000 shares outstanding as of December 31, 2021 and 2020 | | Preferred stock, par value $1.00 per share; liquidation preference $25.00 per share; 100,000,000 shares authorized, 5,700,000 and 9,000,000 shares issued as of December 31, 2021 and 2020; 5,700,000 and 9,000,000 shares outstanding as of December 31, 2021 and 2020 | 137,794 | | | 217,471 | |
| Common stock, par value $1.00 per share; 200,000,000 shares authorized; 34,721,675 and 32,985,707 shares issued as of December 31, 2021 and 2020; 32,913,267 and 31,705,088 shares outstanding as of December 31, 2021 and 2020 | | Common stock, par value $1.00 per share; 200,000,000 shares authorized; 34,721,675 and 32,985,707 shares issued as of December 31, 2021 and 2020; 32,913,267 and 31,705,088 shares outstanding as of December 31, 2021 and 2020 | 34,722 | | | 32,986 | |
| Additional paid in capital | 422,096 |
| | 427,008 |
| Additional paid in capital | 542,391 | | | 455,592 | |
| Retained earnings | 258,076 |
| | 193,698 |
| Retained earnings | 705,732 | | | 438,581 | |
| Accumulated other comprehensive loss, net | (359 | ) | | (4,892 | ) | |
| Treasury stock, at cost (530,260 shares as of December 31, 2017 and 2016) | (8,233 | ) | | (8,233 | ) | |
| Accumulated other comprehensive income (loss), net | | Accumulated other comprehensive income (loss), net | (4,980) | | | (5,764) | |
| Treasury stock, at cost (1,808,408 and 1,280,619 shares as of December 31, 2021 and 2020) | | Treasury stock, at cost (1,808,408 and 1,280,619 shares as of December 31, 2021 and 2020) | (49,442) | | | (21,780) | |
| Total shareholders’ equity | 920,964 |
| | 855,872 |
| Total shareholders’ equity | 1,366,217 | | | 1,117,086 | |
| Total liabilities and shareholders’ equity | $ | 9,839,555 |
| | $ | 9,382,736 |
| Total liabilities and shareholders’ equity | $ | 19,575,028 | | | $ | 18,439,248 | |
See accompanying notes to the consolidated financial statements.
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
| | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Interest income: | | | | | |
| Loans and leases | $ | 736,822 | | | $ | 512,048 | | | $ | 431,491 | |
| | | | | |
| Investment securities | 40,413 | | | 24,206 | | | 23,713 | |
| Other | 3,649 | | | 7,050 | | | 8,535 | |
| Total interest income | 780,884 | | | 543,304 | | | 463,739 | |
| Interest expense: | | | | | |
| Deposits | 62,641 | | | 92,045 | | | 141,464 | |
| FHLB advances | 6,211 | | | 21,637 | | | 26,519 | |
| Subordinated debt | 10,755 | | | 10,755 | | | 6,983 | |
| FRB PPP liquidity facility, federal funds purchased and other borrowings | 16,203 | | | 15,179 | | | 11,463 | |
| Total interest expense | 95,810 | | | 139,616 | | | 186,429 | |
| Net interest income | 685,074 | | | 403,688 | | | 277,310 | |
| Provision for credit losses on loans and leases | 27,426 | | | 62,774 | | | 24,227 | |
| Net interest income after provision for credit losses on loans and leases | 657,648 | | | 340,914 | | | 253,083 | |
| Non-interest income: | | | | | |
| Interchange and card revenue | 336 | | | 646 | | | 781 | |
| Deposit fees | 3,774 | | | 2,526 | | | 1,742 | |
| Commercial lease income | 21,107 | | | 18,139 | | | 12,051 | |
| Bank-owned life insurance | 8,416 | | | 7,009 | | | 7,272 | |
| Mortgage warehouse transactional fees | 12,874 | | | 11,535 | | | 7,128 | |
| Gain (loss) on sale of SBA and other loans | 11,327 | | | 2,009 | | | 2,770 | |
| Loan fees | 7,527 | | | 5,652 | | | 5,021 | |
| Mortgage banking income | 1,536 | | | 1,693 | | | 66 | |
| Loss upon acquisition of interest-only GNMA securities | — | | | — | | | (7,476) | |
| | | | | |
| | | | | |
| Gain (loss) on sale of investment securities | 31,392 | | | 20,078 | | | 1,001 | |
| Unrealized gain (loss) on investment securities | 2,720 | | | 1,447 | | | 1,299 | |
| Loss on sale of foreign subsidiaries | (2,840) | | | — | | | — | |
| Unrealized gain (loss) on derivatives | 3,208 | | | (3,951) | | | 3,162 | |
| Loss on cash flow hedge derivative terminations | (24,467) | | | — | | | — | |
| Other | 957 | | | (2,965) | | | 467 | |
| Total non-interest income | 77,867 | | | 63,818 | | | 35,284 | |
| Non-interest expense: | | | | | |
| Salaries and employee benefits | 108,202 | | | 94,067 | | | 80,122 | |
| Technology, communication and bank operations | 83,544 | | | 50,668 | | | 45,063 | |
| Professional services | 26,688 | | | 13,557 | | | 10,634 | |
| Occupancy | 12,143 | | | 11,362 | | | 11,307 | |
| Commercial lease depreciation | 17,824 | | | 14,715 | | | 9,473 | |
| FDIC assessments, non-income taxes, and regulatory fees | 10,061 | | | 11,661 | | | 5,807 | |
| Loan servicing | 10,763 | | | 3,431 | | | 1,245 | |
| | | | | |
| Advertising and promotion | 1,520 | | | 1,796 | | | 2,690 | |
| Merger and acquisition related expenses | 418 | | | 1,367 | | | — | |
| Loan workout | 265 | | | 3,143 | | | 1,687 | |
| | | | | |
| Deposit relationship adjustment fees | 6,216 | | | — | | | — | |
| Other | 16,663 | | | 9,209 | | | 12,560 | |
| Total non-interest expense | 294,307 | | | 214,976 | | | 180,588 | |
| Income before income tax expense | 441,208 | | | 189,756 | | | 107,779 | |
| Income tax expense | 86,940 | | | 46,717 | | | 26,392 | |
| Net income from continuing operations | $ | 354,268 | | | $ | 143,039 | | | $ | 81,387 | |
| | | | | |
| | | (continued) | | |
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Interest income: | | | | | |
| Loans receivable, including fees | $ | 266,539 |
| | $ | 233,349 |
| | $ | 182,280 |
|
| Loans held for sale | 73,397 |
| | 69,469 |
| | 51,553 |
|
| Investment securities | 25,153 |
| | 14,293 |
| | 10,405 |
|
| Other | 7,761 |
| | 5,428 |
| | 5,612 |
|
| Total interest income | 372,850 |
| | 322,539 |
| | 249,850 |
|
| Interest expense: | | | | | |
| Deposits | 67,582 |
| | 48,268 |
| | 33,982 |
|
| Other borrowings | 10,056 |
| | 6,438 |
| | 6,096 |
|
| FHLB advances | 21,130 |
| | 11,597 |
| | 6,743 |
|
| Subordinated debt | 6,739 |
| | 6,739 |
| | 6,739 |
|
| Total interest expense | 105,507 |
| | 73,042 |
| | 53,560 |
|
| Net interest income | 267,343 |
| | 249,497 |
| | 196,290 |
|
| Provision for loan losses | 6,768 |
| | 3,041 |
| | 20,566 |
|
| Net interest income after provision for loan losses | 260,575 |
| | 246,456 |
| | 175,724 |
|
| Non-interest income: | | | | | |
| Interchange and card revenue | 41,509 |
| | 24,681 |
| | 557 |
|
| Deposit fees | 10,039 |
| | 8,067 |
| | 944 |
|
| Mortgage warehouse transactional fees | 9,345 |
| | 11,547 |
| | 10,394 |
|
| Gain (loss) on sale of investment securities | 8,800 |
| | 25 |
| | (85 | ) |
| Bank-owned life insurance | 7,219 |
| | 4,736 |
| | 7,006 |
|
| Gains on sale of SBA and other loans | 4,223 |
| | 3,685 |
| | 4,047 |
|
| Mortgage banking income | 875 |
| | 969 |
| | 741 |
|
| Impairment loss on investment securities | (12,934 | ) | | (7,262 | ) | | — |
|
| Other | 9,834 |
| | 9,922 |
| | 4,113 |
|
| Total non-interest income | 78,910 |
| | 56,370 |
| | 27,717 |
|
| Non-interest expense: | | | | | |
| Salaries and employee benefits | 95,518 |
| | 80,641 |
| | 58,777 |
|
| Technology, communication and bank operations | 45,885 |
| | 26,839 |
| | 10,596 |
|
| Professional services | 28,051 |
| | 20,684 |
| | 11,042 |
|
| Occupancy | 11,161 |
| | 10,327 |
| | 8,668 |
|
| FDIC assessments, non-income taxes, and regulatory fees | 7,906 |
| | 13,097 |
| | 10,728 |
|
| Provision for operating losses | 6,435 |
| | 3,517 |
| | 140 |
|
| Loan workout | 2,366 |
| | 2,063 |
| | 1,127 |
|
| Advertising and promotion | 1,470 |
| | 1,549 |
| | 1,475 |
|
| Other real estate owned | 570 |
| | 1,953 |
| | 2,516 |
|
| Merger and acquisition related expenses | 410 |
| | 1,195 |
| | — |
|
| Other | 15,834 |
| | 16,366 |
| | 9,877 |
|
| Total non-interest expense | 215,606 |
| | 178,231 |
| | 114,946 |
|
| Income before income tax expense | 123,879 |
| | 124,595 |
| | 88,495 |
|
| Income tax expense | 45,042 |
| | 45,893 |
| | 29,912 |
|
| Net income | 78,837 |
| | 78,702 |
| | 58,583 |
|
| Preferred stock dividends | 14,459 |
| | 9,515 |
| | 2,493 |
|
| Net income available to common shareholders | $ | 64,378 |
| | $ | 69,187 |
| | $ | 56,090 |
|
| Basic earnings per common share | $ | 2.10 |
| | $ | 2.51 |
| | $ | 2.09 |
|
| Diluted earnings per common share | $ | 1.97 |
| | $ | 2.31 |
| | $ | 1.96 |
|
| | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | |
| For the Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Loss from discontinued operations before income tax expense (benefit) | $ | (20,354) | | | $ | (13,798) | | | $ | (5,659) | |
| Income tax expense (benefit) from discontinued operations | 19,267 | | | (3,337) | | | (3,599) | |
| Net loss from discontinued operations | (39,621) | | | (10,461) | | | (2,060) | |
| Net income | 314,647 | | | 132,578 | | | 79,327 | |
| Preferred stock dividends | 11,693 | | | 14,041 | | | 14,459 | |
| Loss on redemption of preferred stock | 2,820 | | | — | | | — | |
| Net income available to common shareholders | $ | 300,134 | | | $ | 118,537 | | | $ | 64,868 | |
| Basic earnings per common share from continuing operations | $ | 10.51 | | | $ | 4.09 | | | $ | 2.15 | |
| Basic earnings per common share | $ | 9.29 | | | $ | 3.76 | | | $ | 2.08 | |
| Diluted earnings per common share from continuing operations | $ | 10.08 | | | $ | 4.07 | | | $ | 2.12 | |
| Diluted earnings per common share | $ | 8.91 | | | $ | 3.74 | | | $ | 2.05 | |
See accompanying notes to the consolidated financial statements.
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(amounts in thousands)
| | | | For the Years Ended December 31, |
| | | | | | | | | 2021 | | 2020 | | 2019 |
| | For the Years Ended December 31, | |
| | 2017 | | 2016 | | 2015 | |
| Net income | $ | 78,837 |
| | $ | 78,702 |
| | $ | 58,583 |
| Net income | $ | 314,647 | | | $ | 132,578 | | | $ | 79,327 | |
| Unrealized gains (losses) on available-for-sale securities: | | | | | | |
| Unrealized gains (losses) on available for sale debt securities: | | Unrealized gains (losses) on available for sale debt securities: | |
| Unrealized gains (losses) arising during the period | 12,266 |
| | (3,335 | ) | | (10,140 | ) | Unrealized gains (losses) arising during the period | (6,841) | | | 32,273 | | | 49,688 | |
| Income tax effect | (4,378 | ) | | 1,317 |
| | 3,759 |
| Income tax effect | 1,779 | | | (8,390) | | | (12,919) | |
| Reclassification adjustments for (gains) losses included in net income | (8,800 | ) | | 7,237 |
| | 85 |
| Reclassification adjustments for (gains) losses included in net income | (31,392) | | | (20,078) | | | (1,001) | |
| Income tax effect | 3,432 |
| | (2,714 | ) | | (32 | ) | Income tax effect | 8,162 | | | 5,220 | | | 260 | |
| Net unrealized gains (losses) on available-for-sale securities | 2,520 |
| | 2,505 |
| | (6,328 | ) | |
| Net unrealized gains (losses) on available for sale debt securities | | Net unrealized gains (losses) on available for sale debt securities | (28,292) | | | 9,025 | | | 36,028 | |
| Unrealized gains (losses) on cash flow hedges: | | | | | | Unrealized gains (losses) on cash flow hedges: | |
| Unrealized gains (losses) arising during the period | 666 |
| | (1,093 | ) | | (2,532 | ) | Unrealized gains (losses) arising during the period | 12,321 | | | (31,772) | | | (21,157) | |
| Income tax effect | (260 | ) | | 464 |
| | 998 |
| Income tax effect | (3,204) | | | 8,545 | | | 5,501 | |
| Reclassification adjustment for losses included in net income | 2,634 |
| | 1,946 |
| | — |
| |
| Reclassification adjustment for (gains) losses included in net income | | Reclassification adjustment for (gains) losses included in net income | 26,972 | | | 13,092 | | | 1,407 | |
| Income tax effect | (1,027 | ) | | (730 | ) | | — |
| Income tax effect | (7,013) | | | (3,404) | | | (366) | |
| Net unrealized gains (losses) on cash flow hedges | 2,013 |
| | 587 |
| | (1,534 | ) | Net unrealized gains (losses) on cash flow hedges | 29,076 | | | (13,539) | | | (14,615) | |
| Other comprehensive income (loss), net of income tax effect | 4,533 |
| | 3,092 |
| | (7,862 | ) | Other comprehensive income (loss), net of income tax effect | 784 | | | (4,514) | | | 21,413 | |
| Comprehensive income | $ | 83,370 |
| | $ | 81,794 |
| | $ | 50,721 |
| |
| Comprehensive income (loss) | | Comprehensive income (loss) | $ | 315,431 | | | $ | 128,064 | | | $ | 100,740 | |
See accompanying notes to the consolidated financial statements.
