Washington, D.C. 20549
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | | | | | | | |
Title of Each Class | | Trading Symbols | | Name of Each Exchange on which Registered |
Voting Common Stock, par value $1.00 per share | | CUBI | | New York Stock Exchange |
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C, par value $1.00 per share | | CUBI/PC | | New York Stock Exchange |
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series D, par value $1.00 per share | | CUBI/PD | | New York Stock Exchange |
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series E, par value $1.00 per share | | CUBI/PE | | New York Stock Exchange |
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series F, par value $1.00 per share | | CUBI/PF | | New York Stock Exchange |
5.375% Subordinated Notes due 2034 | | CUBB | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
| | | | | | | | | | | | | | | | | | | | |
Large accelerated filer | | o | | Accelerated Filer | | x |
| | | | |
Non-accelerated filer | | o | | Smaller Reporting Company | | ☐ |
| | | | | | |
Large accelerated filer | | ¨ | | Accelerated filer | | x |
| | | |
Non-accelerated filer | | o (Do not check if a smaller reporting company)
| | Smaller Reporting Company | | ¨ |
| | | | | | |
| | | | Emerging Growth Company | | ¨☐ |
| | | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | | ¨o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨☐ No x
________________________________________
On October 31, 2017, 30,806,122August 6, 2021, 32,373,955 shares of Voting Common Stock were outstanding.
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
Table of Contents
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Item 1. | | |
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Item 5. | | |
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Item 6. | | |
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Ex-31.1 | | |
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Ex-31.2 | | |
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Ex-32.1 | | |
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Ex-32.2 | | |
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Ex-101 | | |
GLOSSARY OF ABBREVIATIONS AND ACRONYMS
The following list of abbreviations and acronyms may be used throughout this Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Unaudited Consolidated Financial Statements and the Notes to the Unaudited Consolidated Financial Statements. | | | | | |
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| |
| |
ACL | Allowance for credit losses |
AFS | Available for sale |
ASC | Accounting Standards Codification |
| |
AOCI | Accumulated other comprehensive income |
ASU | Accounting Standards Update |
ATM | Automated teller machine |
Bancorp | Customers Bancorp, Inc. |
Bank | Customers Bank |
BBB spread | BBB rated corporate bond spreads to U.S. Treasury securities |
| |
BMT | BankMobile Technologies, Inc. |
BM Technologies | BM Technologies, Inc. |
BOLI | Bank-owned life insurance |
| |
CAA | The Consolidated Appropriations Act, 2021 |
CARES Act | Coronavirus Aid, Relief and Economic Security Act |
CCF | Customers Commercial Finance, LLC |
CECL | Current expected credit loss |
Company | Customers Bancorp, Inc. and subsidiaries |
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| |
| |
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COVID-19 | Coronavirus Disease 2019 |
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CPI | Consumer Price Index |
CUBI | Symbol for Customers Bancorp, Inc. common stock traded on the NYSE |
Customers | Customers Bancorp, Inc. and Customers Bank, collectively |
Customers Bancorp | Customers Bancorp, Inc. |
DCF | Discounted cash flow |
Department | Pennsylvania Department of Banking and Securities |
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Disbursement Business | One Account Student Checking and Refund Management Disbursement Services Business |
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ED | U.S. Department of Education |
| |
EPS | Earnings per share |
| |
ERISA | The Employee Retirement Income Security Act of 1974 |
EVE | Economic value of equity |
Exchange Act | Securities Exchange Act of 1934 |
| |
FDIC | Federal Deposit Insurance Corporation |
| |
Fed Funds | Federal Reserve Board's Effective Federal Funds Rate |
Federal Reserve Board | Board of Governors of the Federal Reserve System |
| |
FHA | Federal Housing Administration |
FHLB | Federal Home Loan Bank |
| |
FPRD | Final Program Review Determination |
FRB | Federal Reserve Bank of Philadelphia |
| |
GDP | Gross domestic product |
GNMA | Government National Mortgage Association |
| |
Higher One | Higher One Holdings, Inc. |
HTM | Held to maturity |
| |
IRS | Internal Revenue Service |
LIBOR | London Interbank Offered Rate |
LPO | Limited Purpose Office |
MFAC | Megalith Financial Acquisition Corp. |
MMDA | Money market deposit accounts |
NIM | Net interest margin, tax equivalent |
NM | Not meaningful |
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NPL | Non-performing loan |
| |
NYSE | New York Stock Exchange |
| |
OCI | Other comprehensive income |
| |
OREO | Other real estate owned |
| |
| |
PCD | Purchased Credit-Deteriorated |
PCI | Purchased Credit-Impaired |
| | | | | |
PPP | Paycheck Protection Program |
PPPLF | FRB Paycheck Protection Program Liquidity Facility |
Rate Shocks | Interest rates rising or falling immediately |
ROU | Right-of-use |
| |
SBA | Small Business Administration |
SBA loans | Loans originated pursuant to the rules and regulations of the SBA |
SEC | U.S. Securities and Exchange Commission |
Securities Act | Securities Act of 1933, as amended |
Series C Preferred Stock | Fixed-to-floating rate non-cumulative perpetual preferred stock, series C |
Series D Preferred Stock | Fixed-to-floating rate non-cumulative perpetual preferred stock, series D |
Series E Preferred Stock | Fixed-to-floating rate non-cumulative perpetual preferred stock, series E |
Series F Preferred Stock | Fixed-to-floating rate non-cumulative perpetual preferred stock, series F |
| |
| |
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TDR | Troubled debt restructuring |
TRAC | Terminal Rental Adjustment Clause |
UCC | Uniform Commercial Code |
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U.S. GAAP | Accounting principles generally accepted in the United States of America |
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CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET — UNAUDITED
(amounts in thousands, except share and per share data) | | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
ASSETS | | | |
Cash and due from banks | $ | 36,837 | | | $ | 78,090 | |
Interest earning deposits | 393,663 | | | 615,264 | |
Cash and cash equivalents | 430,500 | | | 693,354 | |
Investment securities, at fair value | 1,526,792 | | | 1,210,285 | |
| | | |
Loans held for sale (includes $6,074 and $5,509, respectively, at fair value) | 34,540 | | | 79,086 | |
Loans receivable, mortgage warehouse, at fair value | 2,855,284 | | | 3,616,432 | |
Loans receivable, PPP | 6,305,056 | | | 4,561,365 | |
Loans and leases receivable | 7,772,142 | | | 7,575,368 | |
Allowance for credit losses on loans and leases | (125,436) | | | (144,176) | |
Total loans and leases receivable, net of allowance for credit losses on loans and leases | 16,807,046 | | | 15,608,989 | |
FHLB, Federal Reserve Bank, and other restricted stock | 39,895 | | | 71,368 | |
Accrued interest receivable | 90,009 | | | 80,412 | |
| | | |
Bank premises and equipment, net | 10,391 | | | 11,225 | |
Bank-owned life insurance | 329,421 | | | 280,067 | |
| | | |
Goodwill and other intangibles | 3,853 | | | 3,969 | |
Other assets | 362,661 | | | 338,438 | |
Assets of discontinued operations | 0 | | | 62,055 | |
Total assets | $ | 19,635,108 | | | $ | 18,439,248 | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Liabilities: | | | |
Deposits: | | | |
Demand, non-interest bearing | $ | 2,699,869 | | | $ | 2,356,998 | |
Interest bearing | 11,174,070 | | | 8,952,931 | |
Total deposits | 13,873,939 | | | 11,309,929 | |
| | | |
| | | |
Federal funds purchased | 0 | | | 250,000 | |
FHLB advances | 0 | | | 850,000 | |
Other borrowings | 124,240 | | | 124,037 | |
Subordinated debt | 181,534 | | | 181,394 | |
FRB PPP liquidity facility | 3,865,865 | | | 4,415,016 | |
Accrued interest payable and other liabilities | 338,801 | | | 152,082 | |
Liabilities of discontinued operations | 0 | | | 39,704 | |
Total liabilities | 18,384,379 | | | 17,322,162 | |
Commitments and contingencies (NOTE 14) | 0 | | 0 |
Shareholders’ equity: | | | |
Preferred stock, par value $1.00 per share; liquidation preference $25.00 per share; 100,000,000 shares authorized, 9,000,000 shares issued and outstanding as of June 30, 2021 and December 31, 2020 | 217,471 | | | 217,471 | |
Common stock, par value $1.00 per share; 200,000,000 shares authorized; 33,633,875 and 32,985,707 shares issued as of June 30, 2021 and December 31, 2020; 32,353,256 and 31,705,088 shares outstanding as of June 30, 2021 and December 31, 2020 | 33,634 | | | 32,986 | |
Additional paid in capital | 519,294 | | | 455,592 | |
Retained earnings | 496,844 | | | 438,581 | |
Accumulated other comprehensive income (loss), net | 5,266 | | | (5,764) | |
Treasury stock, at cost (1,280,619 shares as of June 30, 2021 and December 31, 2020) | (21,780) | | | (21,780) | |
Total shareholders’ equity | 1,250,729 | | | 1,117,086 | |
Total liabilities and shareholders’ equity | $ | 19,635,108 | | | $ | 18,439,248 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
ASSETS | | | |
Cash and due from banks | $ | 13,318 |
| | $ | 37,485 |
|
Interest-earning deposits | 206,162 |
| | 227,224 |
|
Cash and cash equivalents | 219,480 |
| | 264,709 |
|
Investment securities available for sale, at fair value | 584,823 |
| | 493,474 |
|
Loans held for sale (includes $1,963,076 and $2,117,510, respectively, at fair value) | 2,113,293 |
| | 2,117,510 |
|
Loans receivable | 7,061,338 |
| | 6,154,637 |
|
Allowance for loan losses | (38,314 | ) | | (37,315 | ) |
Total loans receivable, net of allowance for loan losses | 7,023,024 |
| | 6,117,322 |
|
FHLB, Federal Reserve Bank, and other restricted stock | 98,611 |
| | 68,408 |
|
Accrued interest receivable | 27,135 |
| | 23,690 |
|
Bank premises and equipment, net | 12,369 |
| | 12,769 |
|
Bank-owned life insurance | 255,683 |
| | 161,494 |
|
Other real estate owned | 1,059 |
| | 3,108 |
|
Goodwill and other intangibles | 16,604 |
| | 17,621 |
|
Other assets | 119,748 |
| | 102,631 |
|
Total assets | $ | 10,471,829 |
| | $ | 9,382,736 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Liabilities: | | | |
Deposits: | | | |
Demand, non-interest bearing | $ | 1,427,304 |
| | $ | 966,058 |
|
Interest-bearing | 6,169,772 |
| | 6,337,717 |
|
Total deposits | 7,597,076 |
| | 7,303,775 |
|
Federal funds purchased | 147,000 |
| | 83,000 |
|
FHLB advances | 1,462,343 |
| | 868,800 |
|
Other borrowings | 186,258 |
| | 87,123 |
|
Subordinated debt | 108,856 |
| | 108,783 |
|
Accrued interest payable and other liabilities | 59,654 |
| | 75,383 |
|
Total liabilities | 9,561,187 |
| | 8,526,864 |
|
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 September 30, 2017 and December 31, 2016 | 217,471 |
| | 217,471 |
|
Common stock, par value $1.00 per share; 200,000,000 shares authorized; 31,317,892 and 30,820,177 shares issued as of September 30, 2017 and December 31, 2016; 30,787,632 and 30,289,917 shares outstanding as of September 30, 2017 and December 31, 2016 | 31,318 |
| | 30,820 |
|
Additional paid in capital | 429,633 |
| | 427,008 |
|
Retained earnings | 240,076 |
| | 193,698 |
|
Accumulated other comprehensive income (loss), net | 377 |
| | (4,892 | ) |
Treasury stock, at cost (530,260 shares as of September 30, 2017 and December 31, 2016) | (8,233 | ) | | (8,233 | ) |
Total shareholders’ equity | 910,642 |
| | 855,872 |
|
Total liabilities and shareholders’ equity | $ | 10,471,829 |
| | $ | 9,382,736 |
|
See accompanying notes to the unaudited consolidated financial statements.