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2017, 20162021, 2020 and 20152019
(amounts in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | — | | | — | | | — | | | — | | | — | | | 79,327 | | | — | | | — | | | 79,327 | |
| | | | | | | | | | | | | | | | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | 21,413 | | | — | | | 21,413 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Preferred stock dividends(1) | — | | | — | | | — | | | — | | | — | | | (14,459) | | | — | | | — | | | (14,459) | |
| Share-based compensation expense | — | | | — | | | — | | | — | | | 8,898 | | | — | | | — | | | — | | | 8,898 | |
| | | | | | | | | | | | | | | | | |
| Issuance of common stock under share-based-compensation arrangements | — | | | — | | | 364,922 | | | 365 | | | 1,006 | | | — | | | — | | | — | | | 1,371 | |
| Repurchase of common shares | — | | | — | | | (31,159) | | | — | | | — | | | — | | | — | | | (571) | | | (571) | |
| Balance, December 31, 2019 | 9,000,000 | | | 217,471 | | | 31,336,791 | | | 32,617 | | | 444,218 | | | 381,519 | | | (1,250) | | | (21,780) | | | 1,052,795 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Cumulative effect from change in accounting principle - CECL | — | | | — | | | — | | | — | | | — | | | (61,475) | | | — | | | — | | | (61,475) | |
| Net income | — | | | — | | | — | | | — | | | — | | | 132,578 | | | — | | | — | | | 132,578 | |
| | | | | | | | | | | | | | | | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | (4,514) | | | — | | | (4,514) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Preferred stock dividends(1) | — | | | — | | | — | | | — | | | — | | | (14,041) | | | — | | | — | | | (14,041) | |
| Share-based compensation expense | — | | | — | | | — | | | — | | | 12,049 | | | — | | | — | | | — | | | 12,049 | |
| | | | | | | | | | | | | | | | | |
| Issuance of common stock under share-based-compensation arrangements | — | | | — | | | 368,297 | | | 369 | | | (675) | | | — | | | — | | | — | | | (306) | |
| | | | | | | | | | | | | | | | | |
| Balance, December 31, 2020 | 9,000,000 | | | 217,471 | | | 31,705,088 | | | 32,986 | | | 455,592 | | | 438,581 | | | (5,764) | | | (21,780) | | | 1,117,086 | |
| | | | | | | | | | | | | | | | | |
| Net income | — | | | — | | | — | | | — | | | — | | | 314,647 | | | — | | | — | | | 314,647 | |
| | | | | | | | | | | | | | | | | |
| Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | 784 | | | — | | | 784 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Preferred stock dividends(1) | — | | | — | | | — | | | — | | | — | | | (11,693) | | | — | | | — | | | (11,693) | |
Redemption of preferred stock (2) | (3,300,000) | | | (79,677) | | | — | | | — | | | — | | | — | | | — | | | — | | | (79,677) | |
Loss on redemption of preferred stock (2) | — | | | — | | | — | | | — | | | — | | | (2,820) | | | — | | | — | | | (2,820) | |
| | | | | | | | | | | | | | | | | |
Sale of non-controlling interest in BMT (3) | — | | | — | | | — | | | — | | | 31,893 | | | — | | | — | | | — | | | 31,893 | |
Distribution of investment in BM Technologies (4) | — | | | — | | | — | | | — | | | — | | | (32,983) | | | — | | | — | | | (32,983) | |
Restricted stock awards to certain BMT team members (5) | — | | | — | | | — | | | — | | | 19,592 | | | — | | | — | | | — | | | 19,592 | |
| Share-based compensation expense | — | | | — | | | — | | | — | | | 13,860 | | | — | | | — | | | — | | | 13,860 | |
| | | | | | | | | | | | | | | | | |
| Issuance of common stock under share-based-compensation arrangements | — | | | — | | | 1,735,968 | | | 1,736 | | | 21,454 | | | — | | | — | | | — | | | 23,190 | |
| Repurchase of common shares | — | | | — | | | (527,789) | | | — | | | — | | | — | | | — | | | (27,662) | | | (27,662) | |
| Balance, December 31, 2021 | 5,700,000 | | | $ | 137,794 | | | 32,913,267 | | | $ | 34,722 | | | $ | 542,391 | | | $ | 705,732 | | | $ | (4,980) | | | $ | (49,442) | | | $ | 1,366,217 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2014 | — |
| | $ | — |
| | 26,745,529 |
| | $ | 27,278 |
| | $ | 355,822 |
| | $ | 68,421 |
| | $ | (122 | ) | | $ | (8,254 | ) | | $ | 443,145 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 58,583 |
| | — |
| | — |
| | 58,583 |
|
| Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (7,862 | ) | | — |
| | (7,862 | ) |
| Issuance of preferred stock, net of offering costs of $1,931 | 2,300,000 |
| | 55,569 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 55,569 |
|
| Preferred stock dividends | — |
| | — |
| | — |
| | — |
| | — |
| | (2,493 | ) | | — |
| | — |
| | (2,493 | ) |
| Share-based compensation expense | — |
| | — |
| | — |
| | — |
| | 4,862 |
| | — |
| | — |
| | — |
| | 4,862 |
|
| Exercise of warrants | — |
| | — |
| | 7,611 |
| | 8 |
| | 90 |
| | — |
| | — |
| | — |
| | 98 |
|
| Issuance of common stock under share-based-compensation arrangements | — |
| | — |
| | 148,661 |
| | 146 |
| | 1,833 |
| | — |
| | — |
| | 21 |
| | 2,000 |
|
| Balance, December 31, 2015 | 2,300,000 |
| | 55,569 |
| | 26,901,801 |
| | 27,432 |
| | 362,607 |
| | 124,511 |
| | (7,984 | ) | | (8,233 | ) | | 553,902 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 78,702 |
| | — |
| | — |
| | 78,702 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,092 |
| | — |
| | 3,092 |
|
| Issuance of common stock, net of offering costs of $2,238 | — |
| | — |
| | 2,641,677 |
| | 2,642 |
| | 61,389 |
| | — |
| | — |
| | — |
| | 64,031 |
|
| Issuance of preferred stock, net of offering costs of $5,598 | 6,700,000 |
| | 161,902 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 161,902 |
|
| Preferred stock dividends | — |
| | — |
| | — |
| | — |
| | — |
| | (9,515 | ) | | — |
| | — |
| | (9,515 | ) |
| Share-based compensation expense | — |
| | — |
| | — |
| | — |
| | 6,189 |
| | — |
| | — |
| | — |
| | 6,189 |
|
| Exercise of warrants | — |
| | — |
| | 345,414 |
| | 345 |
| | 1,186 |
| | — |
| | — |
| | — |
| | 1,531 |
|
| Issuance of common stock under share-based-compensation arrangements | — |
| | — |
| | 401,025 |
| | 401 |
| | (4,363 | ) | | — |
| | — |
| | — |
| | (3,962 | ) |
| 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 | — |
| | — |
| | — |
| | — |
| | — |
| | 78,837 |
| | — |
| | — |
| | 78,837 |
|
| Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,533 |
| | — |
| | 4,533 |
|
| Preferred stock dividends | — |
| | — |
| | — |
| | — |
| | — |
| | (14,459 | ) | | — |
| | — |
| | (14,459 | ) |
| Share-based compensation expense | — |
| | — |
| | — |
| | — |
| | 6,088 |
| | — |
| | — |
| | — |
| | 6,088 |
|
| Exercise of warrants | — |
| | — |
| | 74,161 |
| | 74 |
| | 985 |
| | — |
| | — |
| | — |
| | 1,059 |
|
| Issuance of common stock under share-based-compensation arrangements | — |
| | — |
| | 1,018,425 |
| | 1,019 |
| | (11,985 | ) | | — |
| | — |
| | — |
| | (10,966 | ) |
| Balance, December 31, 2017 | 9,000,000 |
| | $ | 217,471 |
| | 31,382,503 |
| | $ | 31,913 |
| | $ | 422,096 |
| | $ | 258,076 |
| | $ | (359 | ) | | $ | (8,233 | ) | | $ | 920,964 |
|
(2)Refer to NOTE 13 – SHAREHOLDERS' EQUITY for additional information about the redemption of Series C and Series D Preferred Stock.
(3)Refer to NOTE 3 – DISCONTINUED OPERATIONS for additional information about the sale of non-controlling interest in BMT including the reverse recapitalization of MFAC.
(4)Immediately after the closing of the BMT divestiture, Customers distributed all of its remaining investment in BM Technologies' common stock to its shareholders as special dividends, equivalent to 0.15389 of BM Technologies common stock for each share of Customers common stock. Refer to NOTE 3 – DISCONTINUED OPERATIONS.
(5)At the closing of the BMT divestiture, certain team members of BMT received restricted stock awards in BM Technologies' common stock. Refer to NOTE 3 – DISCONTINUED OPERATIONS.
See accompanying notes to the consolidated financial statements.
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
| | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2021 | | 2020 | | 2019 |
| Cash Flows from Operating Activities | | | | | |
| Net income from continuing operations | $ | 354,268 | | | $ | 143,039 | | | $ | 81,387 | |
| Adjustments to reconcile net income to net cash provided by (used in) continuing operating activities: | | | | | |
| Provision for credit losses on loans and leases | 27,426 | | | 62,774 | | | 24,227 | |
| Depreciation and amortization | 21,667 | | | 18,514 | | | 13,608 | |
| | | | | |
| | | | | |
| Share-based compensation expense | 13,860 | | | 12,883 | | | 9,851 | |
| Deferred taxes | 17,754 | | | (15,852) | | | 9,640 | |
| Net amortization (accretion) of investment securities premiums and discounts | 1,884 | | | (443) | | | 1,016 | |
| Unrealized (gain) loss on investment securities | (2,720) | | | (1,447) | | | (1,299) | |
| (Gain) loss on sale of investment securities | (31,392) | | | (20,078) | | | (1,001) | |
| Loss on sale of foreign subsidiaries | 2,840 | | | — | | | — | |
| Unrealized (gain) loss on derivatives | (3,208) | | | 3,951 | | | (3,162) | |
| Loss on cash flow hedge derivative terminations | 24,467 | | | — | | | — | |
| Settlement of terminated cash flow hedge derivatives | (27,156) | | | — | | | — | |
| | | | | |
| Loss upon acquisition of interest-only GNMA securities | — | | | — | | | 7,476 | |
| | | | | |
| Fair value adjustment on loans held for sale | (1,115) | | | 2,565 | | | — | |
| (Gain) loss on sale of loans | (12,855) | | | (3,558) | | | (2,804) | |
| Origination of loans held for sale | (73,952) | | | (74,828) | | | (48,044) | |
| Proceeds from the sale of loans held for sale | 65,241 | | | 72,999 | | | 47,455 | |
| | | | | |
| Amortization (accretion) of loan net deferred fees, discounts and premiums | (222,693) | | | (2,381) | | | 893 | |
| | | | | |
| | | | | |
| Earnings on investment in bank-owned life insurance | (8,416) | | | (7,009) | | | (7,272) | |
| (Increase) decrease in accrued interest receivable and other assets | 46,655 | | | (108,147) | | | (63,104) | |
| Increase (decrease) in accrued interest payable and other liabilities | 102,985 | | | 50,436 | | | (27,578) | |
| Net Cash Provided by (Used in) Continuing Operating Activities | 295,540 | | | 133,418 | | | 41,289 | |
| Cash Flows from Investing Activities | | | | | |
| Proceeds from maturities, calls and principal repayments on investment securities | 317,046 | | | 236,101 | | | 38,709 | |
| Proceeds from sales of foreign subsidiaries | 3,765 | | | — | | | — | |
| Proceeds from sales of investment securities available for sale | 689,856 | | | 387,810 | | | 97,555 | |
| Purchases of investment securities available for sale | (3,626,377) | | | (1,201,913) | | | — | |
| Origination of mortgage warehouse loans | (55,034,537) | | | (60,948,107) | | | (31,782,542) | |
| Proceeds from repayments of mortgage warehouse loans | 56,365,692 | | | 59,582,277 | | | 30,900,905 | |
| Net (increase) decrease in loans and leases, excluding mortgage warehouse loans | 1,652,994 | | | (4,220,617) | | | 239,018 | |
| Proceeds from sale of loans and leases | 398,015 | | | 26,362 | | | 273,388 | |
| Purchase of loans | (1,907,222) | | | (270,959) | | | (1,167,417) | |
| Purchases of bank-owned life insurance | (46,462) | | | — | | | — | |
| Proceeds from bank-owned life insurance | 1,999 | | | — | | | — | |
| Net proceeds from sales of (purchases of) FHLB, Federal Reserve Bank, and other restricted stock | 6,784 | | | 12,846 | | | 5,471 | |
| | | | | |
| Purchases of bank premises and equipment | (613) | | | (4,668) | | | (1,519) | |
| Proceeds from sales of other real estate owned | 45 | | | 97 | | | 735 | |
| | | | | |
| Proceeds from sales of leased assets under lessor operating leases | 10,092 | | | — | | | — | |
| Purchases of leased assets under lessor operating leases | (32,338) | | | (24,124) | | | (48,552) | |
| | | | | |
| Net Cash Provided by (Used in) Continuing Investing Activities | (1,201,261) | | | (6,424,895) | | | (1,444,249) | |
| Cash Flows from Financing Activities | | | | | |
| Net increase (decrease) in deposits | 5,467,995 | | | 2,660,993 | | | 1,506,700 | |
| Net increase (decrease) in short-term borrowed funds from the FHLB | (150,000) | | | — | | | (748,070) | |
| Net increase (decrease) in federal funds purchased | (175,000) | | | (288,000) | | | 351,000 | |
| Net increase (decrease) in borrowed funds from PPP Liquidity Facility | (4,415,016) | | | 4,415,016 | | | — | |
| Proceeds from long-term borrowed funds from the FHLB | — | | | — | | | 350,000 | |
| Proceeds from issuance of subordinated long-term debt | — | | | — | | | 72,030 | |
| Proceeds from issuance of other long-term borrowings | 98,799 | | | — | | | 24,477 | |
| Repayments of other borrowings | — | | | — | | | (25,000) | |
| | | | | |
| | | | | |
| Redemption of preferred stock | (82,497) | | | — | | | — | |
| Preferred stock dividends paid | (10,833) | | | (14,076) | | | (14,459) | |
| | | | | |
| Purchases of treasury stock | (27,662) | | | — | | | (571) | |
| Payments of employee taxes withheld from share-based awards | (5,568) | | | (2,063) | | | (1,732) | |
| Proceeds from issuance of common stock | 27,762 | | | 923 | | | 2,150 | |
| Proceeds from sale of non-controlling interest in BMT | 26,795 | | | — | | | — | |
| Net Cash Provided by (Used in) Continuing Financing Activities | 754,775 | | | 6,772,793 | | | 1,516,525 | |