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS) — UNAUDITED
(amounts in thousands, except per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Interest income: | | | | | | | |
Loans and leases | $ | 153,608 | | | $ | 118,447 | | | $ | 305,725 | | | $ | 234,527 | |
| | | | | | | |
Investment securities | 8,327 | | | 6,155 | | | 16,306 | | | 11,132 | |
Other | 946 | | | 616 | | | 1,965 | | | 4,902 | |
Total interest income | 162,881 | | | 125,218 | | | 323,996 | | | 250,561 | |
Interest expense: | | | | | | | |
Deposits | 15,653 | | | 23,238 | | | 31,311 | | | 57,591 | |
FHLB advances | 963 | | | 4,736 | | | 6,155 | | | 10,127 | |
Subordinated debt | 2,689 | | | 2,689 | | | 5,378 | | | 5,378 | |
FRB PPP liquidity facility, federal funds purchased and other borrowings | 4,819 | | | 2,573 | | | 9,664 | | | 4,163 | |
Total interest expense | 24,124 | | | 33,236 | | | 52,508 | | | 77,259 | |
Net interest income | 138,757 | | | 91,982 | | | 271,488 | | | 173,302 | |
Provision for credit losses on loans and leases | 3,291 | | | 20,946 | | | 372 | | | 52,732 | |
Net interest income after provision for credit losses on loans and leases | 135,466 | | | 71,036 | | | 271,116 | | | 120,570 | |
Non-interest income: | | | | | | | |
| | | | | | | |
| | | | | | | |
Interchange and card revenue | 84 | | | 193 | | | 169 | | | 463 | |
| | | | | | | |
Deposit fees | 891 | | | 502 | | | 1,754 | | | 1,054 | |
Commercial lease income | 5,311 | | | 4,508 | | | 10,516 | | | 8,776 | |
Bank-owned life insurance | 2,765 | | | 1,757 | | | 4,444 | | | 3,519 | |
Mortgage warehouse transactional fees | 3,265 | | | 2,582 | | | 7,512 | | | 4,533 | |
Gain (loss) on sale of SBA and other loans | 1,900 | | | 23 | | | 3,475 | | | 34 | |
Mortgage banking income | 386 | | | 38 | | | 849 | | | 334 | |
| | | | | | | |
Gain (loss) on sale of investment securities | 1,812 | | | 4,353 | | | 25,378 | | | 8,328 | |
| | | | | | | |
Unrealized gain (loss) on investment securities | 1,746 | | | 1,200 | | | 2,720 | | | (178) | |
Loss on sale of foreign subsidiaries | (2,840) | | | 0 | | | (2,840) | | | 0 | |
Unrealized gain (loss) on derivatives | (439) | | | (4,158) | | | 2,098 | | | (5,304) | |
Loss on cash flow hedge derivative terminations | 0 | | | 0 | | | (24,467) | | | 0 | |
Other | 1,941 | | | 713 | | | 3,682 | | | 1,312 | |
Total non-interest income | 16,822 | | | 11,711 | | | 35,290 | | | 22,871 | |
Non-interest expense: | | | | | | | |
Salaries and employee benefits | 28,023 | | | 23,192 | | | 51,994 | | | 43,716 | |
Technology, communication and bank operations | 19,618 | | | 11,103 | | | 39,606 | | | 21,642 | |
Professional services | 8,234 | | | 2,974 | | | 14,523 | | | 6,519 | |
Occupancy | 2,482 | | | 2,639 | | | 5,103 | | | 5,252 | |
Commercial lease depreciation | 4,415 | | | 3,643 | | | 8,706 | | | 7,070 | |
FDIC assessments, non-income taxes and regulatory fees | 2,602 | | | 2,368 | | | 5,321 | | | 5,235 | |
Merger and acquisition related expenses | 0 | | | 0 | | | 418 | | | 0 | |
Loan workout | 102 | | | 1,808 | | | (159) | | | 2,175 | |
Advertising and promotion | 313 | | | 372 | | | 874 | | | 1,795 | |
| | | | | | | |
Other | 5,034 | | | 1,692 | | | 6,364 | | | 5,354 | |
Total non-interest expense | 70,823 | | | 49,791 | | | 132,750 | | | 98,758 | |
Income before income tax expense | 81,465 | | | 32,956 | | | 173,656 | | | 44,683 | |
Income tax expense | 20,124 | | | 7,980 | | | 37,684 | | | 11,254 | |
Net income from continuing operations | $ | 61,341 | | | $ | 24,976 | | | $ | 135,972 | | | $ | 33,429 | |
| | | | | | | |
| (continued) |
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Interest income: | | | | | | | |
Loans receivable | $ | 67,107 |
| | $ | 60,362 |
| | $ | 195,605 |
| | $ | 173,847 |
|
Loans held for sale | 21,633 |
| | 18,737 |
| | 53,103 |
| | 50,272 |
|
Investment securities | 7,307 |
| | 3,528 |
| | 21,017 |
| | 10,875 |
|
Other | 2,238 |
| | 1,585 |
| | 5,507 |
| | 3,937 |
|
Total interest income | 98,285 |
| | 84,212 |
| | 275,232 |
| | 238,931 |
|
Interest expense: | | | | | | | |
Deposits | 18,381 |
| | 13,009 |
| | 48,934 |
| | 34,365 |
|
Other borrowings | 3,168 |
| | 1,642 |
| | 6,767 |
| | 4,867 |
|
FHLB advances | 7,032 |
| | 3,291 |
| | 15,433 |
| | 9,274 |
|
Subordinated debt | 1,685 |
| | 1,685 |
| | 5,055 |
| | 5,055 |
|
Total interest expense | 30,266 |
| | 19,627 |
| | 76,189 |
| | 53,561 |
|
Net interest income | 68,019 |
| | 64,585 |
| | 199,043 |
| | 185,370 |
|
Provision for loan losses | 2,352 |
| | 88 |
| | 5,937 |
| | 2,854 |
|
Net interest income after provision for loan losses | 65,667 |
| | 64,497 |
| | 193,106 |
| | 182,516 |
|
Non-interest income: | | | | | | | |
Interchange and card revenue | 9,570 |
| | 11,547 |
| | 31,729 |
| | 13,806 |
|
Gain (loss) on sale of investment securities | 5,349 |
| | (1 | ) | | 8,532 |
| | 25 |
|
Deposit fees | 2,659 |
| | 4,218 |
| | 7,918 |
| | 5,260 |
|
Mortgage warehouse transactional fees | 2,396 |
| | 3,080 |
| | 7,139 |
| | 8,702 |
|
Bank-owned life insurance | 1,672 |
| | 1,386 |
| | 5,297 |
| | 3,629 |
|
Gain on sale of SBA and other loans | 1,144 |
| | 1,206 |
| | 3,045 |
| | 2,135 |
|
Mortgage banking income | 257 |
| | 287 |
| | 703 |
| | 737 |
|
Impairment loss on investment securities | (8,349 | ) | | — |
| | (12,934 | ) | | — |
|
Other | 3,328 |
| | 5,763 |
| | 7,741 |
| | 6,943 |
|
Total non-interest income | 18,026 |
| | 27,486 |
| | 59,170 |
| | 41,237 |
|
Non-interest expense: | | | | | | | |
Salaries and employee benefits | 24,807 |
| | 22,681 |
| | 69,569 |
| | 58,051 |
|
Technology, communication and bank operations | 14,401 |
| | 12,525 |
| | 33,227 |
| | 19,021 |
|
Professional services | 7,403 |
| | 7,006 |
| | 21,142 |
| | 13,213 |
|
Occupancy | 2,857 |
| | 2,450 |
| | 8,228 |
| | 7,248 |
|
FDIC assessments, taxes, and regulatory fees | 2,475 |
| | 2,726 |
| | 6,615 |
| | 11,191 |
|
Provision for operating losses | 1,509 |
| | 1,406 |
| | 4,901 |
| | 1,943 |
|
Loan workout | 915 |
| | 592 |
| | 1,844 |
| | 1,497 |
|
Other real estate owned | 445 |
| | 1,192 |
| | 550 |
| | 1,663 |
|
Advertising and promotion | 404 |
| | 591 |
| | 1,108 |
| | 1,178 |
|
Acquisition related expenses | — |
| | 144 |
| | — |
| | 1,195 |
|
Other | 5,824 |
| | 4,905 |
| | 13,634 |
| | 12,106 |
|
Total non-interest expense | 61,040 |
| | 56,218 |
| | 160,818 |
| | 128,306 |
|
Income before income tax expense | 22,653 |
| | 35,765 |
| | 91,458 |
| | 95,447 |
|
Income tax expense | 14,899 |
| | 14,558 |
| | 34,236 |
| | 36,572 |
|
Net income | 7,754 |
| | 21,207 |
| | 57,222 |
| | 58,875 |
|
Preferred stock dividends | 3,615 |
| | 2,552 |
| | 10,844 |
| | 5,900 |
|
Net income available to common shareholders | $ | 4,139 |
| | $ | 18,655 |
| | $ | 46,378 |
| | $ | 52,975 |
|
Basic earnings per common share | $ | 0.13 |
| | $ | 0.68 |
| | $ | 1.52 |
| | $ | 1.95 |
|
Diluted earnings per common share | $ | 0.13 |
| | $ | 0.63 |
| | $ | 1.42 |
| | $ | 1.80 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Loss from discontinued operations before income taxes | $ | 0 | | | $ | (3,190) | | | $ | (20,354) | | | $ | (9,911) | |
Income tax expense (benefit) from discontinued operations | 0 | | | (932) | | | 17,682 | | | (2,299) | |
Net loss from discontinued operations | 0 | | | (2,258) | | | (38,036) | | | (7,612) | |
Net income | 61,341 | | | 22,718 | | | 97,936 | | | 25,817 | |
Preferred stock dividends | 3,299 | | | 3,581 | | | 6,690 | | | 7,196 | |
Net income available to common shareholders | $ | 58,042 | | | $ | 19,137 | | | $ | 91,246 | | | $ | 18,621 | |
| | | | | | | |
Basic earnings per common share from continuing operations | $ | 1.80 | | | $ | 0.68 | | | $ | 4.03 | | | $ | 0.83 | |
Basic earnings per common share | 1.80 | | | 0.61 | | | 2.84 | | | 0.59 | |
Diluted earnings per common share from continuing operations | 1.72 | | | 0.68 | | | 3.88 | | | 0.83 | |
Diluted earnings per common share | 1.72 | | | 0.61 | | | 2.74 | | | 0.59 | |
See accompanying notes to the unaudited consolidated financial statements.
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) — UNAUDITED
(amounts in thousands) | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | |
| | | | | | | |
Net income | $ | 61,341 | | | $ | 22,718 | | | $ | 97,936 | | | $ | 25,817 | |
Unrealized gains (losses) on available for sale debt securities: | | | | | | | |
Unrealized gains (losses) arising during the period | 592 | | | 35,315 | | | 992 | | | 26,217 | |
Income tax effect | (154) | | | (9,182) | | | (258) | | | (6,816) | |
Reclassification adjustments for (gains) losses included in net income | (1,812) | | | (4,353) | | | (25,378) | | | (8,328) | |
Income tax effect | 471 | | | 1,131 | | | 6,598 | | | 2,165 | |
Net unrealized gains (losses) on available for sale debt securities | (903) | | | 22,911 | | | (18,046) | | | 13,238 | |
Unrealized gains (losses) on cash flow hedges: | | | | | | | |
Unrealized gains (losses) arising during the period | 6 | | | (6,369) | | | 12,321 | | | (34,066) | |
Income tax effect | (2) | | | 1,684 | | | (3,204) | | | 9,035 | |
Reclassification adjustment for (gains) losses included in net income | 1,046 | | | 2,718 | | | 26,972 | | | 4,196 | |
Income tax effect | (272) | | | (734) | | | (7,013) | | | (1,118) | |
Net unrealized gains (losses) on cash flow hedges | 778 | | | (2,701) | | | 29,076 | | | (21,953) | |
Other comprehensive income (loss), net of income tax effect | (125) | | | 20,210 | | | 11,030 | | | (8,715) | |
Comprehensive income (loss) | $ | 61,216 | | | $ | 42,928 | | | $ | 108,966 | | | $ | 17,102 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net income | $ | 7,754 |
| | $ | 21,207 |
| | $ | 57,222 |
| | $ | 58,875 |
|
Unrealized (losses) gains on available-for-sale securities: | | | | | | | |
Unrealized holding (losses) gains on securities arising during the period | (3,570 | ) | | 329 |
| | 15,192 |
| | 15,256 |
|
Income tax effect | 1,393 |
| | (124 | ) | | (5,924 | ) | | (5,721 | ) |
Reclassification adjustments for (gains) losses on securities included in net income | (5,349 | ) | | 1 |
| | (8,532 | ) | | (25 | ) |
Income tax effect | 2,086 |
| | — |
| | 3,327 |
| | 9 |
|
Net unrealized (losses) gains on available-for-sale securities | (5,440 | ) | | 206 |
| | 4,063 |
| | 9,519 |
|
Unrealized gains (losses) on cash flow hedges: | | | | | | | |
Unrealized gains (losses) arising during the period | 171 |
| | 890 |
| | (189 | ) | | (2,523 | ) |
Income tax effect | (67 | ) | | (334 | ) | | 74 |
| | 946 |
|
Reclassification adjustment for losses included in net income | 572 |
| | 703 |
| | 2,166 |
| | 1,306 |
|
Income tax effect | (223 | ) | | (264 | ) | | (845 | ) | | (490 | ) |
Net unrealized gains (losses) on cash flow hedges | 453 |
| | 995 |
| | 1,206 |
| | (761 | ) |
Other comprehensive (loss) income, net of income tax effect | (4,987 | ) | | 1,201 |
| | 5,269 |
| | 8,758 |
|
Comprehensive income | $ | 2,767 |
| | $ | 22,408 |
| | $ | 62,491 |
| | $ | 67,633 |
|
See accompanying notes to the unaudited consolidated financial statements.
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY — UNAUDITED
(amounts in thousands, except shares outstanding data) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 |
| Preferred Stock | | Common Stock | | | | | | | | | | |
| Shares of Preferred Stock Outstanding | | Preferred Stock | | Shares of Common Stock Outstanding | | Common Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total |
Balance, March 31, 2021 | 9,000,000 | | | $ | 217,471 | | | 32,238,762 | | | $ | 33,519 | | | $ | 515,318 | | | $ | 438,802 | | | $ | 5,391 | | | $ | (21,780) | | | $ | 1,188,721 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 61,341 | | | — | | | — | | | 61,341 | |
| | | | | | | | | | | | | | | | | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | (125) | | | — | | | (125) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Preferred stock dividends (1) | — | | | — | | | — | | | — | | | — | | | (3,299) | | | — | | | — | | | (3,299) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Share-based compensation expense | — | | | — | | | — | | | — | | | 4,264 | | | — | | | — | | | — | | | 4,264 | |
| | | | | | | | | | | | | | | | | |
Issuance of common stock under share-based compensation arrangements | — | | | — | | | 114,494 | | | 115 | | | (288) | | | — | | | — | | | — | | | (173) | |
Balance, June 30, 2021 | 9,000,000 | | | $ | 217,471 | | | 32,353,256 | | | $ | 33,634 | | | $ | 519,294 | | | $ | 496,844 | | | $ | 5,266 | | | $ | (21,780) | | | $ | 1,250,729 | |
| | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2020 |
| Preferred Stock | | Common Stock | | | | | | | | | | |
| Shares of Preferred Stock Outstanding | | Preferred Stock | | Shares of Common Stock Outstanding | | Common Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Treasury Stock | | Total |
Balance, March 31, 2020 | 9,000,000 | | | $ | 217,471 | | | 31,470,026 | | | $ | 32,751 | | | $ | 446,840 | | | $ | 319,529 | | | $ | (30,175) | | | $ | (21,780) | | | $ | 964,636 | |
| | | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 22,718 | | | — | | | — | | | 22,718 | |
| | | | | | | | | | | | | | | | | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | 20,210 | | | — | | | 20,210 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Preferred stock dividends(1) | — | | | — | | | — | | | — | | | — | | | (3,581) | | | — | | | — | | | (3,581) | |
Share-based compensation expense | — | | | — | | | — | | | — | | | 3,599 | | | — | | | — | | | — | | | 3,599 | |
| | | | | | | | | | | | | | | | | |
Issuance of common stock under share-based compensation arrangements | — | | | — | | | 40,261 | | | 40 | | | 225 | | | — | | | — | | | — | | | 265 | |
Balance, June 30, 2020 | 9,000,000 | | | $ | 217,471 | | | 31,510,287 | | | $ | 32,791 | | | $ | 450,665 | | | $ | 338,665 | | | $ | (9,965) | | | $ | (21,780) | | | $ | 1,007,847 | |
(1)Dividends per share of $0.350359, $0.336942, $0.403125, and $0.375 per share were declared on Series C, D, E, and F preferred stock for the three months ended June 30, 2021. Dividends per share of $0.4375, $0.40625, $0.403125, and $0.375 per share were declared on Series C, D, E, and F preferred stock for the three months ended June 30, 2020.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
| Preferred Stock | | Common Stock | | | | | | | | | | |
| Shares of Preferred Stock Outstanding | | Preferred Stock | | Shares of Common Stock Outstanding | | Common Stock | | Additional Paid in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income/(Loss) | | Treasury Stock | | Total |
Balance, December 31, 2016 | 9,000,000 |
| | $ | 217,471 |
| | 30,289,917 |
| | $ | 30,820 |
| | $ | 427,008 |
| | $ | 193,698 |
| | $ | (4,892 | ) | | $ | (8,233 | ) | | $ | 855,872 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 57,222 |
| | — |
| | — |
| | 57,222 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5,269 |
| | — |
| | 5,269 |
|
Preferred stock dividends | — |
| | — |
| | — |
| | — |
| | — |
| | (10,844 | ) | | — |
| | — |
| | (10,844 | ) |
Share-based compensation expense | — |
| | — |
| | — |
| | — |
| | 4,536 |
| | — |
| | — |
| | — |
| | 4,536 |
|
Exercise of warrants | — |
| | — |
| | 50,387 |
| | 50 |
| | 507 |
| | — |
| | — |
| | — |
| | 557 |
|
Issuance of common stock under share-based compensation arrangements | — |
| | — |
| | 447,328 |
| | 448 |
| | (2,418 | ) | | — |
| | — |
| | — |
| | (1,970 | ) |
Balance, September 30, 2017 | 9,000,000 |
| | $ | 217,471 |
| | 30,787,632 |
| | $ | 31,318 |
| | $ | 429,633 |
| | $ | 240,076 |
| | $ | 377 |
| | $ | (8,233 | ) | | $ | 910,642 |
|
| | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2016 |
| 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, 2015 | 2,300,000 |
| | $ | 55,569 |
| | 26,901,801 |
| | $ | 27,432 |
| | $ | 362,607 |
| | $ | 124,511 |
| | $ | (7,984 | ) | | $ | (8,233 | ) | | $ | 553,902 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 58,875 |
| | — |
| | — |
| | 58,875 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8,758 |
| | — |
| | 8,758 |
|
Issuance of common stock, net of offering costs of $217 | — |
| | — |
| | 226,677 |
| | 227 |
| | 5,450 |
| | — |
| | — |
| | — |
| | 5,677 |
|
Issuance of preferred stock, net of offering costs of $5,520 | 6,700,000 |
| | 161,980 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 161,980 |
|
Preferred stock dividends | — |
| | — |
| | — |
| | — |
| | — |
| | (5,900 | ) | | — |
| | | | (5,900 | ) |
Share-based compensation expense | — |
| | — |
| | — |
| | — |
| | 4,569 |
| | — |
| | — |
| | — |
| | 4,569 |
|
Exercise of warrants | — |
| | — |
| | 259,851 |
| | 259 |
| | 862 |
| | — |
| | — |
| | — |
| | 1,121 |
|
Issuance of common stock under share-based compensation arrangements | — |
| | — |
| | 155,888 |
| | 156 |
| | 673 |
| | — |
| | — |
| | — |
| | 829 |
|
Balance, September 30, 2016 | 9,000,000 |
| | $ | 217,549 |
| | 27,544,217 |
| | $ | 28,074 |
| | $ | 374,161 |
| | $ | 177,486 |
| | $ | 774 |
| | $ | (8,233 | ) | | $ | 789,811 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
| 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, 2020 | 9,000,000 | | | $ | 217,471 | | | 31,705,088 | | | $ | 32,986 | | | $ | 455,592 | | | $ | 438,581 | | | $ | (5,764) | | | $ | (21,780) | | | $ | 1,117,086 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 97,936 | | | — | | | — | | | 97,936 | |
| | | | | | | | | | | | | | | | | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | 11,030 | | | — | | | 11,030 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Preferred stock dividends(1) | — | | | — | | | — | | | — | | | — | | | (6,690) | | | — | | | — | | | (6,690) | |
Sale of non-controlling interest in BMT (2) | — | | | — | | | — | | | — | | | 31,893 | | | — | | | — | | | — | | | 31,893 | |
Distribution of investment in BM Technologies (3) | — | | | — | | | — | | | — | | | — | | | (32,983) | | | — | | | — | | | (32,983) | |
Restricted stock awards to certain BMT team members (4) | — | | | — | | | — | | | — | | | 19,592 | | | — | | | — | | | — | | | 19,592 | |
Share-based compensation expense | — | | | — | | | — | | | — | | | 7,873 | | | — | | | — | | | — | | | 7,873 | |
| | | | | | | | | | | | | | | | | |
Issuance of common stock under share-based compensation arrangements | — | | | — | | | 648,168 | | | 648 | | | 4,344 | | | — | | | — | | | — | | | 4,992 | |
| | | | | | | | | | | | | | | | | |
Balance, June 30, 2021 | 9,000,000 | | | $ | 217,471 | | | 32,353,256 | | | $ | 33,634 | | | $ | 519,294 | | | $ | 496,844 | | | $ | 5,266 | | | $ | (21,780) | | | $ | 1,250,729 | |
| | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2020 |
| 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, 2019 | 9,000,000 | | | $ | 217,471 | | | 31,336,791 | | | $ | 32,617 | | | $ | 444,218 | | | $ | 381,519 | | | $ | (1,250) | | | $ | (21,780) | | | $ | 1,052,795 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Cumulative effect of change in accounting principle - CECL | — | | | — | | | — | | | — | | | — | | | (61,475) | | | — | | | — | | | (61,475) | |
Net income | — | | | — | | | — | | | — | | | — | | | 25,817 | | | — | | | — | | | 25,817 | |
| | | | | | | | | | | | | | | | | |
Other comprehensive income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | (8,715) | | | — | | | (8,715) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Preferred stock dividends(1) | — | | | — | | | — | | | — | | | — | | | (7,196) | | | — | | | | | (7,196) | |
Share-based compensation expense | — | | | — | | | — | | | — | | | 6,827 | | | — | | | — | | | — | | | 6,827 | |
| | | | | | | | | | | | | | | | | |
Issuance of common stock under share-based compensation arrangements | — | | | — | | | 173,496 | | | 174 | | | (380) | | | — | | | — | | | — | | | (206) | |
| | | | | | | | | | | | | | | | | |
Balance, June 30, 2020 | 9,000,000 | | | $ | 217,471 | | | 31,510,287 | | | $ | 32,791 | | | $ | 450,665 | | | $ | 338,665 | | | $ | (9,965) | | | $ | (21,780) | | | $ | 1,007,847 | |
(1)Dividends per share of $0.69514, $0.743192, $0.806250, and $0.750 per share were declared on Series C, D, E, and F preferred stock for the six months ended June 30, 2021. Dividends per share of $0.8750, $0.81250, $0.806250, and $0.750 per share were declared on Series C, D, E, and F preferred stock for the six months ended June 30, 2020.