| Net Increase (Decrease) in Cash and Cash Equivalents From Continuing Operations | $ | (150,946) | | | $ | 481,316 | | | $ | 113,565 | |
| | | | | |
| | | (continued) | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Cash Flows from Operating Activities | | | | | |
| Net income | $ | 78,837 |
| | $ | 78,702 |
| | $ | 58,583 |
|
| Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | | | |
| Provision for loan losses, net of change to FDIC receivable and clawback liability | 6,768 |
| | 3,041 |
| | 20,566 |
|
| Depreciation and amortization | 10,801 |
| | 5,897 |
| | 3,998 |
|
| Share-based compensation expense | 7,167 |
| | 7,069 |
| | 5,661 |
|
| Deferred taxes | 14,820 |
| | (2,579 | ) | | (10,092 | ) |
| Net amortization of investment securities premiums and discounts | 702 |
| | 891 |
| | 858 |
|
| (Gain) loss on sale of investment securities | (8,800 | ) | | (25 | ) | | 85 |
|
| Impairment loss on investment securities | 12,934 |
| | 7,262 |
| | — |
|
| Gain on sale of SBA and other loans | (4,898 | ) | | (3,685 | ) | | (4,479 | ) |
| Origination of loans held for sale | (30,125,427 | ) | | (36,130,924 | ) | | (29,925,763 | ) |
| Proceeds from the sale of loans held for sale | 30,448,318 |
| | 35,772,081 |
| | 29,504,104 |
|
| Decrease (increase) in FDIC loss sharing receivable net of clawback liability | — |
| | 255 |
| | (2,430 | ) |
| Amortization of fair value discounts and premiums | 88 |
| | 405 |
| | 832 |
|
| Net loss on sales of other real estate owned | 154 |
| | 130 |
| | 761 |
|
| Valuation and other adjustments to other real estate owned, net of FDIC receivable | 298 |
| | 1,473 |
| | 992 |
|
| Earnings on investment in bank-owned life insurance | (7,219 | ) | | (4,736 | ) | | (7,006 | ) |
| Increase in accrued interest receivable and other assets | (32,256 | ) | | (11,538 | ) | | (12,024 | ) |
| (Decrease) increase in accrued interest payable and other liabilities | (16,687 | ) | | 5,819 |
| | 8,706 |
|
| Net Cash Provided by (Used in) Operating Activities | 385,600 |
| | (270,462 | ) | | (356,648 | ) |
| Cash Flows from Investing Activities | | | | | |
| Purchases of investment securities available for sale | (796,594 | ) | | (5,000 | ) | | (231,703 | ) |
| Proceeds from maturities, calls and principal repayments on investment securities available for sale | 48,124 |
| | 64,701 |
| | 76,331 |
|
| Proceeds from sales of investment securities available for sale | 769,203 |
| | 2,852 |
| | 806 |
|
| Net increase in loans | (960,372 | ) | | (794,954 | ) | | (1,341,133 | ) |
| Purchase of loans | (262,641 | ) | | — |
| | — |
|
| Proceeds from sale of loans | 462,518 |
| | 133,104 |
| | 248,060 |
|
| Purchases of bank-owned life insurance | (90,000 | ) | | — |
| | (15,000 | ) |
| Proceeds from bank-owned life insurance | 1,418 |
| | 619 |
| | 3,384 |
|
| Net (purchases of) proceeds from FHLB, Federal Reserve Bank, and other restricted stock | (37,510 | ) | | 22,433 |
| | (8,839 | ) |
| (Payments to) reimbursements from the FDIC on loss sharing agreements | — |
| | (2,049 | ) | | 3,917 |
|
| Purchases of leased assets under operating leases | (22,223 | ) | | — |
| | — |
|
| Purchases of bank premises and equipment | (2,135 | ) | | (5,426 | ) | | (2,939 | ) |
| Proceeds from sales of other real estate owned | 1,680 |
| | 1,051 |
| | 8,890 |
|
| Acquisition of Disbursements business, net | — |
| | (17,000 | ) | | — |
|
| Net Cash Used in Investing Activities | (888,532 | ) | | (599,669 | ) | | (1,258,226 | ) |
| Cash Flows from Financing Activities | | | | | |
| Net (decrease) increase in deposits | (503,633 | ) | | 1,394,276 |
| | 1,376,985 |
|
| Net increase (decrease) in short-term borrowed funds from the FHLB | 743,060 |
| | (831,500 | ) | | (17,700 | ) |
| Net increase in federal funds purchased | 72,000 |
| | 13,000 |
| | 70,000 |
|
| Proceeds from long-term FHLB borrowings | — |
| | 75,000 |
| | 25,000 |
|
| Proceeds from issuance of long-term debt | 98,564 |
| | — |
| | — |
|
| Net proceeds from issuance of preferred stock | — |
| | 161,902 |
| | 55,569 |
|
| Preferred stock dividends paid | (14,459 | ) | | (9,051 | ) | | (2,314 | ) |
| Exercise of warrants | 1,059 |
| | 1,532 |
| | 98 |
|
| Payment of employee taxes withheld from share-based awards | (14,761 | ) | | (5,897 | ) | | — |
|
| Net proceeds from issuance of common stock | 2,716 |
| | 70,985 |
| | 806 |
|
| Net Cash Provided by Financing Activities | 384,546 |
| | 870,247 |
| | 1,508,444 |
|
| Net (Decrease) Increase in Cash and Cash Equivalents | (118,386 | ) | | 116 |
| | (106,430 | ) |
| Cash and Cash Equivalents – Beginning | 264,709 |
| | 264,593 |
| | 371,023 |
|
| Cash and Cash Equivalents – Ending | $ | 146,323 |
| | $ | 264,709 |
| | $ | 264,593 |
|
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2021 | | 2020 | | 2019 |
| Discontinued Operations: | | | | | |
| Net cash (used in) provided by operating activities | $ | (24,376) | | | $ | 18,605 | | | $ | 36,991 | |
| Net cash used in investing activities | — | | | (72) | | | (186) | |
| Net cash provided by financing activities | — | | | (19,000) | | | — | |
| Net Increase (Decrease) in Cash and Cash Equivalents From Discontinued Operations | (24,376) | | | (467) | | | 36,805 | |
| Net Increase (Decrease) in Cash and Cash Equivalents | (175,322) | | | 480,849 | | | 150,370 | |
| Cash and Cash Equivalents – Beginning Balance | 693,354 | | | 212,505 | | | 62,135 | |
| Cash and Cash Equivalents – Ending Balance | $ | 518,032 | | | $ | 693,354 | | | $ | 212,505 | |
| | | | | |
| Supplementary Cash Flow Information: | | | | | |
| Interest paid | $ | 107,916 | | | $ | 131,363 | | | $ | 182,596 | |
| Income taxes paid | 94,093 | | | 3,253 | | | 7,410 | |
| Noncash Investing and Financing Activities: | | | | | |
| Transfer of loans to other real estate owned | $ | — | | | $ | 31 | | | $ | 291 | |
| Distribution of investment in BM Technologies common stock | 32,983 | | | — | | | — | |
| Transfer of loans held for investment to held for sale | — | | | 74,050 | | | 499,774 | |
| Transfer of loans held for sale to held for investment | 55,684 | | | — | | | — | |
| Transfer of multi-family loans held for sale to held for investment | — | | | 401,144 | | | — | |
| | | | | |
| Unsettled purchases of investment securities | — | | | 2,244 | | | — | |
| | | | | |
| 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 | |
(continued)
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(amounts in thousands)
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2017 | | 2016 | | 2015 |
| Supplementary Cash Flow Information | | | | | |
| Interest paid | $ | 101,575 |
| | $ | 71,216 |
| | $ | 51,313 |
|
| Income taxes paid | 40,282 |
| | 57,251 |
| | 38,734 |
|
| Non-cash Items: | | | | | |
| Transfer of loans to other real estate owned | $ | 750 |
| | $ | 703 |
| | $ | 3,467 |
|
| Transfer of loans from held for investment to held for sale | 150,638 |
| | — |
| | — |
|
| Transfer of loans from held for sale to held for investment | — |
| | 25,118 |
| | 30,365 |
|
See accompanying notes to the consolidated financial statements.
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF THE BUSINESS
Customers Bancorp, Inc. (the “Bancorp” or “Customers Bancorp”("Customers Bancorp") is a bank holding company engaged in banking activities through its wholly owned subsidiary, Customers Bank (the “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”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).
Customers Bancorp Inc. and its wholly owned subsidiaries, Customersthe Bank, and non-bank subsidiaries, serve residents and businesses in Southeastern Pennsylvania (Bucks, Berks, Chester, Philadelphia and Delaware Counties); Harrisburg, Pennsylvania (Dauphin County); 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; Dallas, Texas; Orlando, Florida; Wilmington, North Carolina; and nationally for certain loan and deposit products. The Bank has 1312 full-service branches and provides commercial banking products, primarily loans and deposits. In addition, Customers Bank also administratively supports loan and other financial products, including equipment finance leases, to customers through its limited-purpose offices in Boston, Massachusetts,Massachusetts; Providence, Rhode Island,Island; Portsmouth, New Hampshire,Hampshire; Manhattan and Melville, New York,York; Philadelphia and Philadelphia, Pennsylvania.Lancaster, Pennsylvania; Chicago, Illinois; Dallas, Texas; Orlando, Florida; Wilmington, North Carolina; and other locations. The Bank also provides liquidity to residential mortgage originatorsserves specialty niche businesses nationwide, throughincluding its commercial loans to mortgage banking businesses, commercial equipment financing, SBA lending, specialty lending and consumer loans through relationships with fintech companies.
ThroughOn January 4, 2021, Customers Bancorp completed the previously announced divestiture of BankMobile a divisionTechnologies, Inc. ("BMT"), the technology arm of its BankMobile segment, to MFAC Merger Sub Inc., an indirect wholly-owned subsidiary of Megalith Financial Acquisition Corp. ("MFAC"), pursuant to an Agreement and Plan of Merger, dated August 6, 2020, by and among MFAC, MFAC Merger Sub Inc., BMT, Customers Bank, the sole stockholder of BMT, and Customers Bancorp, the parent bank holding company of Customers Bank Customers offers state(as amended on November 2, 2020 and December 8, 2020). Following the completion of the art high tech digital banking services to consumers, students,divestiture of BMT, BankMobile's serviced deposits and loans and the "under banked" nationwide. In October 2017, Customers announced its intentrelated net interest income have been combined with Customers’ financial condition and the results of operations as a single reportable segment. BMT's historical financial results for periods prior to spin-off its BankMobile business directly tothe divestiture are reflected in Customers’ shareholders, to be followed by a merger of BankMobile into Flagship Community Bank ("Flagship"),consolidated financial statements as the most favorable option for disposition of BankMobile to Customers' shareholders rather than sell the business directly to a third party. Until execution of the spin-off and merger transaction, thediscontinued operations. The assets and liabilities of BankMobile will be reportedBMT have been presented as held"Assets of discontinued operations" and used for all periods presented. Previously, Customers had stated its intention to sell BankMobile and, accordingly, all BankMobile-related assets and liabilities were reported as held for sale in"Liabilities of discontinued operations" on the consolidated balance sheet as ofat December 31, 2016, and its2020. BMT's operating results and associated cash flows for the years ended December 31, 2016 and 2015, werehave been presented as discontinued operations. All"Discontinued operations" within the accompanying consolidated financial statements and prior period amounts have been reclassified to conform with the current period consolidated financial statement presentation. See NOTE 3 - SPIN-OFF AND MERGER.– DISCONTINUED OPERATIONS for additional information.
CustomersThe Bank 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., which were sold in June 2021. Refer to NOTE 6 – INVESTMENT SECURITIES for additional information.
NOTE 2 – ACQUISITION ACTIVITY
On June 15, 2016, Customers completed the acquisition of substantially all the assets and the assumption of certain liabilities of the Disbursement business from Higher One. The acquisition was completed pursuant to the terms of an Asset Purchase Agreement (the "Purchase Agreement") dated as of December 15, 2015, between Customers and Higher One. Under the terms of the Purchase Agreement, Customers also acquired all existing relationships with vendors and educational institutions, and all intellectual property and assumed normal business related liabilities. In conjunction with the acquisition, Customers hired approximately 225 Higher One employees primarily located in New Haven, Connecticut that manage the Disbursement business and serve the Disbursement business customers.
The transaction contemplated aggregate guaranteed payments to Higher One of $42 million. The aggregate purchase price payable by Customers was $37 million in cash, with the payments to be made as follows: (i) $17 million in cash paid upon the closing of the acquisition, (ii) $10 million in cash to be paid upon the first anniversary of the closing and (iii) $10 million in cash to be paid upon the second anniversary of the closing. In addition, concurrently with the closing, the parties entered into a Transition Services Agreement pursuant to which Higher One provided certain transition services to Customers through June 30, 2017. As consideration for these services, Customers paid Higher One an additional $5 million in cash. Customers will also be required to make additional payments to Higher One if, during the three years following the closing, revenues from the Disbursement business exceed $75 million in a year. The potential payment is equal to 35% of the amount the Disbursement business related revenue exceeds $75 million in each year. As of December 31, 2017, Customers has not recorded a liability for any additional contingent consideration payable under the Purchase Agreement.