(2)Refer to NOTE 3 – DISCONTINUED OPERATIONS for additional information about the sale of non-controlling interest in BMT including the reverse recapitalization of MFAC.
(3)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.
(4)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 unaudited consolidated financial statements.
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(amounts in thousands)
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
Cash Flows from Operating Activities | | | |
Net income | $ | 57,222 |
| | $ | 58,875 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | |
Provision for loan losses, net of change to FDIC receivable and clawback liability | 5,937 |
| | 2,854 |
|
Depreciation and amortization | 7,476 |
| | 4,138 |
|
Share-based compensation expense | 5,377 |
| | 5,213 |
|
Deferred taxes | 286 |
| | (4,846 | ) |
Net amortization of investment securities premiums and discounts | 520 |
| | 664 |
|
Gain on sale of investment securities | (8,532 | ) | | (25 | ) |
Impairment loss on investment securities | 12,934 |
| | — |
|
Gain on sale of SBA and other loans | (3,553 | ) | | (2,674 | ) |
Origination of loans held for sale | (22,770,726 | ) | | (27,092,862 | ) |
Proceeds from the sale of loans held for sale | 22,925,668 |
| | 26,473,789 |
|
Decrease in FDIC loss sharing receivable net of clawback liability | — |
| | 255 |
|
Amortization of fair value discounts and premiums | 93 |
| | 312 |
|
Net loss on sales of other real estate owned | 154 |
| | 85 |
|
Valuation and other adjustments to other real estate owned, net of FDIC receivable | 298 |
| | 1,261 |
|
Earnings on investment in bank-owned life insurance | (5,297 | ) | | (3,629 | ) |
Increase in accrued interest receivable and other assets | (27,862 | ) | | (38,672 | ) |
(Decrease) increase in accrued interest payable and other liabilities | (14,106 | ) | | 66,577 |
|
Net Cash Provided By (Used In) Operating Activities | 185,889 |
| | (528,685 | ) |
Cash Flows from Investing Activities | | | |
Proceeds from maturities, calls and principal repayments of securities available for sale | 36,461 |
| | 46,097 |
|
Proceeds from sales of investment securities available for sale | 698,451 |
| | 2,853 |
|
Purchases of investment securities available for sale | (796,594 | ) | | (5,000 | ) |
Net increase in loans | (921,049 | ) | | (641,093 | ) |
Proceeds from sales of loans | 124,703 |
| | 91,868 |
|
Purchase of loans | (262,641 | ) | | — |
|
Purchases of bank-owned life insurance | (90,000 | ) | | — |
|
Proceeds from bank-owned life insurance | 1,418 |
| | 619 |
|
Net (purchases of) proceeds from FHLB, Federal Reserve Bank, and other restricted stock | (30,203 | ) | | 19,220 |
|
Payments to the FDIC on loss sharing agreements | — |
| | (2,049 | ) |
Purchases of bank premises and equipment | (1,725 | ) | | (3,343 | ) |
Proceeds from sales of other real estate owned | 1,680 |
| | 419 |
|
Acquisition of Disbursements business, net | — |
| | (17,000 | ) |
Net Cash Used In Investing Activities | (1,267,428 | ) | | (507,409 | ) |
Cash Flows from Financing Activities | | | |
Net increase in deposits | 293,301 |
| | 1,479,471 |
|
Net increase (decrease) in short-term borrowed funds from the FHLB | 593,543 |
| | (663,600 | ) |
Net increase (decrease) in federal funds purchased | 64,000 |
| | (18,000 | ) |
Proceeds from long-term FHLB borrowings | — |
| | 75,000 |
|
Net proceeds from issuance of long-term debt | 98,564 |
| | — |
|
Net proceeds from issuance of preferred stock | — |
| | 161,980 |
|
Preferred stock dividends paid | (10,844 | ) | | (5,450 | ) |
Exercise of warrants | 557 |
| | 1,121 |
|
Payments of employee taxes withheld from share-based awards | (4,923 | ) | | (702 | ) |
Proceeds from issuance of common stock | 2,112 |
| | 7,269 |
|
Net Cash Provided By Financing Activities | 1,036,310 |
| | 1,037,089 |
|
Net (Decrease) Increase in Cash and Cash Equivalents | (45,229 | ) | | 995 |
|
Cash and Cash Equivalents – Beginning | 264,709 |
| | 264,593 |
|
Cash and Cash Equivalents – Ending | $ | 219,480 |
| | $ | 265,588 |
|
| | | |
| | | |
| | | |
| (continued) |
| | |
| | | |
Supplementary Cash Flows Information | | | |
Interest paid | $ | 70,706 |
| | $ | 50,410 |
|
Income taxes paid | 31,545 |
| | 40,966 |
|
Non-cash items: | | | |
Transfer of loans to other real estate owned | $ | 83 |
| | $ | 605 |
|
Transfer of loans held for investment to loans held for sale | 150,638 |
| | — |
|
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
Cash Flows from Operating Activities | | | |
Net income from continuing operations | $ | 135,972 | | | $ | 33,429 | |
Adjustments to reconcile net income to net cash provided by continuing operating activities: | | | |
Provision (benefit) for credit losses on loans and leases | 372 | | | 52,732 | |
Depreciation and amortization | 10,735 | | | 14,319 | |
| | | |
Share-based compensation expense | 7,645 | | | 7,278 | |
Deferred taxes | 3,494 | | | (28,104) | |
Net amortization (accretion) of investment securities premiums and discounts | 449 | | | (364) | |
Unrealized (gain) loss on investment securities | (2,720) | | | 178 | |
(Gain) loss on sale of investment securities | (25,378) | | | (8,328) | |
Loss on sale of foreign subsidiaries | 2,840 | | | 0 | |
| | | |
Unrealized (gain) loss on derivatives | (2,098) | | | 5,304 | |
Loss on cash flow hedge derivative terminations | 24,467 | | | 0 | |
Settlement of terminated cash flow hedge derivatives | (27,156) | | | 0 | |
(Gain) loss on sale of leased assets under lessor operating leases | 132 | | | 0 | |
Fair value adjustment on loans held for sale | (1,115) | | | 1,450 | |
(Gain) loss on sale of SBA and other loans | (4,256) | | | (426) | |
Origination of loans held for sale | (28,894) | | | (22,730) | |
Proceeds from the sale of loans held for sale | 29,110 | | | 21,745 | |
| | | |
Amortization (accretion) of fair value discounts and premiums | (771) | | | (1,137) | |
| | | |
| | | |
Earnings on investment in bank-owned life insurance | (4,444) | | | (3,519) | |
(Increase) decrease in accrued interest receivable and other assets | 55,839 | | | (113,857) | |
Increase (decrease) in accrued interest payable and other liabilities | 115,102 | | | 81,835 | |
Net Cash Provided By Continuing Operating Activities | 289,325 | | | 39,805 | |
Cash Flows from Investing Activities | | | |
Proceeds from maturities, calls and principal repayments of investment securities | 172,750 | | | 78,485 | |
Proceed from sales of foreign subsidiaries | 3,765 | | | 0 | |
Proceeds from sales of investment securities available for sale | 407,587 | | | 109,207 | |
Purchases of investment securities available for sale | (890,186) | | | (280,410) | |
Origination of mortgage warehouse loans | (31,399,228) | | | (23,573,962) | |
Proceeds from repayments of mortgage warehouse loans | 32,162,462 | | | 23,033,058 | |
Net (increase) decrease in loans and leases, excluding mortgage warehouse loans | (1,304,356) | | | (4,515,097) | |
Proceeds from sales of loans and leases | 130,501 | | | 0 | |
Purchase of loans | (737,336) | | | (211,096) | |
Purchases of bank-owned life insurance | (46,462) | | | 0 | |
Proceeds from bank-owned life insurance | 1,999 | | | 0 | |
Net proceeds from sale of (purchases of) FHLB, Federal Reserve Bank, and other restricted stock | 31,473 | | | (6,809) | |
| | | |
Purchases of bank premises and equipment | (312) | | | (165) | |
Proceeds from sales of other real estate owned | 45 | | | 77 | |
Proceeds from sales of leased assets under lessor operating leases | 6,106 | | | 0 | |
Purchases of leased assets under lessor operating leases | (8,625) | | | (9,011) | |
Net Cash Used In Continuing Investing Activities | (1,469,817) | | | (5,375,723) | |
Cash Flows from Financing Activities | | | |
Net increase in deposits | 2,564,010 | | | 2,316,939 | |
| | | |
Net increase (decrease) in short-term borrowed funds from the FHLB | (850,000) | | | 0 | |
| | | |
Net increase (decrease) in federal funds purchased | (250,000) | | | (538,000) | |
Net increase (decrease) in borrowed funds from FRB PPP liquidity facility | (549,151) | | | 4,419,967 | |
| | | |
| | | |
| | | |
| | | |
| | | |
Preferred stock dividends paid | (6,746) | | | (7,229) | |
| | | |
| | | |
Payments of employee taxes withheld from share-based awards | (2,294) | | | (1,067) | |
Proceeds from issuance of common stock | 7,815 | | | 410 | |
Proceeds from sale of non-controlling interest in BMT | 26,795 | | | 0 | |
Net Cash Provided By Continuing Financing Activities | 940,429 | | | 6,191,020 | |
Net Increase (Decrease) in Cash and Cash Equivalents From Continuing Operations | $ | (240,063) | | | $ | 855,102 | |
| | | |
| (continued) |
| | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
Discontinued Operations: | | | |
Net Cash Used In Operating Activities | $ | (22,791) | | | $ | (329) | |
Net Cash Provided By Investing Activities | 0 | | | 52 | |
| | | |
Net Increase (Decrease) in Cash and Cash Equivalents From Discontinued Operations | (22,791) | | | (277) | |
Net Increase (Decrease) in Cash and Cash Equivalents | (262,854) | | | 854,825 | |
Cash and Cash Equivalents – Beginning | 693,354 | | | 212,505 | |
Cash and Cash Equivalents – Ending | $ | 430,500 | | | $ | 1,067,330 | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Non-cash Operating and Investing Activities: | | | |
Transfer of loans to other real estate owned | $ | 0 | | | $ | 31 | |
Distribution of investment in BM Technologies common stock | 32,983 | | | 0 | |
Transfer of loans held for investment to held for sale | 27,824 | | | 19,050 | |
Transfer of loans held for sale to held for investment | 55,684 | | | 0 | |
Unsettled sales of investment securities | 0 | | | 33,615 | |
Unsettled purchases of investment securities | 10,000 | | | 0 | |
| | | |
See accompanying notes to the unaudited consolidated financial statements.
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
NOTE 1 — DESCRIPTION OF THE BUSINESS
Customers Bancorp, Inc. (the “Bancorp” or “Customers(“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); 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; and nationally for certain loan and deposit products. The Bank has 1412 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 and Orlando, Florida. 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.
Through BankMobile, a division of CustomersThe Bank Customers offers state of the art high tech digital banking services to consumers, students, and the "under banked" nationwide. The combination of the BankMobile technology software platform with the Vibe Student Checking and Refund Management Disbursement Services business (the "Disbursement business") acquired from Higher One Holdings, Inc. and Higher One, Inc. (together, "Higher One") in June 2016 propelled BankMobile to one of the largest mobile banking services in the United States by number of customers. Customers has announced its intent to spin-off BankMobile to Customers’ shareholders through a tax-free spin-off/merger transaction. Accordingly, the assets and liabilities of BankMobile will not be reported separately as held for sale, and its operating results and associated cash flows will not be reported as discontinued operations, until execution of the spin-off/merger transaction and will be considered held and used for all periods presented. Previously reported held-for-sale balances in the consolidated balance sheet as of December 31, 2016, and corresponding operating results and cash flows for the periods presented, have been reclassified to conform with the current period consolidated financial statement presentation. See NOTE 3 TAX-FREE SPIN-OFF AND MERGER.
Customers is subject to regulation of the Pennsylvania Department of Banking and Securities and the Federal Reserve Bank and is periodically examined by those regulatory authorities. Customers Bancorp has made certain equity investments through its wholly owned subsidiaries CB Green Ventures Pte Ltd. and CUBI India Ventures Pte Ltd., which were sold in June 2021. See NOTE 6 – INVESTMENT SECURITIES for additional information.
NOTE 2 - ACQUISITION ACTIVITY
On June 15, 2016, Customers completed the acquisition of substantially all of 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 contemplates aggregate guaranteed payments to Higher One of $42 million. The aggregate purchase price payable by Customers is $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 upon the first anniversary of the closing and (iii) $10 million in cash paid upon the second anniversary of the closing. In accordance with the terms of the agreement, $10 million was paid to Higher One in June 2017. 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 also will be required to make additional payments to Higher One if, during the three years following the closing, revenues from the acquired 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 September 30, 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. The escrow account with $10 million and $20 million, respectively, as of September 30, 2017 and December 31, 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 September 30, 2017 and December 31, 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 - TAX-FREE 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 for up to one year after the
closing date of the acquisition as 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 at December 31, 2016). Customers paid the first $10 million due to Higher One in June 2017.
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. Because BankMobile met the criteria to be classified as held for sale at December 31, 2016, the acquired assets were not depreciated or amortized during first quarter 2017 and second quarter 2017. The reclassification of the acquired assets as held and used as of September 30, 2017 resulted in depreciation and amortization expense for the developed software, other intangible assets, and fixed assets totaling $3.5 million in third quarter 2017. The acquired assets were reclassified to held and used at their carrying amounts, adjusted for depreciation and amortization for the periods they were classified as held for sale, which was lower than their estimated fair values as of September 30, 2017.
NOTE 3 – TAX-FREE SPIN-OFF AND MERGER
In third quarter 2017, Customers decided that the best strategy for its shareholders for divesting BankMobile was to spin-off BankMobile to Customers’ shareholders through a spin-off/merger transaction. The tax-free spin-off is expected to be followed by a merger of Customers' BankMobile Technologies, Inc. subsidiary ("BMT") into Clearwater Florida based Flagship Community Bank ("Flagship"), with Customers' shareholders receiving shares of Flagship common stock in exchange for shares of BMT they receive in the spin-off. Flagship is expected to separately purchase BankMobile deposits directly from Customers for cash. Following completion of the spin-off and merger and other transactions contemplated in a purchase and sale agreement between Customers and Flagship, Customers' shareholders would receive collectively more than 50% of Flagship common stock, valued at approximately $110 million. The common stock of the merged entities, to be called BankMobile, is expected to be listed on a national securities exchange after completion of the transactions. Customers believes the transactions will be treated as a tax-free exchange for both Customers' shareholders and Customers. Customers expects to execute 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 purchase of BankMobile deposits from Customers. Customers expects that the Amended Agreement will provide 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 transaction 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”. However, with the third quarter 2017 spin-off/merger decision, generally accepted accounting principles require that assets, liabilities, operating results, and cash flows associated with a business to be disposed of through a spin-off/merger transaction not be reported as held for sale or discontinued operations until execution of the spin-off/merger transaction. Accordingly, BankMobile's assets, liabilities, operating results and cash flows will not be reported separately as held for sale or discontinued operations at September 30, 2017 and December 31, 2016 and for the three and nine month periods ended September 30, 2017 and 2016 and instead will be reported as held and used. As a result, 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. Customers recorded a charge of $4.2 million in third quarter 2017 relating to the amount of depreciation and amortization expense that would have been recorded had the assets been continuously classified as held and used.
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 have also been reclassified to conform with the current period presentation within the accompanying consolidated financial statements as summarized below. Customers will continue reporting the Community Business Banking and BankMobile segment results. See NOTE 14 - BUSINESS SEGMENTS.
The following summarizes the effect of the reclassification from held for sale classification to held and used classification on the previously reported consolidated balance sheet as of December 31, 2016 and the previously reported consolidated statements of income for the the three and nine months ended September 30, 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 |
|
|
| | | | | | | | | | | |
| Three Months Ended September 30, 2016 | | Effect of Reclassification From Held For Sale to Held and Used | | Three Months Ended September 30, 2016 |
| As Previously Reported | | | After Reclassification |
Interest income | $ | 84,212 |
| | $ | — |
| | $ | 84,212 |
|
Interest expense | 19,622 |
| | 5 |
| | 19,627 |
|
Net interest income | 64,590 |
| | (5 | ) | | 64,585 |
|
Provision for loan losses | (161 | ) | | 249 |
| | 88 |
|
Non-interest income | 11,121 |
| | 16,365 |
| | 27,486 |
|
Non-interest expenses | 36,750 |
| | 19,468 |
| | 56,218 |
|
Income from continuing operations before income taxes | 39,122 |
| | (3,357 | ) | | 35,765 |
|
Provision for income taxes | 15,834 |
| | (1,276 | ) | | 14,558 |
|
Net income from continuing operations | 23,288 |
| | (2,081 | ) | | 21,207 |
|
Loss from discontinued operations before income taxes | (3,357 | ) | | 3,357 |
| | — |
|
Income tax benefit from discontinued operations | (1,276 | ) | | 1,276 |
| | — |
|
Net loss from discontinued operations | (2,081 | ) |
| 2,081 |
|
| — |
|
Net income | 21,207 |
|
| — |
|
| 21,207 |
|
Preferred stock dividend | 2,552 |
| | — |
| | 2,552 |
|
Net income available to common shareholders | $ | 18,655 |
| | $ | — |
| | $ | 18,655 |
|
| | | | | |
|
| | | | | | | | | | | |
| Nine Months Ended September 30, 2016 | | Effect of Reclassification From Held For Sale to Held and Used | | Nine Months Ended September 30, 2016 |
| As Previously Reported | | | After Reclassification |
Interest income | $ | 238,931 |
| | $ | — |
| | $ | 238,931 |
|
Interest expense | 53,548 |
| | 13 |
| | 53,561 |
|
Net interest income | 185,383 |
| | (13 | ) | | 185,370 |
|
Provision for loan losses | 2,605 |
| | 249 |
| | 2,854 |
|
Non-interest income | 22,241 |
| | 18,996 |
| | 41,237 |
|
Non-interest expenses | 100,706 |
| | 27,600 |
| | 128,306 |
|
Income from continuing operations before income taxes | 104,313 |
| | (8,866 | ) | | 95,447 |
|
Provision for income taxes | 39,942 |
| | (3,370 | ) | | 36,572 |
|
Net income from continuing operations | 64,371 |
| | (5,496 | ) | | 58,875 |
|
Loss from discontinued operations before income taxes | (8,865 | ) | | 8,865 |
| | — |
|
Income tax benefit from discontinued operations | (3,369 | ) | | 3,369 |
| | — |
|
Net loss from discontinued operations | (5,496 | ) | | 5,496 |
| | — |
|
Net income | 58,875 |
| | — |
| | 58,875 |
|
Preferred stock dividend | 5,900 |
| | — |
| | 5,900 |
|
Net income available to common shareholders | $ | 52,975 |
| | $ | — |
| | $ | 52,975 |
|
| | | | | |
NOTE 4 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation
The interim unaudited consolidated financial statements of Customers Bancorp and subsidiaries have been prepared in conformity with U.S. GAAP and pursuant to the rules and regulations of the SEC. These interim unaudited consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the financial position and the results of operations and cash flows of Customers Bancorp and subsidiaries for the interim periods presented. Certain information and footnote disclosures normally included in the annual consolidated financial statements have been omitted from these interim unaudited consolidated financial statements as permitted by SEC rules and regulations. The December 31, 20162020 consolidated balance sheet presented in this report has been derived from Customers Bancorp’s audited 20162020 consolidated financial statements. Management believes that the disclosures are adequate to present fairly the consolidated financial statements as of the dates and for the periods presented. These interim unaudited consolidated financial statements should be read in conjunction with the 20162020 consolidated financial statements of Customers Bancorp and subsidiaries included in Customers' Annual Report on Form 10-K for the year ended December 31, 20162020 filed with the SEC on March 8, 2017. That1, 2021 (the "2020 Form 10-K"). The 2020 Form 10-K describes Customers Bancorp’s significant accounting policies, which include its policies on Principles of Consolidation; Cash and Cash Equivalents and Statements of Cash Flows; Restrictions on Cash and Amounts due from Banks; Business Combinations; Investment Securities; Loan Accounting Framework; AllowanceLoans Held for Loan Losses;Sale and Loans at Fair Value; Loans Receivable - Mortgage Warehouse, at Fair Value; Loans Receivable, PPP; Loans and Leases Receivable; PCD Loans and Leases; ACL; Goodwill and otherOther Intangible Assets; Investments in FHLB, Federal Reserve Bank, and other restricted stock; Other Real Estate Owned; FDIC Loss Sharing Receivable and Clawback Liability; Bank-Owned Life Insurance;Restricted Stock; OREO; BOLI; Bank Premises and Equipment; Lessor and Lessee Operating Leases; Treasury Stock; Income Taxes; Share-Based Compensation; Segments;Transfer of Financial Assets; Derivative Instruments and Hedging; Comprehensive Income;Income (Loss); EPS; and Earnings per Share. CertainLoss Contingencies. There have been no material changes to Customers Bancorp's significant accounting policies noted above for the three and six months ended June 30, 2021.
On January 4, 2021, Customers Bancorp completed the previously announced divestiture of BankMobile Technologies, Inc., 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 of Customers Bank (as amended on November 2, 2020 and December 8, 2020). 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’ 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 consolidated financial statements and prior period amounts have been reclassified to conform to the current period presentation. Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year.