As specified in the Purchase Agreement, the payments of $10 million payable to Higher One upon each of the first and second anniversary of the transaction closing were placed into an escrow account with a third party. Upon the first anniversary of the transaction closing in June 2017, Customers paid to Higher One the first $10 million installment payment. In December 2017, Customers paid $5 million of the second installment payment to Higher One in advance of the second anniversary of the transaction closing pursuant to a mutual agreement between Customers and Higher One. The remaining $5 million of the second installment payment will be held in the escrow account until June 2018.
The escrow account with $5 million and $20 million, respectively, as of December 31, 2017 and 2016, in aggregate restricted cash and the corresponding obligation to pay Higher One pursuant to the terms of the Purchase Agreement have been assigned to BankMobile and are included with "Cash and cash equivalents" and "Accrued interest payable and other liabilities" on the December 31, 2017 and 2016 consolidated balance sheets. For more information regarding Customers' plans for BankMobile and the presentation of BankMobile within the consolidated financial statements, see NOTE 3 - SPIN-OFF AND MERGER.
The assets acquired and liabilities assumed were initially presented at their estimated fair values based on a preliminary allocation of the purchase price. In many cases, the determination of these fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events that were highly subjective and subject to change. The fair value estimates were considered preliminary and subject to change after the closing date of the acquisition if additional information became available. Based on a preliminary purchase price allocation, Customers recorded $4.3 million in goodwill as a result of the acquisition. At December 31, 2016, Customers recorded adjustments to the estimated fair values of prepaid expenses and other liabilities, which resulted in a $1.0 million increase in goodwill. The adjusted amount of goodwill of $5.3 million reflects the excess purchase price over the estimated fair value of the net assets acquired. The goodwill recorded is deductible for tax purposes. The purchase price allocation was considered final as of June 30, 2017. The following table summarizes the final adjusted amounts recognized for assets acquired and liabilities assumed:
|
| | | |
| | |
| (amounts in thousands) | |
| Fair value of assets acquired: | |
| Developed software | $ | 27,400 |
|
| Other intangible assets | 9,300 |
|
| Accounts receivable | 2,784 |
|
| Prepaid expenses | 418 |
|
| Fixed assets, net | 229 |
|
| Total assets acquired | 40,131 |
|
| | |
| Fair value of liabilities assumed: | |
| Other liabilities | 5,735 |
|
| Deferred revenue | 2,655 |
|
| Total liabilities assumed | 8,390 |
|
| | |
| Net assets acquired | $ | 31,741 |
|
| | |
| Transaction cash consideration (1) | $ | 37,000 |
|
| | |
| Goodwill recognized | $ | 5,259 |
|
(1) Includes $10 million payable to Higher One upon each of the first and second anniversary of the transaction closing, which has been placed into an escrow account with a third party (aggregate amount of $20 million). As of December 31, 2017, $15 million of the $20 million installment payments had been paid to Higher One.
The fair value for the developed software was estimated based on expected revenue attributable to the software utilizing a discounted cash flow methodology giving consideration to potential obsolescence. The developed software is being amortized over ten years based on the estimated economic benefits received. The fair values for the other intangible assets represent the value of existing student and university relationships and a non-compete agreement with Higher One based on estimated retention rates and discounted cash flows. Other intangible assets are being amortized over an estimated life ranging from four to twenty years.
NOTE 3 – 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 Customers' BankMobile Technologies, Inc. ("BMT") subsidiary into Flagship, with Customers' shareholders first receiving shares of BMT as a dividend in the spin-off and then receiving shares of Flagship common stock in the merger of BMT into Flagship in exchange for the shares of BMT common stock they received in the spin-off. Flagship will separately purchase BankMobile deposits directly from Customers for cash. Following completion of the spin-off and merger and other transactions contemplated in the Amended Agreement between Customers and Flagship, BMT's 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 December 31, 2017 consolidated balance sheet. The Amended Agreement provides that completion of the transactions will be subject to the receipt of all necessary regulatory approvals, certain Flagship shareholder approvals, successful raising of capital by Flagship and other customary closing conditions. Customers expects the transactions to close in mid-2018.
At December 31, 2016, Customers intended to sell its BankMobile division, and the BankMobile division met the criteria to be classified as held for sale; and accordingly the assets and liabilities of BankMobile were presented as “Assets held for sale,” “Non-interest bearing deposits held for sale,” and “Other liabilities held for sale” and BankMobile’s operating results and associated cash flows 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 and merger transaction should not be reported as held for sale or discontinued operations until execution of the spin-off and merger. 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 assets, liabilities, 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.
BankMobile's assets, liabilities, operating results and cash flows at December 31, 2017 and 2016, and for the years ended December 31, 2017, 2016 and 2015, are reported as held and used in the accompanying consolidated financial statements.
Prior reported December 31, 2016 assets held for sale, non-interest bearing deposits held for sale and other liabilities held for sale have been reclassified to conform with the current period presentation as summarized below. Amounts previously reported as discontinued operations for the years ended December 31, 2016 and 2015, have also been reclassified to conform with the current period presentation as summarized below. Customers will continue reporting the Community Business Banking and BankMobile segment results. See NOTE 24 - BUSINESS SEGMENTS.
The following table summarizes the effects of the reclassification of BankMobile's assets and liabilities from held for sale to held and used on the previously reported consolidated balance sheet as of December 31, 2016:
|
| | | | | | | | | | | |
| | December 31, 2016 As Previously Reported | | Effect of Reclassification From Held For Sale to Held and Used | | December 31, 2016 After Reclassification |
| (amounts in thousands) | | |
| ASSETS | | | | | |
| Cash and cash equivalents | $ | 244,709 |
| | $ | 20,000 |
| | $ | 264,709 |
|
| Loans receivable | 6,142,390 |
| | 12,247 |
| | 6,154,637 |
|
| Bank premises and equipment, net | 12,259 |
| | 510 |
| | 12,769 |
|
| Goodwill and other intangibles | 3,639 |
| | 13,982 |
| | 17,621 |
|
| Assets held for sale | 79,271 |
| | (79,271 | ) | | — |
|
| Other assets | 70,099 |
| | 32,532 |
| | 102,631 |
|
| LIABILITIES | | | | | |
| Demand, non-interest bearing deposits | $ | 512,664 |
| | $ | 453,394 |
| | $ | 966,058 |
|
| Interest-bearing deposits | 6,334,316 |
| | 3,401 |
| | 6,337,717 |
|
| Non-interest bearing deposits held for sale | 453,394 |
| | (453,394 | ) | | — |
|
| Other liabilities held for sale | 31,403 |
| | (31,403 | ) | | — |
|
| Accrued interest payable and other liabilities | 47,381 |
| | 28,002 |
| | 75,383 |
|
| | | | | | |
The following table summarizes the effects of the reclassification of BankMobile's operating results from discontinued operations to continuing operations for the year ended December 31, 2016:
|
| | | | | | | | | | | |
| | Year Ended December 31, 2016 As Previously Reported | | Effect of Reclassification From Discontinued Operations | | Year Ended December 31, 2016 After Reclassification |
| (amounts in thousands) | | |
| Interest income | $ | 322,539 |
| | $ | — |
| | $ | 322,539 |
|
| Interest expense | 73,023 |
| | 19 |
| | 73,042 |
|
| Net interest income | 249,516 |
| | (19 | ) | | 249,497 |
|
| Provision for loan losses | 2,345 |
| | 696 |
| | 3,041 |
|
| Non-interest income | 23,165 |
| | 33,205 |
| | 56,370 |
|
| Non-interest expenses | 131,217 |
| | 47,014 |
| | 178,231 |
|
| Income from continuing operations before income taxes | 139,119 |
| | (14,524 | ) | | 124,595 |
|
| Provision for income taxes | 51,412 |
| | (5,519 | ) | | 45,893 |
|
| Net income from continuing operations | 87,707 |
|
| (9,005 | ) | | 78,702 |
|
| Loss from discontinued operations before income taxes | (14,524 | ) | | 14,524 |
| | — |
|
| Income tax benefit from discontinued operations | (5,519 | ) | | 5,519 |
| | — |
|
| Net loss from discontinued operations | (9,005 | ) | | 9,005 |
| | — |
|
| Net income | 78,702 |
| | — |
| | 78,702 |
|
| Preferred stock dividend | 9,515 |
| | — |
| | 9,515 |
|
| Net income available to common shareholders | $ | 69,187 |
| | $ | — |
| | $ | 69,187 |
|
The following table summarizes the effects of the reclassification of BankMobile's operating results from discontinued operations to continuing operations for the year ended December 31, 2015:
|
| | | | | | | | | | | |
| | Year Ended December 31, 2015 As Previously Reported | | Effect of Reclassification From Discontinued Operations
| | Year Ended December 31, 2015 After Reclassification |
| (amounts in thousands) | | |
| Interest income | $ | 249,850 |
| | $ | — |
| | $ | 249,850 |
|
| Interest expense | 53,551 |
| | 9 |
| | 53,560 |
|
| Net interest income | 196,299 |
| | (9 | ) | | 196,290 |
|
| Provision for loan losses | 20,566 |
| | — |
| | 20,566 |
|
| Non-interest income | 27,572 |
| | 145 |
| | 27,717 |
|
| Non-interest expenses | 107,568 |
| | 7,378 |
| | 114,946 |
|
| Income from continuing operations before income taxes | 95,737 |
| | (7,242 | ) | | 88,495 |
|
| Provision for income taxes | 32,664 |
| | (2,752 | ) | | 29,912 |
|
| Net income from continuing operations | 63,073 |
| | (4,490 | ) | | 58,583 |
|
| Loss from discontinued operations before income taxes | (7,242 | ) | | 7,242 |
| | — |
|
| Income tax benefit from discontinued operations | (2,752 | ) | | 2,752 |
| | — |
|
| Net loss from discontinued operations | (4,490 | ) | | 4,490 |
| | — |
|
| Net income | 58,583 |
| | — |
| | 58,583 |
|
| Preferred stock dividend | 2,493 |
| | — |
| | 2,493 |
|
| Net income available to common shareholders | $ | 56,090 |
| | $ | — |
| | $ | 56,090 |
|
NOTE 4 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation
The consolidated financial statements have been prepared in conformity with U.S. GAAP and pursuant to the rules and regulations of the SEC. The accounting and reporting policies of Customers Bancorp Inc. and subsidiaries are in conformity with accounting principles generally accepted in the United States of AmericaU.S. GAAP and predominant practices of the banking industry. The preparation of financial statements requires management to make estimates and assumptions that affect the reported balances of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimatesThe allowance for credit losses ("ACL") is a material estimate that areis particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, credit deterioration and expected cash flows of purchased-credit-impaired loans, valuation of deferred tax assets, other-than-temporary impairment losses on securities, fair values of financial instruments, fair value of stock option awards and annual goodwill and intangible asset impairment analysis.near-term.
Reclassifications
As described in NOTE 3 - SPIN-OFF AND MERGER, during third quarter 2017 Customers reclassified BankMobile, a segment which Customers previously intended to sell directly to a third party but decided to divest in a spin-off to its shareholders, was reclassified from held for sale to held and used because it no longer met the held-for-sale criteria. Certain prior period amounts and note disclosures (including NOTE 5, NOTE 9, NOTE 10, NOTE 11, NOTE 16, NOTE 20 and NOTE 23) have been reclassified to conform with the current period presentation.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the parent companyCustomers Bancorp and its wholly owned subsidiaries, including Customers Bank, CB Green Ventures Pte Ltd. and CUBI India Ventures Pte Ltd., as well as Customers Bank's wholly owned subsidiaries, CIC, Inc., BankMobile Technologies, Inc., Customers Commercial Finance, LLC ("CCF") and Devon Service PA LLC. All significant intercompany balances and transactions have been eliminated in consolidation.
The purpose of consolidated financial statements is to present the results of operations and the financial position of Customers and its subsidiaries as if the consolidated group were a single economic entity. In accordance with the applicable accounting guidance for consolidations, the consolidated financial statements include any voting interest entity ("VOE") in which Customers has a controlling financial interest and any variable interest entity ("VIE") for which Customers is deemed to be the primary beneficiary. Customers
generally consolidates its VOEs if Customers, directly or indirectly, owns more than 50% of the outstanding voting shares of the entity and the non-controlling shareholders do not hold any substantive participating or controlling rights. Customers is also involved with various entities in the normal course of its business that are deemed to be VIEs. Customers evaluates VIEs to understand the purpose and design of the entity, and its involvement in the ongoing activities of the VIE and will consolidate the VIE if it is deemed to be the primary beneficiary. Customers is deemed to be the primary beneficiary if it has (i) the power to direct the activities of the VIE that most significantly affect the VIE's economic performance and (ii) an obligation to absorb losses of the VIE, or the right to receive benefits from the VIE, that could potentially be significant to the VIE. Refer to NOTE 6 – INVESTMENT SECURITIES for additional information.
Cash and Cash Equivalents and Statements of Cash Flows
Cash and cash equivalents include cash on hand, amounts due from banks and interest-bearing deposits with banks with a maturity date of three months or less and are recorded at cost. The carrying value of cash and cash equivalents is a reasonable estimate of its approximate fair value. Changes in the balances of cash and cash equivalents are reported inon the consolidated statements of cash flows. Cash receipts from the repayment or sale of loans are classified within the statement of cash flows based on management's original intent upon origination of the loan, as prescribed by accounting guidance related to the statement of cash flows. Cash used upon initial funding of Customers'Commercial mortgage warehousing lending transactions and proceeds received when the mortgagewarehouse loans are sold into the secondary market are classified as operatingheld for investment and presented at "Loans receivable, mortgage warehouse, at fair value" on the consolidated balance sheets and the cash flow activities withinassociated with these commercial mortgage warehouse lending activities are reported as investing activities on the statementconsolidated statements of cash flows.
Restrictions on Cash and Amounts due from Banks
CustomersThe Bank is usually required to maintain average balances at a certain level of cash and amounts on deposit with the Federal Reserve Bank. Because of the COVID-19 pandemic, the Federal Reserve temporarily waived this requirement beginning in 2020. Customers Bank generally maintains balances in excess of the required levels at the Federal Reserve Bank. At December 31, 20172021 and 2016,2020, these required reserve balances were $164.7 million and $149.3 million, respectively.
In connection with the acquisition of the Disbursement business from Higher One, as of 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 as described in NOTE 2 - ACQUISITION ACTIVITY. In connection with the spin-off and merger, Customers had $1.0 million in an escrow account with a third party that is reserved for payment to Flagship in the event the agreement is terminated for reasons described in the agreement. See NOTE 3 - SPIN-OFF AND MERGER for additional details related to this escrow account.zero.
Business Combinations
Business combinations are accounted for by applying the acquisition method in accordance with Accountings Standards Codification ("ASC")ASC 805, Business Combinations. Under the acquisition method, identifiable assets acquired and liabilities assumed are measured at their fair values as of the date of acquisition and are recognized separately from goodwill. The results of operations of the acquired entity are included in the consolidated statement of income from the date of acquisition. Customers recognizes goodwill when the acquisition price exceeds the estimated fair value of the net assets acquired.
Investment Securities
Customers acquirespurchases securities, largely agency-guaranteed mortgage-backed securities, agency-guaranteed and private label collateralized mortgage obligations, asset-backed securities, collateralized loan obligations, commercial mortgage-backed securities and corporate notes, to effectively utilize cash and capital, maintain liquidity and to generate earnings. Security transactions are recorded as of the trade date. SecuritiesDebt securities are classified at the time of acquisition as available for sale, held to maturityavailable-for-sale ("AFS"), held-to-maturity ("HTM") or trading, and their classification determines the accounting as follows:
Available for sale: Investment securities classified as available for saleAFS are those debt and equity securities that Customers intends to hold for an indefinite period of time but not necessarily to maturity. Investment securities available for saleclassified as AFS are carried at fair value. Unrealized gains or losses are reported as increases or decreases in accumulated other comprehensive income ("AOCI"), net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of the specific securities sold, are included in earnings and recorded aton the trade date. Premiums and discounts are recognized in interest income using the interest method over the terms of the securities.
For AFS debt securities in an unrealized loss position, Customers first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, Customers evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an ACL on AFS securities is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an ACL on AFS securities is recognized in other comprehensive income.
Changes in the ACL on AFS securities are recorded as provision, or reversal of provision for credit losses on AFS securities in other non-interest income within the consolidated income statement. Losses are charged against the ACL on AFS securities when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable on AFS debt securities totaled $11.0 million and $4.2 million at December 31, 2021 and 2020, respectively, and is excluded from the estimate of credit losses.
Interest-only GNMA securities: On June 28, 2019, Customers obtained ownership of certain 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, as further described in NOTE 6 – INVESTMENT SECURITIES. Upon acquisition, Customers elected the fair value option for these interest-only GNMA securities, with changes in fair value reported as unrealized gain (loss) on investment securities within non-interest income. These securities were sold for $15.4 million with a realized gain of $1.0 million during the year ended December 31, 2020.
Held to maturity: Investment securities classified as held to maturityHTM are those debt securities that Customers has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs, or changes in general economic conditions. These securities are carried at cost, adjusted for the amortization of premiums and accretion of discounts, computed by a method which approximates the interest method over the terms of the securities. ACL on HTM securities is a contra-asset valuation account, calculated in accordance with the Accounting Standards Codification ("ASC") 326, Financial Instruments - Credit Losses ("ASC 326"), that is deducted from the amortized cost basis of HTM securities to present management's best estimate of the net amount expected to be collected. HTM securities are charged-off against the allowance when deemed uncollectible by management. Adjustments to the ACL will be reported in the income statement as a component of provision, or reversal of provision for credit losses on HTM securities in other non-interest income within the consolidated income statement. The expected credit losses on HTM securities are determined on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. There were no securities classified as held to maturityHTM as of December 31, 20172021 and 2016.2020.
Trading: InvestmentEquity securities: Equity securities classified as trading are those debt and equity securities that management intends to actively trade. These securitieswith a readily determinable fair value are carried at their current fair value, with changes in fair value reported in other non-interest income. Customers does not actively trade securities.
For available-for-sale and held-to-maturityEquity securities management periodically assesses whether the securitieswithout readily determinable fair values are other than temporarily impaired. Other-than-temporarycarried at cost, minus impairment, means that management believes a security’s decline in fair value below its amortized cost basis is due to factors that could include the issuer’s inability to pay interestif any, plus or dividends, its potential for default and/or other factors. When a held-to-maturity or available-for-sale debt security is assessed for other-than-
temporary impairment, management has to first consider (a) whether Customers intends to sell the security, and (b) whether it is more likely than not that Customers will be required to sell the security prior to recovery of its amortized cost basis.
If one of these circumstances applies to a security, an other-than-temporary impairment loss is recognized in the consolidated statements of income equal to the full amount of the decline in fair value below the amortized cost basis. If neither of these circumstances applies to a security, but Customers does not expect to recover the entire amortized cost basis, an other-than-temporary impairment has occurred that must be separated into two categories for debt securities: (a) the amount related to a credit loss and (b) the amount related to other factors. In determining the amount of other-than-temporary impairment attributable to credit loss, management compares the present value of cash flows expected to be collected to the amortized cost basis of the security. The portion of the total other-than-temporary impairment attributed to a credit loss is recognized in earnings (as the difference between the fair value and the present value of the estimated cash flows expected to be collected), while the amount related to all other factors is recognized in accumulated other comprehensive income. The total other-than-temporary impairment loss is presented in the statement of income, less the portion recognized in accumulated other comprehensive income. When a debt security becomes other-than-temporarily impaired, its amortized cost basis is reduced to reflect the portion of the total impairment related to credit loss.
For marketable equity securities, Customers considers the issuer’s financial condition, capital strength and near-term prospects to determine whether an impairment is temporary or other-than-temporary. Customers also considers the volatility of a security’sminus changes resulting from observable price in comparison to the market as a whole and any recoveries or declines in fair value subsequent to the balance sheet date. If management determines that the impairment is other-than-temporary, the entire amount of the impairment as of the balance sheet date is recognized in earnings even if the decision to sell the security has not been made. The fair value of the security becomes the new amortized cost basis of the investment and is not adjusted for subsequent recoveries in fair value.
Beginning January 1, 2018, changes in the fair value of marketable equity securities classified as availableorderly transactions for sale will be recorded in earnings 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.identical or similar investments.
Loan Accounting FrameworkFramework
The accounting for a loan depends on management’s strategy for the loan and on whether the loan was credit impaireddeteriorated at the date of acquisition. The Bank accounts for loans based on the following categories:
•Loans held for sale,
•Loans at fair value,
•Loans receivable, and
•Purchased credit-deteriorated loans.
The discussion that follows describes the accounting for loans in these categories.
Loans Held for Sale and Loans at Fair Value
Loans originated or acquiredpurchased by Customers with the intent to sell them in the secondary market are carried either at the lower of cost or fair value, determined in the aggregate, or at fair value, depending upon an election made at the time the loan is originated.originated or purchased. These loans are generally sold on a non-recourse basis with servicing released. Gains and losses on the sale of loans accounted for at the lower of cost or fair value are recognized in earnings based on the difference between the proceeds received and the carrying amount of the loans, inclusive of deferred origination fees and costs, if any.
As a result of changes in events and circumstances or developments regarding management’s view of the foreseeable future, loans not originated or acquiredpurchased with the intent to sell may subsequently be designated as held for sale. These loans are transferred to the held-for-sale portfolio at the lower of amortized cost or fair value. When the recorded investment of the loan exceeds its fair value at the date of transfer to the held-for-sale portfolio, the excess will be recognized as a charge against the allowance for loan losses to the extent the loan's reduction in fair value has already been provided for in the allowance for loan losses. Any subsequent lower of cost or fair value adjustments are recognized as a valuation allowance with chargescharge recognized in non-interest income. If it is determined that a loan should be transferred from held for sale to held for investment, the loan is transferred at the lower of cost or fair value on the transfer date, which coincides with the date of change in management’s intent. The difference between the carrying value of the loan and the fair value, if lower, is reflected as a loan discount at the transfer date, which reduces its carrying value. Subsequent to the transfer, the discount is accreted into earnings as an increase to interest income over the life of the loan using the effective interest method.
Loans originated or acquiredpurchased by Customers with the intent to sell them for which fair value accounting is elected are reported at fair value, with changes in fair value recognized in earnings in the period in which they occur. Upon sale, any difference
between the proceeds received and the carrying amount of the loan is recognized in earnings. No fees or costs related to such loans are deferred, so they do not affect the gain or loss calculation at the time of sale.
An ACL is not maintained on loans designated as held for sale or reported at fair value.
Loans Receivable - Mortgage Warehouse, at Fair Value
Certain mortgage warehouse lending transactions subject to master repurchase agreements are designated as held for sale and reported at fair value based on an election made to account for the loans at fair value. Pursuant to these agreements, Customers funds the pipelines for these mortgage lenders by sending payments directly to the closing agents for funded loans (i.e., the purchase event) and receives proceeds directly from third party investors when the loans are sold into the secondary market (i.e,market. Commercial mortgage warehouse loans are classified as held for investment and presented as "Loans receivable, mortgage warehouse, at fair value" on the repurchase event).
consolidated balance sheets. An allowance for loan lossesACL is not maintained on commercial mortgage warehouse loans designated as held for sale or reported at fair value.
Loans Receivable, PPP
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") was signed into law and contained substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic and stimulate the economy. The CARES Act includes the Small Business Administration's ("SBA") Paycheck Protection Program ("PPP") designed to aid small-and medium-sized businesses through federally guaranteed loans distributed through banks. Customers is a participant in the PPP. For additional information about the accounting for PPP loans refer to "Accounting and Reporting Considerations related to COVID-19, Accounting for PPP Loans" section below.
Loans and Leases Receivable
Loans and leases receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are reported at their outstanding unpaid principal balances, net of an allowance for loan lossesACL and any deferred fees. Interest income is accrued on the unpaid principal balance. Loan and lease origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment ofto the yield (interest income) of the related loans and leases using the level-yield method without anticipating prepayments. Customers is generally amortizing these amounts over the contractual life of the loans.loans and leases.
The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past due or when management has doubts about further collectibility of principal or interest, even though the loan is currently performing. A loan or lease may remain on accrual status if it is in the process of collection and is well secured. When a loan or lease is placed on non-accrual status, unpaid accrued interest previously credited to income is reversed. Interest received on non-accrual loans and leases is generally applied against principal until all principal has been recovered. Thereafter, payments are recognized as interest income until all unpaid amounts have been received. Generally, loans and leases are restored to accrual status when the obligationloan is brought current and has performed in accordance with the contractual terms for a minimum of six months, and the ultimate collectibility of the total contractual principal and interest is no longer in doubt.
Purchased Credit-Deteriorated Loans and Leases
Customers believes that the varying circumstances under which it purchasesPurchased credit-deteriorated ("PCD") assets are acquired individual loans and leases (or acquired groups of loans and leases with similar risk characteristics) that, as of the diversedate of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by an acquirer’s assessment. PCD loans and leases are recorded at their purchase price plus the ACL expected at the time of acquisition, or “gross up” of the amortized cost basis. The January 1, 2020 transition adjustment related to the adoption of ASC 326, discussed below, was established for these loans purchased should driveand leases without affecting the decisionincome statement or retained earnings. Changes in the current estimate of the ACL after acquisition from the estimated allowance previously recorded are reported in the income statement as to whetherprovision for credit losses or reversal of provision for credit losses in subsequent periods as they arise. Purchased loans in a portfolio should be deemed to be purchased credit-impaired loans. Therefore, loan purchases are evaluated on a case-by-case basis to determine the appropriate accounting treatment. Loans acquiredor leases that do not have evidence of credit deterioration at the purchase datequalify as PCD assets are accounted for similar to originated assets, whereby an ACL is recognized with a corresponding increase to the income statement provision for credit losses. Evidence that purchased loans and leases, measured at amortized cost, have more-than-insignificant deterioration in accordance with ASC 310-20, Nonrefundable Fees and Other Costs, and loans acquired with evidence of credit deteriorationquality since origination and, for which it is probable that all contractually required payments will not be collected are accounted for in accordance with ASC 310-30, Loanstherefore meet the PCD definition, may include loans and Debt Securities Acquired with Deteriorated Credit Quality.
Loansleases that are purchased that do not have evidence of credit deterioration
Purchased performing loans are initially recorded at fair value and include credit and interest rate marks associated with acquisition accounting adjustments. Purchase premiums or discounts are subsequently amortized or accreted as an adjustment to yield over the estimated contractual lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. An allowance for loan losses is recorded for any credit deteriorationpast-due, in these loans subsequent to acquisition.
Loans that are purchased that have evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected
For these types of loan purchases, evidence of deteriorated credit quality may include past-due and non-accrual status, poor borrower credit scores andscore, recent loan-to-value percentages.percentages and other standard indicators (i.e., troubled debt restructurings, charge-offs, bankruptcy).
Allowance for Credit Losses
The fair value of loans with evidence of credit deteriorationACL is recordeda valuation account that is deducted from the loan or lease’s amortized cost basis to present the net of a nonaccretable difference and accretable yield. The difference between contractually required payments at acquisition and the cash flowsamount expected to be collected at acquisition is the nonaccretable difference that is not included in the carrying amount of acquired loans. Subsequent to acquisition, estimates of cash flows expected to be collected are updated each reporting period based on updated assumptions regarding default rates, loss severities and other factors that are reflective of current market conditions. Subsequent decreases in expected cash flows will generally result in a provision for loan losses. Subsequent increases in expected cash flows will result in a reversal of the provision for loan losses to the extent of prior charges or a reclassification of the difference from
nonaccretable to accretable with a positive impact on accretion of interest income in future periods. Further, any excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of those cash flows.
Purchased credit-impaired ("PCI") loans acquired in the same fiscal quarter may be aggregated into one or more pools, provided that the loans have similar risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows. On a quarterly basis, Customers re-estimates the total cash flows (both principalleases. Loans and interest) expected to be collected over the remaining life of each pool. These estimates incorporate assumptions regarding default rates, loss severities, the amounts and timing of prepayments and other factors that reflect the then-current market conditions. If the timing and/or amounts of expected cash flows on purchased credit-impaired loans are determined not to be reasonably estimable, no interest is accreted, and the loans are reported as non-accrual loans; however, when the timing and amounts of expected cash flows for purchased credit-impaired loans are reasonably estimable, interest is accreted, and the loans are reported as performing loans.