Reclassifications
As described in NOTE 3 - TAX-FREE SPIN-OFF AND MERGER, as of September 30, 2017, Customers reclassified BankMobile, a segment previously classified as held for sale to held and used, as it no longer met the held-for-sale criteria. Certain prior period amounts and note disclosures (including NOTE 9 and NOTE 12) have been reclassified to conform with the current period presentation. ExceptSee NOTE 3 – DISCONTINUED OPERATIONS for additional information.
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 CAA was signed into law, which extended and expanded various relief provisions of the CARES Act.
Accounting for PPP Loans
In April 2020, Customers began originating 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 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 1.00% and terms of two or five years, if not forgiven, in whole or in part. Payments are deferred for the first six months of the 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 reclassifications, thereloans 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 no material changes to Customers' significant accounting policiesmore than 30 days past due as disclosed in Customers' Annual Report on Form 10-K for the year endedof December 31, 2016.2019, 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 provided to borrowers either individually or as part of a loan modification program. Moreover, the interagency statement applies to short-term modifications (e.g. not more than six months deferral) including payment deferrals, fee waivers, extensions of repayment terms, or other insignificant payment delays as a result of COVID-19.
Presented below are recently issuedCustomers applied Section 4013 of the CARES Act and the interagency statement in connection with applicable modifications. For modifications that qualify under either the CARES Act or the interagency statement, TDR accounting standardsand reporting is suspended. These modifications generally involve principal and/or interest payment deferrals for a period of 90 days at a time and can be extended to six months or longer for modifications that Customers has adoptedqualified under the Section 4013 of the CARES Act if requested by the borrower as welllong as those that the Financial Accounting Standards Board (“FASB”) has issued but arereason is still related to COVID-19. These modified loans would not yet effectivealso be reported as past due or that Customers has not yet adopted.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
Accounting Standards Adopted in 2017
Since January 1, 2017,Presented below are recently issued accounting standards that Customers has adopted.
| | | | | | | | | | | | | | |
Standard | | Summary of Guidance | | Effects on Financial Statements |
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 June 30, 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. |
| | | | |
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 June 30, 2021, Customers has not yet elected to apply optional expedients for certain contract modifications. 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. |
| | | | |
NOTE 3 – DISCONTINUED OPERATIONS
On January 4, 2021, Customers Bancorp completed the following FASB Accounting Standard Updates (“ASUs”)previously announced divestiture of BMT, the technology arm of its BankMobile segment, to MFAC Merger Sub Inc., nonean indirect wholly-owned subsidiary of which had a material impactMFAC, pursuant to Customers’ consolidatedan 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). 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 statements:
Customers adopted ASU 2016-05, Derivativescondition and Hedging: Effectthe results 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 de-designation of a hedging relationship provided that all the other hedge accounting criteria continue to be met.
Customers also adopted ASU 2016-06, Contingent Put and Call Options in Debt Instruments. This ASU clarifies that a contingency of put or call exercise does not need to be evaluated to determine whether it relates to interest rates and credit risk in an embedded derivative analysis 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 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. As the adoption did not result in any significant impact to Customers’ consolidated financial statements, it did not result in a modified retrospective application.
Customers also adopted ASU 2016-07, Simplifying the Transition to the Equity Method of Accounting, on a prospective basis. This ASU eliminates the requirement for the retrospective useMay 2021. Upon closing of the equity methoddivestiture, the holders of accounting as a result of an increase in the level of ownership interest or degree of influence of an investor. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of
the investor’s previouslyCustomers Bancorp's common stock who held interest and adopt the equity method of accountingtheir shares as of the date the investment becomes qualifiedclose of business on December 18, 2020 became entitled to receive an aggregate of 4,876,387 shares of BM Technologies' common stock. Customers distributed 0.15389 shares of BM Technologies common stock for the equity methodeach share of accounting.
Customers also adopted ASU 2016-17, Consolidation - Interests Held Through Related Parties that are Under Common Control. This ASU amends the guidance included in ASU 2015-02, Consolidation: Amendments to Consolidation Analysis which Customers adopted in first quarter 2016. This ASU makes a narrow amendment that requires that a single decision maker considers indirect economic interests in an entityBancorp's common stock held through related parties that are under common control on a proportionate basis when determining whether it is the primary beneficiary of that VIE. Prior to this amendment, indirect interests held through related parties that are under common control were to be considered equivalentas of the single decision maker’s direct interests in their entirety which could result in a single decision maker consolidating the VIE. As the adoption did not result in any significant impact to Customers’ consolidated financial statements, it did not result in a full or modified retrospective application.
Accounting Standards Issued But Not Yet Adopted
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities, which amends the existing hedge accounting model and expands an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedgesclose of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire changebusiness on December 18, 2020 as special dividends. Certain team members of BMT also received 1,348,748 restricted shares of BM Technologies' common stock in the fair valueform of a hedging instrument to be presented in the same income statement line as the hedged item.severance payments. The guidance also changes certain documentation and assessment requirements and modifies the accounting for components excludedtotal stock consideration from the assessmentdivestiture that were distributed to holders of hedge effectiveness. This ASU is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption permitted. Customers plans to adopt this ASU by January 1, 2018. Adoption of this new guidance must be applied on a modified retrospective approach. While Customers continues to assess all potential impactsBancorp's common stock and certain BMT team members represented 52% of the standard, Customers does not currently expectoutstanding common stock of BM Technologies at the adoptionclosing date of this ASU to have a significant impact on its financial condition, resultsthe divestiture.
The sale of operations and consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11, Accounting for Certain Financial Instruments with Down Round Features, which will change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) would no longer beBMT was accounted for as a derivative liability at fair valuesale of non-controlling interest and the merger between BMT and MFAC was accounted for as a resultreverse recapitalization as BMT was considered to be the accounting acquirer. Upon closing of the existencetransaction, Customers had no remaining investment in BM Technologies.
BMT's historical financial instruments,results for periods prior to the amendments require entities to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of income available to common shareholdersdivestiture are reflected in basic earnings per share ("EPS"). For public business entities, the amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Customers currently does not have any equity-linked financial instruments (or embedded features) with down round features, accordingly Customers does not expect the adoption of this ASU to have a significant impact on its financial condition, results of operations andBancorp’s consolidated financial statements however, Customers will continue to evaluateas discontinued operations. The assets and liabilities of BMT have been presented as "Assets of discontinued operations" and "Liabilities of discontinued operations" on the potential impact throughconsolidated balance sheet at December 31, 2020. BMT's operating results and associated cash flows have been presented as "Discontinued operations" within the adoption date.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation: Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification in Accounting Standards Codification (“ASC”) 718. Under this ASU, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award as equity or a liability changes as a result of the change in terms or conditions. This ASU does not change the accounting for modifications under ASC 718. The ASU will be effective for Customers for its first reporting period beginning after December 15, 2017, with early adoption permitted. Adoption of this new guidance must be applied prospectively to an award modified on or after the adoption date. Customers generally does not modify the terms of conditions of its share-based payment awards, accordingly Customers does not expect the adoption of this ASU to have a significant impact on its financial condition, results of operations andaccompanying consolidated financial statements however, Customers will continueand prior period amounts have been reclassified to evaluateconform with the potential impact through the adoption date.current period presentation.
In March 2017, the FASB issued ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities, which requires that premiums for certain callable debt securities held be amortizedThe following summarized financial information related to their earliest call date. This ASU does not affect the accounting for securities purchased at a discount. This ASU will be effective for Customers for its first reporting period beginning after December 15, 2018, with earlier adoption permitted. Adoption of this new guidance must be applied on a modified retrospective approach. Customers currentlyBMT has an immaterial amount of callable debt securities purchased with premiums, accordingly Customers does not expect the adoption of this ASU to have a significant
impact on its financial condition, results ofbeen segregated from continuing operations and
consolidated financial statements, however, Customers will continue to evaluatereported as discontinued operations for the
potential impact through the adoption date.periods presented. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | |
(amounts in thousands) | | 2021 | | 2020 | | 2021 | | 2020 | | | | |
Discontinued operations: | | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Non-interest income | | $ | 0 | | | $ | 16,254 | | | $ | 0 | | | $ | 32,327 | | | | | |
Non-interest expense | | 0 | | | 19,444 | | | 20,354 | | | 42,238 | | | | | |
Loss from discontinued operations before income taxes | | 0 | | | (3,190) | | | (20,354) | | | (9,911) | | | | | |
Income tax expense (benefit) | | 0 | | | (932) | | | 17,682 | | | (2,299) | | | | | |
Net loss from discontinued operations | | $ | 0 | | | $ | (2,258) | | | $ | (38,036) | | | $ | (7,612) | | | | | |
In February 2017, the FASB issued ASU 2017-05, Clarifying the ScopeThe assets and liabilities of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which clarifies the scope and application of the accounting guidancediscontinued operations on the saleconsolidated balance sheet as of nonfinancial assets to non-customers, including partial sales. This ASU defines an in-substance nonfinancial asset, in part,December 31, 2020 were as a financial asset promised to a counterparty in a contract if substantially all of the fair value of the assets (recognized and unrecognized) that are promised to the counterparty in the contract is concentrated in nonfinancial assets. If substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in substance nonfinancial assets within the scope of Subtopic 610-20. This ASU also unifies the guidance related to partial sales of nonfinancial assets, eliminates rules specifically addressing the sales of real estate, removes exceptions to the financial asset derecognition model, and clarifies the accounting for contributions of nonfinancial assets to joint ventures. This ASU will be effective for Customers for its first reporting period beginning after December 15, 2017, with early adoption permitted. The adoption of this new guidance must be applied on a full or modified retrospective basis. Customers does not expect the adoption of this ASU to have a significant impact on its financial condition, results of operations and consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which will simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test that requires an entity to determine the implied fair value of its goodwill through a hypothetical purchase price allocation. Instead, under this ASU, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. All other goodwill impairment guidance will remain largely unchanged. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will also be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This ASU is effective for Customers for its first reporting period beginning after December 15, 2019. Early adoption is permitted for impairment tests performed after January 1, 2017. Customers expects to early adopt this ASU upon its next annual goodwill impairment test in 2017 and does not expect the adoption of this ASU to have a significant impact on its financial condition, results of operations and consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, which narrows the definition of a business and clarifies that to be considered a business, the fair value of gross assets acquired (or disposed of) should not be concentrated in a single identifiable asset or a group of similar identifiable assets. In addition, to be considered a business, an acquisition would have to include an input and a substantive process that together will significantly contribute to the ability to create an output. Also, the amendments narrow the definition of the term “output” so that it is consistent with how outputs are defined in ASC Topic 606, Revenue from Contracts with Customers. This ASU is effective for Customers for its first reporting period beginning after December 15, 2017. Adoption of this new guidance must be applied on a prospective basis. Customers does not expect the adoption of this ASU to have a significant impact on its financial condition, results of operations and consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows: Restricted Cash, which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU is effective for Customers for its first reporting period beginning after December 15, 2017, with early adoption permitted. Customers does not expect the adoption to this ASU to have a significant impact on the presentation of its statement of cash flows.
In October 2016, the FASB issued ASU 2016-16-Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires that an entity recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This eliminates the current exception for all intra-entity transfers of an asset other than inventory that requires deferral of the tax effects until the asset is sold to a third party or otherwise recovered through use.