Allowance for Loan Losses
The allowance for loan losses is established as losses that are estimated to have occurred and are recognized through provisions for loan losses. Loansleases deemed to be uncollectible are charged against the allowance for loan losses,ACL on loans and leases, and subsequent recoveries, if any, are credited to the allowanceACL on loans and leases. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Changes to the ACL on loans and leases are recorded through the provision for loan losses.credit losses on loans and leases. The allowance for loan lossesACL on loans and leases is maintained at a level considered appropriate to absorb probable incurred loanexpected credit losses inherent inover the loanexpected life of the portfolio as of the reporting date.
Customers segments its loan portfolio into groups ofThe ACL on loans withand leases is measured on a collective (pool) basis when similar risk characteristics for purposes of estimating the allowance for loan losses.
exist. Customers' loan groupsportfolio segments include commercial and consumer. Each of these two loan portfolio segments is comprised of multiple loan classes. Loan classes are characterized by similarities in loan type, collateral type, risk attributes and the manner in which credit risk is assessed and monitored. The commercial segment is composed of multi-family, commercial and industrial, commercial real estate owner and non-owner occupied, commercial real estate non-owner occupied and construction loan classes. The consumer segment is composed of residential real estate, manufactured housing other consumer and PCI loans.installment loan classes. Loans originated pursuant tothat do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the rules and regulations ofcollective evaluation. For individually assessed loans, see related details in the Small Business Administration ("SBA loans") are further segmented. Customers also further segments its residential real estate portfolio into two classes based upon certain risk characteristics: first-mortgageIndividually Assessed Loans section below.
The ACL on collectively assessed loans and home equity loans and lines of credit. The remaining loan groups are also considered classes for purposes of monitoring and assessing credit quality based on certain risk characteristics. Additionally, within each loan groupleases is measured over the acquired loans that are accounted for under ASC 310-10 are further segmented.
The total allowance for loan losses consists of an allowance for impaired loans, a general allowance for losses and may also include residual non-specific reserve amounts. The allowance for loan losses is maintained at a level considered adequate to provide for losses that are estimated to have been incurred. Management performs a quarterly assessment of the adequacy of the allowance for loan losses, which is based on Customers' past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, compositionexpected life of the loan portfolio,or lease using lifetime loss rate models which consider historical loan performance, loan or borrower attributes and forecasts of future economic conditions in addition to information about past events and current conditions. Significant loan/borrower attributes utilized in the models include origination date, maturity date, collateral property type, internal risk rating, delinquency status, borrower state and FICO score at origination. Customers uses external sources in the creation of its forecasts, including current economic conditions peer and industry dataforecasts for macroeconomic variables over its reasonable and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptiblesupportable forecast period (e.g., GDP growth rate, unemployment rate, BBB spread, commercial real estate and home price index). After the reasonable and supportable forecast period, which ranges from two to significant revision as more information becomes available. Customers' current methodologyfive years, the models revert the forecasted macroeconomic variables to their historical long-term trends, without specific predictions for determining the allowance foreconomy, over the expected life of the pool. For certain loan losses is based onportfolios with limited historical loss experience, Customers calibrates the modelled lifetime loss rates peer and industry data, current economic conditions, risk ratings, allowances on loans identified as impaired and other qualitative adjustments as considered appropriate.
The impaired-loan component of the allowance for loan losses generally relates to loans for which it is probable that Customers will be unable to collect all amounts due according to the contractual terms of the loan agreements. Customers analyzes certain loans in its portfolio for impairment in accordance with ASC 310-10-35. Customers' impaired loans generally include loans that have been (i) placed on non-accrual, (ii) restructured in a troubled debt restructuring, regardless of their payment status and (iii) charged-off to their net realizable value. For such loans, an allowance is established when the (i) discounted cash flows, (ii) collateral value or (iii) the impaired loan estimated fair value is lower than the carrying value of the loan.
The general component of the allowance for loan losses covers groups of loans by loan class, including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity loans, home equity lines of credit and other consumer loans. These pools of loans are evaluated for loss exposure based upon industry, peer or Customers' historical loss rates for each of these groups of loans. After determining the appropriate historicalindustry information. The lifetime loss rate models also incorporate prepayment assumptions into estimated lifetime loss rates. Customers runs the current expected credit losses ("CECL") impairment models on a quarterly basis and qualitatively adjusts model results for each group of loans, management considers current qualitative or environmentalrisk factors that are likely to cause estimatednot considered within the models but which are relevant in assessing the expected credit losses as of the evaluation date to differ from the historical loss experience. The overall effect of these factors is recorded as an adjustment that, as appropriate, increases or decreases the historical loss rate applied towithin the loan group. The qualitative factors that managementand lease pools. Management generally considers include the following:following qualitative factors:
National, regional and local economic and business conditions, including review of changes in the unemployment rate;
•Volume and severity of past-due loans, non-accrual loans and classified loans;
•Lending policies and procedures, including underwriting standards and historically based loss/collection, charge-off and recovery practices;
•Nature and volume of the portfolio;
•Existence and effect of any credit concentrations and changes in the level of such concentrations;
•Risk ratings;
Changes in•The value of the values ofunderlying collateral for loans that are not collateral dependent loans;dependent;
•Changes in the quality of the loan review system;
•Experience, ability and depth of lending management and staff; and
•Other external factors, such as changes in the legal, regulatory or competitive environment.environment; and
•Model and data limitations.
A residual reserve may be maintainedCustomers, as applicable, also qualitatively adjusts the model results for any uncertainty related to cover uncertainties that could affect management’s estimate of probable losses. The residual reserve amount reflects the margin of imprecision inherent in the underlying assumptionseconomic forecasts used in the methodologiesmodeled credit loss estimates using multiple alternative scenarios other than the forecasted baseline scenario to arrive at a scenario or a composite scenario supporting the period-end ACL balance. This approach utilizes weighting of the differences between the forecasted baseline and upside and downside scenarios. Customers has elected to not estimate an ACL on accrued interest receivable, as it already has a policy in place to reverse or write-off accrued interest, through interest income, for estimating credit lossesnon-accruals loans or leases in a timely manner. Accrued interest receivable is presented as a separate financial statement line item in the portfolio.consolidated balance sheet.
The discussion that follows describes Customers' underwriting policies for its primary lending activities and its credit monitoring and charge-off practices.
Commercial and industrial loans and leases are underwritten after evaluating historical and projected profitability and cash flow to determine the borrower’s ability to repay its obligation as agreed. Commercial and industrial loans and leases are made primarily based
on the identified cash flow of the borrower and secondarily on the underlying collateral supporting the loan or lease facility. Accordingly, the repayment of a commercial and industrial loan or lease depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.
Construction loans are underwritten based upon a financial analysis of the developers and property owners and construction cost estimates, in addition to independent appraisal valuations. These loans rely on the value associated with the project upon completion. TheseThe cost and valuation amounts used are estimates and may be inaccurate. Construction loans generally involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the success of the completed project. Sources of repayment of these loans would be permanent financing upon completion or sales of the developed property. These loans are closely monitored by on-site inspections and are considered to be of a higher risk than other real estate loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term financing, interest-rate sensitivity and governmental regulation of real property.
Commercial real estate and multi-family loans are subject to the underwriting standards and processes similar to commercial and industrial loans, in addition to those underwriting standards for real estate loans. These loans are viewed primarily as cash flow dependent and secondarily as loans secured by real estate. Repayment of these loans is generally dependent upon the successful operation of the property securing the loan, or the principal business conducted on the property securing the loan, to generate sufficient cash flows to service the debt. In addition, the underwriting considers the amount of the principal advanced relative to the property value. Commercial real estate and multi-family loans may be adversely affected by conditions in the real estate markets or the economy in general. Management monitors and evaluates commercial real estate and multi-family loans based on cash flow estimates, collateral valuation and risk-rating criteria. Customers also utilizes third-party experts to provide environmental and market valuations. Substantial effort is required to underwrite, monitor and evaluate commercial real estate and multi-family loans.
Residential real estate loans are secured by one-to-four dwelling units. This group is further divided into first mortgage and home equity loans. First mortgages are originated at a loan to value ratio of 80% or less. Home equity loans have additional risks as a result of typically being in a second position or lower in the event collateral is liquidated.
Manufactured housing loans are loans that are secured by the manufactured housing unit where the borrower may or may not own the underlying real estate and therefore have a higher risk than a residential real estate loan.
Other consumerInstallment loans consist primarily of unsecured loans to individuals which are originated through Customers' retail network andor acquired through purchases from third parties, primarily market place lenders. None of the loans are typically secured by personal property or are unsecured. Consumersub-prime at the time of origination. Customers considers sub-prime borrowers to be those with FICO scores below 660. Installment loans have a greater credit risk than residential loans because of the difference in the underlying collateral, if any. The application of various federal and state bankruptcy and insolvency laws may limit the amount that can be recovered on such loans.
Delinquency status and other borrower characteristics are used to monitor loans and leases and identify credit risks, and the general reserves are established based on the expected incurred net charge-offs, adjusted for qualitative factors.
Charge-offs on commercial and industrial, construction, multi-family and commercial real estate loans and leases are recorded when management estimates that there are insufficient cash flows to repay the contractual loan obligation based upon financial information available and valuation of the underlying collateral. Shortfalls in the underlying collateral value for loans or leases determined to be collateral dependent are charged-off immediately.
Customers also takes into account the strength of any guarantees and the ability of the borrower to provide value related to those guarantees in determining the ultimate charge-off or allowance associated with an impaired loan.loan or lease. Accordingly, Customers may charge-off a loan or lease to a value below the net appraised value if it believes that an expeditious liquidation is desirable under the circumstance, and it has legitimate offers or other indications of interest to support a value that is less than the net appraised value. Alternatively, Customers may carry a loan or lease at a value that is in excess of the appraised value in certain circumstances, such as when Customers has a guarantee from a borrower that Customers believes has realizable value. In evaluating the strength of any guarantee, Customers evaluates the financial wherewithal of the guarantor, the guarantor’s reputation and the guarantor’s willingness and desire to work with Customers. Customers then conducts a review of the strength of athe guarantee on a frequency established as the circumstances and conditions of the borrower warrant.
Customers records charge-offs for residential real estate, consumerinstallment and manufactured housing loans after 120 days of delinquency or sooner when cash flows are determined to be insufficient for repayment. Customers may also charge-off these loans below the net appraised valuation if Customers holds a junior-mortgage position in a piece of collateral whereby the risk to acquiring control of the property through the purchase of the senior-mortgage position is deemed to potentially increase the risk of loss upon liquidation due to the amount of time to ultimately marketsell the property and the volatile market conditions. In such cases, Customers may abandon its junior mortgage and charge-off the loan balance in full.
Estimates of cash flows expected to be collected for purchased credit-impaired loans are updated each reporting period. If Customers estimates decreases in expected cash flows to be collected after acquisition, Customers charges the provision for loan losses and establishes an allowance for loan losses.
Credit Quality Factors
Commercial and industrial, multi-family, commercial real estate and construction loans and leases are each assigned a numerical rating of risk based on an internal risk-rating system. The risk rating is assigned at loan origination and indicates management's estimate of credit quality. Risk ratings are reviewed on a periodic or “as needed” basis. Residential real estate, manufactured housing and other consumerinstallment loans are evaluated primarily based on payment activity of the loan. Risk ratings are not established for residential real estate, home equity loans, manufactured housing loans, 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 on aggregate payment history (through the monitoring of delinquency levels and trends). For additional information about credit quality factorrisk ratings refer to NOTE 98 – LOANS AND LEASES RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES.CREDIT LOSSES ON LOANS AND LEASES.
Impaired LoansAllowance for Credit Losses on Lending-Related Commitments
A loan is generally considered impaired when, based on current information and events,Customers estimates expected credit losses over the contractual period in which it is probable that Customers will be unableexposed to collect all amounts due accordingcredit risk on contractual obligations to extend credit, unless the contractual termsobligation is unconditionally cancellable by Customers. The ACL on lending-related commitments is recorded in accrued interest payable and other liabilities in the consolidated balance sheet and is recorded as a provision for credit losses within other non-interest expense in the consolidated income statement. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives. Customers estimates the expected credit losses for undrawn commitments using a usage given default calculation. The lifetime loss rates for off-balance sheet credit exposures are calculated in the same manner as on-balance sheet credit exposures, using the same models and economic forecasts, adjusted for the estimated likelihood that funding will occur. Please refer to NOTE 18 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK for additional information regarding Customers' ACL on lending related commitments.
Individually Assessed Loans and Leases
ASC 326 provides that a loan agreement. Customers' impairedor lease is measured individually if it does not share similar risk characteristics with other financial assets. For Customers, loans generallyand leases which are identified to be individually assessed include loans that have been (i) placed on non-accrual, (ii) restructured in a troubled debt restructuring, regardless of their payment statusrestructurings and (iii) charged-off to their net realizable value.collateral dependent loans. Factors considered by management in determining impairmentits assessment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan or lease and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed.
Impairment is generally measured on a loan-by-loan basis for For commercial and construction loans, bythe ACL is generally determined using the present value of expected future cash flows discounted at the loan’s original effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. The fair value of the collateral is measured based on the value of the collateral securing the loans, less estimated costs to liquidate the collateral. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The vast majority of Customers' collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, third-party licensed appraiser using observablecomparable market data. The value of business equipment is based upon an outside appraisal if deemed significant or the net book value on the applicable business’ financial statements if not considered significant, using observablecomparable market data. Similarly, values for inventory and accounts receivable collateral are based on financial statement balances or aging reports.
Troubled Debt Restructurings
A loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties is considered to be a troubled debt restructuring ("TDR"). The ACL on a TDR is measured using the same method as all other loans held for investment, except in cases when the value of a concession cannot be measured using a method other than the discounted cash flow ("DCF") method. When the value of a concession is measured using the DCF method, the ACL is determined by discounting the expected future cash flows at the original effective interest rate of the loan.
The CARES Act, as amended, and certain regulatory agencies recently issued guidance stating certain loan modifications to borrowers experiencing financial distress as a result of the economic impacts created by COVID-19 may not be required to be treated as TDRs under U.S. GAAP. For COVID-19 related loan modifications which met the loan modification criteria under either the CARES Act, as amended, or the criteria specified by the regulatory agencies, Customers elected to suspend TDR accounting for such loan modifications. Please refer to NOTE 8 – LOANS AND LEASES RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES for additional information about COVID-19 related loan modifications.
Collateral Dependent Loans
Customers considers a loan to be collateral dependent when foreclosure of the underlying collateral is probable. Customers has also elected to apply the practical expedient to measure expected credit losses of a collateral dependent asset using the fair value of the
collateral, less any estimated costs to sell, when foreclosure is not probable but repayment of the loan is expected to be provided substantially through the operation or sale of the collateral, and the borrower is experiencing financial difficulty.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the identifiable net assets of businesses acquired through business combinations accounted for under the acquisition method. Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. Intangible assets that have finite lives, such as customer and university relationships and non-compete agreements, are amortized over their estimated useful lives and are subject to impairment testing.
Goodwill and other intangible assets recognized as part of the Disbursement business acquisition in June 2016 were based on a preliminary allocation of the purchase price. At December 31, 2016, Customers recorded adjustments to the estimated fair values of the net assets acquired in the Disbursement business acquisition, which resulted in a $1.0 million increase in goodwill. For more information regarding the net assets acquired and goodwill recorded upon acquisition of the Disbursement business, see NOTE 2 - ACQUISITION ACTIVITY.
Goodwill and otherindefinite-lived intangible assets are reviewed for impairment annually as of October 31 and between annual tests when events and circumstances indicate that impairment may have occurred. As described below, Customers early adopted Accounting Standards Update 2017-04, Simplifying the Test for Goodwill Impairment, during its annualIf there is a goodwill impairment review in October 2017. The new rules provide that the goodwill impairment charge, it will be the amount by which the reporting unit's carrying amount exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The same one-stepannual impairment test is applied to goodwill at all reporting units. Customers applies a qualitative assessment for its reporting units to determine if the one-step quantitative impairment test is necessary.
Intangible assets subject to amortization are reviewed for impairment under ASC 360,Property, Plant, and Equipment, which requires that a long-lived asset or asset group be tested for recoverability whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The carrying value of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset.
As part of its qualitative assessment, Customers reviewed regional and national trends in current and expected economic conditions, examining indicators such as GDP growth, interest rates and unemployment rates. Customers also considered its own historical performance, expectations of future performance, indicative deal values and other trends specific to the banking industry as well as an initial valuation of the BankMobile business performed by an independent third party.and financial technology industries. Based on its qualitative assessment, Customers determined that there was no evidence of impairment on the balance of goodwill and other intangible assets. As of December 31, 20172021 and 2016,2020, goodwill and other intangible assets totaled $16.3$3.7 million and $17.6$4.0 million, respectively.
FHLB, Federal Reserve Bank and other restricted stock
FHLB, Federal Reserve Bank and other restricted stock represents required investment in the capital stock of the Federal Home Loan Bank (“FHLB”),FHLB, the Federal Reserve BankFRB and Atlantic Community Bankers Bank and is carried at cost. Total restricted stock as of December 31, 20172021 and 2016,2020, was $105.9$64.6 million and $68.4$71.4 million, respectively, which included $83.7$35.8 million and $51.3$46.1 million, respectively, of FHLB stock.
Other Real Estate Owned
Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at fair value less estimated costs to sell at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by third-party appraisers, and the real estate is carried at the lower of its carrying amount or fair value less estimated costs to sell. Any declines in the fair value of the real estate properties below the initial cost basis are recorded through a valuation allowance. Increases in the fair value of the real estate properties net of estimated selling costs will reverse the valuation allowance but only up to the costscost basis which was established at the initial measurement date. Revenue and expenses from operations and changes in the valuation allowance are included in earnings.
Bank-Owned Life Insurance
Bank-owned life insurance ("BOLI") policies insure the lives of officers of Customers and name Customers as beneficiary. Non-interest income is generated tax free (subject to certain limitations) from the increase in value of the policies’ underlying investments made by the insurance company. Cash proceeds received from the settlement of the bank-owned life insuranceBOLI policies are tax-free and can be used to partially offset costs associated with employee compensation and benefit programs.
Bank Premises and Equipment
Bank premises and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation and amortization is computed on the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the term of the lease or estimated useful life, unless extension of the lease term is reasonably assured.
Lessor Operating Leases
Leased assets under operating leases are carried at amortized cost net of accumulated depreciation and any impairment charges. The depreciation expense of the leased assets is recognized on a straight-line basis over the contractual term of the leases up to their 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 other non-interest 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. During 2017,leased asset.
Lessee Operating Leases
A right-of-use ("ROU") asset and corresponding lease liability is recognized at the lease commencement date when Customers leased various types of equipment to customers within its commercial and industrial loan portfolio. The net carryingis a lessee. ROU lease assets are included in other assets on the consolidated balance sheet. A ROU asset reflects the present value of the leased assets was $21.7 million, which included accumulated depreciation of $0.5 million, as of December 31, 2017,future minimum lease payments adjusted for any initial direct costs, incentives, or other payments prior to the lease commencement date. A lease liability represents a legal obligation to make lease payments and is presenteddetermined by the present value of the future minimum lease payments discounted using the rate implicit in other assetsthe lease, or Customers’ incremental borrowing rate. Variable lease payments that are dependent on an index, or rate, are initially measured using the index or rate at the commencement date and are included in Customers’ consolidated balance sheets. Asthe measurement of December 31, 2017, the leases have a weighted-average termlease liability. Renewal options are not included as part of 5.4 years. Customers had not entered into similarthe ROU asset or lease liability unless the option is deemed reasonably certain to exercise. Operating lease expense is comprised of operating lease arrangementscosts and variable lease costs, net of sublease income, and is reflected as part of occupancy expense within non-interest expense in prior years.the consolidated statement of income. Operating lease expense is recorded on a straight-line basis. See NOTE 9 – LEASES for additional information.
Treasury Stock
Common stock purchased for treasury is recorded at cost.
Income Taxes
Customers accounts for income taxes under the liability method of accounting for income taxes. The income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. Customers determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
A tax position is recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the term upon examination includes resolution of the related appeals or litigation process. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment.
In assessing the realizability of federal or state deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and prudent, feasible and permissible as well as available tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible as well as available tax planning strategies, management believes it is more likely than not that Customers will realize the benefits of these deferred tax assets.
On December 22, 2017, the 2017 Tax Cuts and Jobs Act (the “Act”) was enacted into law. The Act contained several key tax provisions including the reduction in the corporate federal tax rate from 35% to 21% effective January 1, 2018. As a result,
Customers was required to re-measure, through income tax expense, its deferred tax assets and liabilities using the enacted rate at which it expects them to be recovered or settled. In December 2017, the U.S. Securities and Exchange Commission ("SEC") also issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), which allows companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Because the Tax Act was passed late in December 2017 and ongoing analysis and interpretation of the other key tax provisions is expected over the next 12 months, Customers considers the deferred tax re-measurements and other items to be provisional in nature. Customers expects to complete its analysis within the measurement period in accordance with SAB 118. See NOTE 16 -– INCOME TAXES for additional information.
Share-Based Compensation
Customers has four active share-based compensation plans. Share-based-compensation accounting guidance requires that the compensation cost relating to share-based-payment transactions be recognized in earnings. The cost is measured based on the grant-date fair value of the equity instruments issued. The Black-Scholes model is used to estimate the fair value of stock options, while the closing market price of Customers’ common stock on the date of grant is generally used for restricted stock awards.
Compensation cost for all share-based awards is calculated and recognized over the team member's service period, generally defined as the vesting period. For performance-based awards, compensation cost is recognized over the vesting period as long as it remains probable that the performance conditions will be met. If the service or performance conditions are not met, Customers reverses previously recorded compensation expense upon forfeiture. Customers' accounting policy election is to recognize forfeitures as they occur.
In 2014, the shareholders of Customers Bancorp approved an employee stock purchase plan.Employee Stock Purchase Plan ("ESPP"). Because the purchase price under the plan is 85% (a 15% discount to the market price) of the fair market value of a share of common stock on the first day of each quarterly subscription period, the plan is considered to be a compensatory plan under current accounting guidance. Therefore, the entire amount of the discount is recognizable compensation expense. See NOTE 15 -– SHARE-BASED COMPENSATION for additional information.
Transfers of Financial Assets
Transfers of financial assets, including loan participations sold, are accounted for as sales when control over the assets has been surrendered (settlement date). Control over transferred assets is generally considered to have been surrendered when (i) the assets have been isolated from Customers, (ii) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (iii) Customers does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. If the sale criteria are met, the transferred financial assets are removed from Customers' balance sheet, and a gain or loss on sale is recognized. If the sale criteria are not met, the transfer is recorded as a secured borrowing with the assets remaining on Customers' balance sheet, and the proceeds received from the transaction recognized as a liability.
Segment Information
In connection with the acquisition of the Disbursement business from Higher One and the combination of that business with the BankMobile technology platform late in second quarter 2016, Customers' chief operating decision makers our Chief Executive Officer and the Board of Directors, began allocatingallocate resources and assessingassess performance for two distinct business segments, "Community Business Banking"a single reportable segment. Customers' products and "BankMobile." The Community Business Banking segment isservices are delivered predominately to commercial customers in Southeastern and Central Pennsylvania, New York, New Jersey, Massachusetts, Rhode Island, and New Hampshire, Washington, D.C., Illinois, Texas, Florida, North Carolina and other states through a single point of contact business model and provides liquidity to residential mortgage originators nationwide through commercial loans to mortgage companies. The BankMobile segmentcompanies and SBA loans to small businesses. Customers provides state-of-the-art high-tech digital bankingunsecured consumer installment loans, residential mortgage and disbursement services to consumers, students and the "under banked" nationwide. BankMobile, as a division of Customers Bank, is a full service bank that is accessiblehome equity loans to customers anywhere and anytimenationwide through the customer's smartphone or other web-enabled device. Prior to third quarter 2016, Customers operated in one business segment, “Community Banking.” Additional information regarding reportable segments can be found in NOTE 24 - BUSINESS SEGMENTS.
relationships with fintech companies.
Derivative Instruments and Hedging
ASC 815, Derivatives and Hedging (“ ("ASC 815”815"), provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (i) how and why an entity uses derivative instruments, (ii) how the entity accounts for derivative instruments and the related hedged items and (c)(iii) how derivative instruments and the related hedged items affect an entity’s financial position, financial performance and cash flows. Further, qualitative disclosures are required that explain the objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by ASC 815, Customers records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether Customers has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as hedges of the exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk, such as interest-rate risk, are considered fair value hedges. Derivatives designated and qualifying as hedges of the exposure to variability in expected future cash flows or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. In addition, to qualify for the use of hedge accounting, a derivative must be effective at inception and expected to be continuously effective in offsetting the risk being hedged. Customers may enter into derivative contracts that are intended to economically hedge certain of its risks; even though hedge accounting does not apply, or Customers elects not to apply hedge accounting.
Prior to first quarter 2014, none of Customers' financial derivatives were designated in qualifying hedge relationships in accordance with the applicable accounting guidance. As such, all changes in fair value of the financial derivatives were recognized directly in earnings. Beginning in March 2014, Customers entered into pay-fixed interest-rate swaps to hedge the variable cash flows associated with the forecasted issuance of debt.debt and a certain variable rate deposit relationship. Customers documented and designated these interest-rate swaps as cash flow hedges. The effective portion of changes in the fair value of financial derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period in which the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the financial derivatives is recognized directlyalso recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period in which the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive income (loss) related to financial derivatives will be reclassified to interest expense as interest payments are made on Customers' variable-rate debt. As of December 31, 2017,2021, Customers had nineno financial derivatives designated in qualifying cash flow hedge relationship as they were either terminated or
matured during the 2021. As of December 31, 2020, Customers had 5 financial derivatives designated in qualifying cash flow hedge relationships with a notional aggregate balance of $550.0 million. As$1.1 billion.
In November 2020, Customers entered into 24 pay-fixed, receive variable interest rate derivatives with notional amounts totaling $272.3 million designated as fair value hedges of certain AFS debt securities. The Company is exposed to changes in the fair value of certain of its fixed rate AFS debt securities due to changes in the benchmark interest rate. The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate, the Federal Funds Effective Swap Rate. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount. For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income. At December 31, 2016,2021 and 2020, Customers had four financialan outstanding notional balance of interest rate derivatives designated in qualifying cash flow hedge relationships with a notional aggregate balanceas fair value hedges of $325.0 million.$80.5 million and $272.3 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 were not designated in hedge relationships for accounting purposes and are being recorded at their fair value, with fair value changes recorded directly in earnings. At December 31, 20172021 and 2016,2020, Customers had an outstanding notional balance of credit derivatives of $80.5$129.9 million and $44.9 million,$177.2million, respectively.
In accordance with the FASB’sFinancial Accounting Standards Board's ("FASB") fair value measurement guidance, Customers made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. See NOTE 21 -– DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES for additional information.
Comprehensive Income (Loss)
Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes changes in unrealized gains and losses on AFS debt securities available for sale arising during the period and reclassification adjustments for realized gains and losses on AFS debt securities available for sale included in net income. Unrealized gains and losses on securities available for sale include a component for unrealized changes in foreign currency exchange rates relating to Customers’ investment in certain foreign equity securities. Other comprehensive income (loss) also includes the effective and ineffective portion of changes in fair value of financial derivatives designated and qualifying as cash flow hedges. Cash flow hedge amounts classified as comprehensive income are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings.
Earnings per Share
Basic earnings per shareEPS represents net income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per shareEPS includes all potentially dilutive common shares outstanding during the period. Potential common shares that may be issued related to outstanding stock options, restricted stock units and warrants are determined using the treasury stock method.
The treasury stock method assumes that the proceeds received for common shares that may be issued for outstanding stock options, restricted stock units, and warrants are used to repurchase the common shares in the market.
Loss Contingencies
Loss contingencies, including claims and legal, regulatory and governmental actions arisingand proceedings arise in the ordinary course of business,business. In accordance with applicable accounting guidance, Customers establishes an accrued liability when those matters present loss contingencies that are recorded as liabilities whenboth probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. As facts and circumstances evolve, Customers, in conjunction with any outside counsel handling the likelihood ofmatter, evaluates on an ongoing basis whether such matter presents a loss contingency that is probable and estimable. Once the loss contingency is deemed to be both probable and estimable, Customers will establish an accrued liability and record a corresponding amount of litigation-related expense. Customers continues to monitor the matter for further developments that could affect the amount of the accrued liability that has been previously established.