This ASU is effective for Customers for its first reporting period beginning after December 15, 2017, with early adoption permitted. Customers does not expect the adoption of this ASU to have a significant impact on its financial condition, results of operations and consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which aims to reduce the existing diversity in practice with regards to the following specific items in the Statement of Cash Flows:
follows: | | | | | | | |
1.(amounts in thousands) | Cash payments for debt prepayment or extinguishment costs will be classified in financing activities. | | December 31, 2020 |
Carrying amounts of assets included as part of discontinued operations: | | | |
2.Cash and cash equivalents | Upon settlement | | $ | 2,989 | |
Premises and equipment, net | | | 401 | |
Goodwill and other intangibles | | | 10,329 | |
Other assets | | | 48,336 | |
Total assets of zero-coupon bonds and bonds with insignificant cash coupons, the portion of the payment attributable to imputed interest will be classified as an operating activity, while the portion of the payment attributable to principal will be classified as a financing activity.discontinued operations | | | $ | 62,055 | |
| | | |
3.Carrying amounts of liabilities included as part of discontinued operations: | Cash paid by an acquirer soon after a business combination (i.e. approximately three months or less) for the settlement of a contingent consideration liability will be classified in investing activities. Payments made thereafter should be separated between financing activities and operating activities. Cash payments up to the amount of the contingent consideration liability recognized at the acquisition date will be classified in financing activities; any excess will be classified in operating activities. |
| |
4.Borrowings from Customers Bank | Cash proceeds received from the settlement of insurance claims will be classified on the basis of the related insurance coverage (i.e., the nature of the loss). Cash proceeds from lump-sum settlements will be classified based on the nature of each loss component included in the settlement. |
| $ | 21,000 | |
5.Accrued interest payable and other liabilities | Cash proceeds received from the settlement of bank-owned life insurance (BOLI) policies will be classified as cash inflows from investing activities. Cash payments for premiums on BOLI may be classified as cash outflows for investing, operating, or a combination of both. |
| 18,704 | |
6. | A transferor’s beneficial interest obtained in a securitizationTotal liabilities of financial assets will be disclosed as a non-cash activity, and cash received from beneficial interests will be classified in investing activities.discontinued operations |
| |
7.$ | Distributions received from equity method investees will be classified using either a cumulative earnings approach or a look-through approach as an accounting policy election.39,704 | |
|
| | | | | | | | | | | | |
| | December 31, 2016 |
| | Derivative Assets | | Derivative Liabilities |
| | Balance Sheet | | | | Balance Sheet | | |
| | Location | | Fair Value | | Location | | Fair Value |
(amounts in thousands) | | | | | | | | |
Derivatives designated as cash flow hedges: | | | | | | | | |
Interest rate swaps | | Other assets | | $ | — |
| | Other liabilities | | $ | 3,624 |
|
Total | | | | $ | — |
| | | | $ | 3,624 |
|
Derivatives not designated as hedging instruments: | | | | | | | | |
Interest rate swaps | | Other assets | | $ | 10,683 |
| | Other liabilities | | $ | 10,537 |
|
Credit contracts | | Other assets | | 136 |
| | Other liabilities | | 11 |
|
Residential mortgage loan commitments | | Other assets | | 45 |
| | Other liabilities | | — |
|
Total | | | | $ | 10,864 |
| | | | $ | 10,548 |
|
Effect of Derivative Instruments on Comprehensive Income
The following tables presenttable presents the effect of Customers' derivative financial instruments on comprehensive income for the three and ninesix months ended SeptemberJune 30, 20172021 and 2016.2020. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Amount of Gain (Loss) Recognized in OCI on Derivatives (1) | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income | | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income |
| Three Months Ended June 30, | | | | Three Months Ended June 30, |
(amounts in thousands) | 2021 | | 2020 | | | | 2021 | | 2020 |
Derivatives in cash flow hedging relationships: | | | | | | | | | |
Interest rate swaps | $ | 4 | | | $ | (4,685) | | | Interest expense | | $ | (1,046) | | | $ | (2,718) | |
| | | | | | | | | |
| | | | | | | | | |
|
| | | | | |
| Three Months Ended September 30, 2017 |
| Income Statement Location | | Amount of Income (Loss) Recognized in Earnings |
(amounts in thousands) | | | |
Derivatives not designated as hedging instruments: | | | |
Interest rate swaps | Other non-interest income | | $ | 91 |
|
Credit contracts | Other non-interest income | | (6 | ) |
Residential mortgage loan commitments | Mortgage banking income | | 1 |
|
Total | | | $ | 86 |
|
|
| | | | | |
| Three Months Ended September 30, 2016 |
| Income Statement Location | | Amount of Income (Loss) Recognized in Earnings |
(amounts in thousands) | | | |
Derivatives not designated as hedging instruments: | | | |
Interest rate swaps | Other non-interest income | | $ | 1,737 |
|
Credit contracts | Other non-interest income | | (15 | ) |
Residential mortgage loan commitments | Mortgage banking income | | (71 | ) |
Total | | | $ | 1,651 |
|
|
| | | | | |
| Nine Months Ended September 30, 2017 |
| Income Statement Location | | Amount of Income (Loss) Recognized in Earnings |
(amounts in thousands) | | | |
Derivatives not designated as hedging instruments: | | | |
Interest rate swaps | Other non-interest income | | $ | 429 |
|
Credit contracts | Other non-interest income | | (5 | ) |
Residential mortgage loan commitments | Mortgage banking income | | 58 |
|
Total | | | $ | 482 |
|
| | | |
|
| | | | | |
| Nine Months Ended September 30, 2016 |
| Income Statement Location | | Amount of Income Recognized in Earnings |
(amounts in thousands) | | | |
Derivatives not designated as hedging instruments: | | | |
Interest rate swaps | Other non-interest income | | $ | 1,250 |
|
Credit contracts | Other non-interest income | | 257 |
|
Residential mortgage loan commitments | Mortgage banking income | | 41 |
|
Total | | | $ | 1,548 |
|
| | | |
|
| | | | | | | | | |
| Three Months Ended September 30, 2017 |
| Amount of Gain Recognized in OCI on Derivatives (Effective Portion) (1) | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | | Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion) |
(amounts in thousands) | | | | | |
Derivatives in cash flow hedging relationships: | | | | | |
Interest rate swaps | $ | 104 |
| | Interest expense | | $ | (572 | ) |
|
| | | | | | | | | |
| Three Months Ended September 30, 2016 |
| Amount of Gain Recognized in OCI on Derivatives (Effective Portion) (1) | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | | Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion) |
(amounts in thousands) | | | | | |
Derivatives in cash flow hedging relationships: | | | | | |
Interest rate swaps | $ | 556 |
| | Interest expense | | $ | (703 | ) |
|
| | | | | | | | | |
| Nine Months Ended September 30, 2017 |
| Amount of Loss Recognized in OCI on Derivatives (Effective Portion) (1) | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | | Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion) |
(amounts in thousands) | | | | | |
Derivative in cash flow hedging relationships: | | | | | |
Interest rate swaps | $ | (115 | ) | | Interest expense | | $ | (2,166 | ) |
| | | | | |
| | | Nine Months Ended September 30, 2016 | | | Amount of Gain (Loss) Recognized in OCI on Derivatives (1) | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income | | | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income |
| Amount of Loss Recognized in OCI on Derivatives (Effective Portion) (1) | | Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) | | Amount of Loss Reclassified from Accumulated OCI into Income (Effective Portion) | | | Six Months Ended June 30, | | | | | Six Months Ended June 30, |
(amounts in thousands) | | | | | | (amounts in thousands) | | 2021 | | 2020 | | | 2021 | | 2020 |
Derivative in cash flow hedging relationships: | | | | |
Derivatives in cash flow hedging relationships: | | Derivatives in cash flow hedging relationships: | | | | | | | | | |
Interest rate swaps | $ | (1,577 | ) | | Interest expense | | $ | (1,306 | ) | Interest rate swaps | | $ | 9,117 | | | $ | (25,031) | | | Interest expense | | | $ | (2,505) | | | $ | (4,196) | |
| | | | | | 0 | | | 0 | | | Other non-interest income | | | (24,467) | | | 0 | |
Total | | Total | | $ | 9,117 | | | $ | (25,031) | | | | $ | (26,972) | | | $ | (4,196) | |
(1) Amounts presented are net of taxes. See NOTE 65 - CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) for the total effect on other comprehensive income (loss) from derivatives designated as cash flow hedges for the periods presented.
Credit-risk-related Contingent Features
By entering into derivative contracts, Customers is exposed to credit risk. The credit risk associated with derivatives executed with customers is the same as that involved in extending the related loans and is subject to the same standard credit policies. To mitigate the credit-risk exposure to major derivative dealer counterparties, Customers only enters into agreements with those counterparties that maintain credit ratings of high quality.quality or with central clearing parties.
Agreements with major derivative dealer counterparties contain provisions whereby default on any of Customers' indebtedness would be considered a default on its derivative obligations. Customers also has entered into agreements that contain provisions under which the counterparty could require Customers to settle its obligations if Customers fails to maintain its status as a well/adequately capitalized institution. As of SeptemberJune 30, 2017,2021, the fair value of derivatives in a net liability position (which includes accrued interest but excludes any adjustment for nonperformance-risk) related to these agreements was $7.3$37.5 million. In addition, Customers, which has minimum collateral posting thresholds with certain of these counterparties, and at September 30, 2017 had posted $8.3$35.6 million of cash as collateral.collateral at June 30, 2021. Customers records cash posted as collateral with these counterparties, except with a central clearing party, as a reduction in the outstanding balance of cash and cash equivalents and an increase in the balance of other assets.