Accounting and Reporting Considerations related to COVID-19
On March 27, 2020, the CARES Act was signed into law and contained substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic and stimulate the economy. The CARES Act includes the SBA's PPP designed to aid small-and medium-sized businesses through federally guaranteed loans distributed through banks. Customers is a participant in the PPP. Section 4013 of the CARES Act also gives entities temporary relief from the accounting and disclosure requirements for TDRs under ASC 310-40 in certain situations. On December 27, 2020, the Consolidated Appropriations Act, 2021 ("CAA") was signed into law, which
extended and expanded various relief provisions of the CARES Act including the temporary relief from the accounting and disclosure requirements for TDRs until January 1, 2022.
Accounting for PPP Loans
In April 2020, Customers began to originate loans to qualified small businesses under the PPP administered by the SBA. The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1% and terms of two or rangefive years, if not forgiven, in whole or in part. Payments are deferred for the first six months of lossthe loan. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1% to 5% based on the size of the loan. On December 27, 2020, the CAA was signed into law, including Division N, Title III, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, which provides $284 billion in additional funding for the SBA's PPP for small businesses affected by the COVID-19 pandemic. On March 11, 2021, the American Rescue Plan Act of 2021 was enacted expanding eligibility for first and second round of PPP loans and revising the exclusions from payroll costs for purposes of loan forgiveness. The second round of PPP loans have the same general loan terms as the first round, and a processing fee of up to $2,500 per loan of less than $50,000, and 1% to 3% for loans greater than $50,000. Customers classified the PPP loans as held for investment and these loans are carried at amortized cost and interest income is recognized using the interest method. The origination fees, net of direct origination costs, are deferred and recognized as an adjustment to the yield of the related loans over their contractual life using the interest method. As PPP is newly created, Customers does not have historical prepayment data to accurately estimate principal prepayments and therefore has elected to not estimate prepayments as a policy election. No ACL has been recognized for PPP loans as these loans are 100% guaranteed by the SBA. See NOTE 8 – LOANS AND LEASES RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES for additional information.
Loan Modifications
As mentioned above, Section 4013 of the CARES Act, as amended by the CAA, gives entities temporary relief from the accounting and disclosure requirements for TDRs. In addition, on April 7, 2020, certain regulatory banking agencies issued an interagency statement that offers practical expedients for evaluating whether loan modifications in response to the COVID-19 pandemic are TDRs. To qualify for TDR accounting and disclosure relief under the CARES Act, as amended by the CAA, the applicable loan must not have been more than 30 days past due as of December 31, 2019 and the modification must be executed during the period beginning on March 1, 2020, and ending on the earlier of January 1, 2022, or the date that is 60 days after the termination date of the national emergency declared by the president on March 13, 2020, under the National Emergencies Act related to the outbreak of COVID-19. The CARES Act applies to modifications made as a result of COVID-19 including: forbearance agreements, interest rate modifications, repayment plans, and other arrangements to defer or delay payment of principal or interest. The interagency statement does not require the modification to be completed within a certain time period if it is related to COVID-19 and can be reasonably estimated. Management doesprovided to borrowers either individually or as part of a loan modification program. Moreover, the interagency statement applies to short-term modifications (e.g. not believe there are any such mattersmore than six months deferral) including payment deferrals, fee waivers, extensions of repayment terms, or other insignificant payment delays as a result of COVID-19.
Customers applied Section 4013 of the CARES Act, as amended, and the interagency statement in connection with applicable modifications. For modifications that will havequalify under either the CARES Act, as amended, or the interagency statement, TDR accounting and reporting is suspended. These modifications generally involve principal and/or interest payment deferrals for a material effect onperiod of 90 days at a time and can be extended to six months or longer for modifications that qualified under the consolidated financial statements that areSection 4013 of the CARES Act, as amended, if requested by the borrower as long as the reason is still related to COVID-19. These modified loans would not currently accrued for.
also be reported as past due or nonaccrual during the deferral period. See NOTE 8 – LOANS AND LEASES RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES for additional information.
Recently Issued Accounting Standards
Presented below are recently issued accounting standards that Customers has adopted.
Accounting Standards adopted in 2020
Allowance for Credit Losses
On January 1, 2020, Customers adopted ASC 326, which replaced the incurred loss methodology with an expected loss methodology that is referred to as the CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and Updatesnet investments in leases recognized by Customers as a lessor in accordance with ASC 842. CECL also applies to off-balance sheet credit exposures not accounted for as insurance, such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments. ASC 326 also made changes to the
accounting for AFS debt securities, which now requires credit losses to be presented as an allowance, rather than as a write-down on AFS debt securities that management does not intend to sell or believes that it is more likely than not they will not be required to sell.
Customers adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost, net investments in leases, and off-balance sheet credit exposures. Results for reporting periods beginning after December 31, 2019 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. Customers recorded a net decrease to retained earnings of $61.5 million, net of deferred taxes of $21.5 million, and increases to allowance for credit losses on loans and leases of $79.8 million and lending-related commitments of $3.4 million, as of January 1, 2020 for the cumulative effect of adopting ASC 326. Customers adopted ASC 326 using the prospective transition approach for PCD financial assets that were previously classified as purchased credit-impaired ("PCI") and accounted for under ASC 310-30. In accordance with the standard, Customers did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $0.2 million of the ACL on PCD loans and leases. The remaining noncredit discount of $0.3 million, based on the adjusted amortized cost basis, will be accreted into interest income at the effective interest rate as of January 1, 2020.
0
Other Accounting Standards Adopted in 20172020 and 2021
Since January 1, 2017,During 2020, Customers has adopted the following FASB Accounting StandardStandards Updates (“ASUs”("ASUs"), none of which had a material impact to Customers’ consolidated financial statements:
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ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting
Issued March 2020 | | • Provides optional guidance for a limited period of time to ease the potential burden in accounting for (or derecognizing the effects of) reference rate reform on financial reporting. Specifically, the amendments provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. These relate only to those contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. • Effective as of March 12, 2020 and can be adopted anytime during the period of January 1, 2020 through December 31, 2022. | | • Customers adopted this guidance during adoption period for certain optional expedients. • The adoption of this guidance did not have a material impact on Customers' financial condition, results of operations and consolidated financial statements. • As of December 31, 2021, Customers has not yet elected to apply optional expedients for certain contract modifications. However, we plan to elect additional optional expedients in the future, which are not expected to have a material impact on Customers' financial condition, results of operations and consolidated financial statements. |
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ASU 2021-01, Reference Rate Reform (Topic 848) - Scope
Issued January 2021 | | • Clarifies that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition, including derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform. • Effective as of March 12, 2020 and can be adopted anytime during the period of January 1, 2020 through December 31, 2022. | | • Customers adopted this guidance during adoption period for certain optional expedients. • The adoption of this guidance did not have a material impact on Customers' financial condition, results of operations and consolidated financial statements. • As of December 31, 2021, Customers has not yet elected to apply optional expedients for certain contract modifications. However, we plan to elect additional optional expedients in the future, which are not expected to have a material impact on Customers' financial condition, results of operations and consolidated financial statements. |
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CustomersAccounting Standards adopted ASU 2016-05, Derivatives and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, on a prospective basis. This ASU clarifies that a change in the counterparties to a derivative contract (i.e., a novation), in and of itself, does not require the dedesignation of a hedging relationship provided that all the other hedge accounting criteria continue to be met.January 1, 2022
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| Standard | | Summary of guidance | | Effects on Financial Statements |
ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity
Issued August 2020 | | • Provides for simplified accounting for convertible debt instruments by eliminating separation models in ASC 470-20 for convertible debt instruments with a cash conversion feature, or another beneficial conversion feature. • Removes the requirements to consider whether a contract would be settled in registered shares, to consider whether collateral is required to be posted and to assess shareholders rights upon conversion.. • Effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. | | • Customers adopted this guidance on January 1, 2022. • The adoption of this guidance did not have any impact on Customers' financial condition, results of operations and consolidated financial statements. |
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ASU 2021-05, Leases (Topic 842): Lessors - Certain Leases with Variable Lease Payments
Issued July 2021 | | • Provides updates for accounting for leases with variable lease payments under ASC 842. • Allows for variable lease payments which are 1) not driven by a reference rate and 2) not dependent upon an estimate to be included within consideration or the investment in a lease at the inception of a sales-type or direct financing lease. • Effective for fiscal years beginning after December 15, 2021 and interim periods within those fiscal years. Early adoption is permitted. | | • Customers adopted this guidance on January 1, 2022. • The adoption of this guidance did not have any impact on Customers' financial condition, results of operations and consolidated financial statements. |
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NOTE 3 – DISCONTINUED OPERATIONS
On January 4, 2021, Customers also adopted ASU 2016-06, Contingent PutBancorp completed the previously announced divestiture of BMT, the technology arm of its BankMobile segment, to MFAC Merger Sub Inc., an indirect wholly-owned subsidiary of MFAC, pursuant to an Agreement and Call Options in Debt InstrumentsPlan of Merger, dated August 6, 2020, by and among MFAC, MFAC Merger Sub Inc., BMT, Customers Bank, the sole stockholder of BMT, and Customers Bancorp, the parent bank holding company for Customers Bank (as amended on November 2, 2020 and December 8, 2020). This ASU clarifies that a contingencyFollowing the completion of put or call exercise does not need to be evaluated to determine whether it relates tothe divestiture of BMT, BankMobile's serviced deposits and loans and the related net interest ratesincome have been combined with Customers' financial condition and credit risk in an embedded derivative analysisthe results of hybrid financial instruments. In other words, a contingent put or call option embedded in a debt instrument would be evaluated for possible separate accountingoperations as a derivative instrument without regard to the naturesingle reportable segment.
Customers received cash consideration of $23.1 million upon closing of the exercise contingency. However, as required under the existing accounting guidance, companies will still need to evaluate the other relevant embedded derivative guidance, such as whether the payoff from the contingent put or call option is adjusted based on changesdivestiture and $3.7 million of additional cash consideration in an index other than interest rates or credit risk, and whether the debt involves a substantial premium or discount. The adoption did not result in any significant impact to Customers’ consolidated financial statements that would warrant the application on a modified retrospective basis.
The following table presents the changes in accumulated other comprehensive income (loss) by component for the years ended December 31, 20172021 and 2016. All amounts are presented net of tax.2020. Amounts in parentheses indicate reductions to accumulated other comprehensive income.income (loss).
In November 2013, Customers Bancorp announced that its Board of Directors had authorized a stock repurchase plan in which it could acquire up to 5% of its current outstanding shares at prices not to exceed a 20% premium over the then current book value. TheIn December 2018, Customers Bancorp announced that its Board of Directors amended the terms of the November 2013 stock repurchase program mayplan to allow purchases to be suspended, modified or discontinuedmade at any time, andprices not to exceed the Bancorp has no obligation to repurchase any amountbook value per share of Customers' common stock measured as of September 30, 2018. In January 2019, Customers repurchased 31,159 shares of its common stock at a weighted average price of $18.35. Customers repurchased all remaining authorized shares pursuant to this program in January 2019.
Customers has a 401(k) profit sharing plan whereby eligible team members may contribute amounts up to the annual IRS statutory contribution limit. Customers provides a matching contribution equal to 50% of the first 6% of the contribution made by the team member. EmployerCustomers' employer contributions for the years ended December 31, 2017, 20162021, 2020 and 2015,2019 were $1.9$2.1 million, $2.0 million, and $1.6 million, respectively. Effective April 9, 2021, the 401(k) plan became a multiple employer plan, as defined by the U.S. Department of Labor in accordance with the Employee Retirement Income Security Act of 1974, covering the full-time employees of Customers and $1.1 million, respectively.BM Technologies.
Customers entered into a supplemental executive retirement plan ("SERP") with its Chairman and Chief Executive OfficerCEO that provides annual retirement benefits for a 15-year period upon the later of hishim reaching the age of 65 or when he terminates employment. The SERP is a defined-contribution type of deferred-compensation arrangement that is designed to provide a target annual retirement benefit of $300,000 per year for 15 years starting at age 65, based on an assumed constant rate of return of 7% per year. The level of retirement benefit is not guaranteed by Customers, and the ultimate retirement benefit can be less than or greater than the target. Customers funds its obligations under the SERP with the increase in cash surrender value of a life insurance policy on the life of the Chairman and Chief Executive OfficerCEO which it owns. The present value of the amount owed as of December 31, 2017,2021 and 2020 was $4.6$7.7 million and $6.4 million, respectively, and was included in other liabilities.
continuously employed by Customers from the date of funding to the anniversary date.
Vesting is accelerated in the event of involuntary termination other than for cause, retirement at or after age 65, death, termination on account of disability or a change in control of Customers. Participants were first eligible to make elections under the BRRP with respect to their bonuses for 2011, which were payable in first quarter 2012. The BRRP doesdid not provide for a specific number of shares to be reserved; by its terms, the award of restricted stock units under this plan is limited by the amount of cash bonuses paid to the participants in the plan. At December 31, 2017,2021, non-vested restricted stock units outstanding under this plan totaled 263,517.30,776.
Under the ESPP, team members may elect to purchase shares of Customers' common stock through payroll deduction.deductions. Because the purchase price under the plan is 85% of the fair market value of a share of common stock on the first day of each quarterly subscription period (a 15% discount to the market price), Customers' ESPP is considered to be a compensatory plan under current accounting guidance. Therefore, the entire amount of the discount is recognizable compensation expense. ESPP expense for 2017, 20162021, 2020 and 20152019 was $132$115 thousand, $103$140 thousand, and $80$170 thousand, respectively.
The following table presents the weighted-average assumptions used and the resulting weighted-average fair value of each option granted for the periods presented.years ended December 31, 2021, 2020 and 2019.
Cash received from the exercise of the stock options during the year ended December 31, 20172021 was $2.0$26.6 million. The tax benefit realized for the tax deductionsresulting from option exercises totaled $10.2was $2.5 million in 2017.2021.