Disclosures about Offsetting Assets and Liabilities
The following tables present derivative instruments that are subject to enforceable master netting arrangements. Customers' interest rate swaps and interest rate caps with institutional counterparties are subject to master netting arrangements and are included in the table below. Interest rate swaps and interest rate caps with commercial banking customers and residential mortgage loan commitments are not subject to master netting arrangements and are excluded from the table below. Customers has not made a policy election to offset its derivative positions.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross Amounts Recognized on the Consolidated Balance Sheets | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | |
(amounts in thousands) | Financial Instruments | | Cash Collateral Received/(Posted) | | Net Amount |
June 30, 2021 | | | | | | | | | | | |
Interest rate derivative assets with institutional counterparties | $ | 0 | | | | | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | |
Interest rate derivative liabilities with institutional counterparties | $ | 35,590 | | | | | | | $ | 0 | | | $ | (35,590) | | | $ | 0 | |
Offsetting of Financial Assets and Derivative Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross Amounts Recognized on the Consolidated Balance Sheets | | | | | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | |
(amounts in thousands) | Financial Instruments | | Cash Collateral Received/(Posted) | | Net Amount |
December 31, 2020 | | | | | | | | | | | |
Interest rate derivative assets with institutional counterparties | $ | 199 | | | | | | | $ | 0 | | | $ | 0 | | | $ | 199 | |
| | | | | | | | | | | |
Interest rate derivative liabilities with institutional counterparties | $ | 97,641 | | | | | | | $ | 0 | | | $ | (97,641) | | | $ | 0 | |
At September 30, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Amount of Recognized Assets | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Amounts of Assets Presented in the Consolidated Balance Sheet | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | Net Amount |
| Financial Instruments | | Cash Collateral Received | |
(amounts in thousands) | | | | | | | | | | | |
Description | | | | | | | | | | | |
Interest rate swap derivatives with institutional counterparties | $ | 4,190 |
| | $ | — |
| | $ | 4,190 |
| | $ | — |
| | $ | 1,900 |
| | $ | 2,290 |
|
Offsetting of Financial Liabilities and Derivative Liabilities
At September 30, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Amount of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Amounts of Liabilities Presented in the Consolidated Balance Sheet | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | |
| Financial Instruments | | Cash Collateral Pledged | | Net Amount |
(amounts in thousands) | | | | | | | | | | | |
Description | | | | | | | | | | | |
Interest rate swap derivatives with institutional counterparties | $ | 8,400 |
| | $ | — |
| | $ | 8,400 |
| | $ | — |
| | $ | 8,262 |
| | $ | 138 |
|
Offsetting of Financial Assets and Derivative Assets
At December 31, 2016
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Amount of Recognized Assets | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Amounts of Assets Presented in the Consolidated Balance Sheet | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | Net Amount |
| Financial Instruments | | Cash Collateral Received | |
(amounts in thousands) | | | | | | | | | | | |
Description | | | | | | | | | | | |
Interest rate swap derivatives with institutional counterparties | $ | 4,723 |
| | $ | — |
| | $ | 4,723 |
| | $ | — |
| | $ | — |
| | $ | 4,723 |
|
Offsetting of Financial Liabilities and Derivative Liabilities
At December 31, 2016
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Gross Amount of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Amounts of Liabilities Presented in the Consolidated Balance Sheet | | Gross Amounts Not Offset in the Consolidated Balance Sheet | | Net Amount |
| Financial Instruments | | Cash Collateral Pledged | |
(amounts in thousands) | | | | | | | | | | | |
Description | | | | | | | | | | | |
Interest rate swap derivatives with institutional counterparties | $ | 9,825 |
| | $ | — |
| | $ | 9,825 |
| | $ | — |
| | $ | 4,472 |
| | $ | 5,353 |
|
NOTE 14 — BUSINESS SEGMENTSLOSS CONTINGENCIES
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such matters that will have a material effect on the consolidated financial statements that are not currently accrued for. However, in light of the uncertainties inherent in these matters, it is possible that the ultimate resolution may have a material adverse effect on Customers’ results of operations for a particular period, and future changes in circumstances or additional information could result in accruals or resolution in excess of established accruals, which could adversely affect Customers’ results of operations, potentially materially.
United States Department of Education Matter
In third quarter 2018, Customers has historically operated under one business segment, "Community Banking." However,received a Final Program Review Determination ("FPRD") letter dated September 5, 2018 from the ED regarding a focused program review of Higher One's/Customers Bank's administration, as a third party servicer, of the programs authorized pursuant to Title IV of the Higher Education Act of 1965. The ED program review covered the award years beginning in 2013 through the FPRD issuance date, including the time period when Higher One was acting as the third party servicer prior to Customers' acquisition of the Disbursement business on June 15, 2016. The FPRD determined that, with respect to students enrolled at specified partner institutions, Higher One/Customers did not provide convenient fee-free access to ATMs or bank branch offices in such locations as required by the ED’s cash management regulations. Those regulations, which were in effect during the period covered by the program review and were revised during that period, seek, among other purposes, to ensure that students can make fee-free cash withdrawals. The FPRD determined that students incurred prohibited costs in accessing Title IV credit balance funds, and the FPRD classifies those costs as financial liabilities of Customers. The FPRD also requires Customers to take prospective action to increase ATM access for students at certain of its partner institutions. Customers disagreed with the FPRD and appealed the asserted financial liabilities of $6.5 million, and a request for review has been submitted to trigger an administrative process before the ED’s Office of Hearing and Appeals.
On March 26, 2020, the ED and Customers filed a Joint Motion to Dismiss with Prejudice (the "Joint Motion") with the United States Department of Education. The Joint Motion states that the ED and Customers reached an agreement that resolves the liabilities at issue in the appeal. The Joint Motion was granted on April 27, 2020. As part of the settlement, the liabilities assessed in the FPRD were reduced to $3.0 million (the "settlement amount"). Customers had previously recorded a liability in the amount of $1.0 million during third quarter 2016, Customers revised2019 and increased its segment financial reportingliability by an additional $1.0 million in first quarter 2020. The remaining $1.0 million is expected to reflectbe funded from funds in an escrow account set-up at the manner in which its chief operating decision makers (our Chief Executive Officer and Boardtime of Directors) have begun allocating resources and assessing performance subsequent to Customers' acquisition of the Disbursement business from Higher One in 2016.
Specialty’s Café Bakery, Inc. Matter
On May 27, 2020, the appointed Chapter 7 Trustee for Specialty’s Café Bakery, Inc. (“Debtor”) filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code in the United Stated Bankruptcy Court for the Central District of California. On October 28, 2020, the Trustee, as plaintiff, filed her amended adversary complaint (“Adversary Complaint”) against Customers Bank and the combinationSBA seeking to avoid and recover for the benefit of that businessthe Debtor’s estate and its creditors the payment made by the Debtor to Customers Bank in the amount of $8.1 million in satisfaction of a Payroll Protection Program loan made by Customers Bank to the Debtor (the “PPP Loan Payment”). The Trustee seeks to avoid and recover the entire PPP Loan Payment from the Bank under the authority provided in 11 U.S.C. §547 and §550, which together permit a trustee of a bankruptcy debtor to avoid and recover, for a more equitable distribution among all creditors, certain transfers made within ninety (90) days before the filing of the bankruptcy petition. The Bank intends to vigorously defend itself against the Trustee’s Adversary Complaint and is currently unable to reasonably determine the likelihood of loss nor estimate a possible range of loss.
NOTE 15 – SUBSEQUENT EVENTS
On July 28, 2021, Customers' board of directors approved a plan to redeem $ 82.5 million, or all of our outstanding shares of Series C Preferred Stock and Series D Preferred Stock. On August 6, 2021, Customers Bancorp completed an underwritten public offering of $100 million in aggregate principal amount of its 2.875% Fixed-to-Floating Rate Senior Notes due 2031 (the “Notes”). The price to the public was 100% of the principal amount of the Notes. The Company estimates the net proceeds from the sale of the Notes, after deducting discounts and commissions and estimated offering expenses payable by the Company, will be approximately $98.7 million. The Company intends to use the net proceeds from the offering to fund the redemption of all of the Company's outstanding Series C Preferred Stock and Series D Preferred Stock. The Company intends to use any remaining proceeds following the redemptions for general corporate purposes, which may include working capital, repaying indebtedness and providing capital to the Bank. The amounts the Company actually expends for any purpose may vary significantly depending upon numerous factors, including assessments of potential market opportunities and competitive developments. The offering of the Notes was made pursuant to the Company’s effective shelf registration statement on Form S-3 previously filed by the Company 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.
The Community Business Banking segment is delivered predominately to commercial customers in Southeastern Pennsylvania, New York, New Jersey, Massachusetts, Rhode Island and New Hampshire through a single point of contact business model and provides liquidity to residential mortgage originators nationwide through commercial loans to mortgage companies. Lending and deposit gathering activities are focused primarily on privately held businesses, high net worth families, selected commercial real estate lending, and commercial mortgage companies. Revenues are generated primarily through net interest income (the difference between interest earned on loans, investments, and other interest earning assets and interest paid on deposits and other borrowed funds) and other non-interest income, such as mortgage warehouse transactional fees and bank owned life insurance.
The BankMobile segment provides state of the art high tech digital banking and disbursement services to consumers, students, and the "under banked" nationwide. BankMobile, as a division of Customers Bank, is a full service banking platform that is accessible to customers anywhere and anytime through the customer's smartphone or other web-enabled device. Revenues are currently being generated primarily through interchange and card revenue, deposit and wire transfer fees and university fees. The majority of revenue and expenses for BankMobile are a result of the Disbursement business acquisition.
The following tables present the operating results for Customers' reportable business segments for the three and nine months ended September 30, 2017 and 2016. Customers has presented the financial information and disclosures for prior periods to reflect the segment disclosures as if they had been in effect for the periods presented. The segment financial results include directly attributable revenues and expenses. Corporate overhead costs are assigned to the Community Business Banking segment as those expenses are expected to continue following the planned spin-off of BankMobile. Similarly, the preferred stock dividends have been allocated in their entirety to the Community Business Banking segment. The tax benefit assigned to BankMobile was based on an estimated effective tax rate of 37.25% for 2017 and 38% for 2016.
BankMobile, previously presented as discontinued operations in the financial statements due to Customers' stated intent to sell the business, was reclassified as held and used at September 30, 2017. As of September 30, 2017, Customers has decided to spin off BankMobile to Customers’ shareholders through a spin-off/merger transaction which is currently being negotiated. For more information on BankMobile's reclassification, see NOTE 3 - TAX-FREE SPIN-OFF AND MERGER.
|
| | | | | | | | | | | | |
| Three Months Ended September 30, 2017 |
| Community Business Banking | | BankMobile | | Consolidated |
Interest income | $ | 95,585 |
| | $ | 2,700 |
| (1 | ) | $ | 98,285 |
|
Interest expense | 30,250 |
| | 16 |
|
| 30,266 |
|
Net interest income | 65,335 |
| | 2,684 |
| | 68,019 |
|
Provision for loan losses | 1,874 |
| | 478 |
| | 2,352 |
|
Non-interest income | 4,190 |
| | 13,836 |
| | 18,026 |
|
Non-interest expense | 33,990 |
| | 27,050 |
|
| 61,040 |
|
Income (loss) before income tax expense (benefit) | 33,661 |
| | (11,008 | ) | | 22,653 |
|
Income tax expense (benefit) | 18,999 |
| | (4,100 | ) | | 14,899 |
|
Net income (loss) | 14,662 |
| | (6,908 | ) | | 7,754 |
|
Preferred stock dividends | 3,615 |
| | — |
| | 3,615 |
|
Net income (loss) available to common shareholders | $ | 11,047 |
| | $ | (6,908 | ) | | $ | 4,139 |
|
| | | | | |
|
| | | | | | | | | | | | |
| Three Months Ended September 30, 2016 |
| Community Business Banking | | BankMobile | | Consolidated |
Interest income | $ | 82,828 |
| | $ | 1,384 |
| (1 | ) | $ | 84,212 |
|
Interest expense | 19,620 |
| | 7 |
| | 19,627 |
|
Net interest income | 63,208 |
| | 1,377 |
| | 64,585 |
|
Provision for loan losses | (162 | ) | | 250 |
| | 88 |
|
Non-interest income | 11,121 |
| | 16,365 |
| | 27,486 |
|
Non-interest expense | 36,864 |
| | 19,354 |
| | 56,218 |
|
Income (loss) before income tax expense (benefit) | 37,627 |
| | (1,862 | ) | | 35,765 |
|
Income tax expense (benefit) | 15,266 |
| | (708 | ) | | 14,558 |
|
Net income (loss) | 22,361 |
| | (1,154 | ) | | 21,207 |
|
Preferred stock dividends | 2,552 |
| | — |
| | 2,552 |
|
Net income (loss) available to common shareholders | $ | 19,809 |
| | $ | (1,154 | ) | | $ | 18,655 |
|
| | | | | |
|
| | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
| Community Business Banking | | BankMobile | | Consolidated |
Interest income | $ | 265,524 |
| | $ | 9,708 |
| (1 | ) | $ | 275,232 |
|
Interest expense | 76,134 |
| | 55 |
| | 76,189 |
|
Net interest income | 189,390 |
| | 9,653 |
| | 199,043 |
|
Provision for loan losses | 5,459 |
| | 478 |
| | 5,937 |
|
Non-interest income | 16,587 |
| | 42,583 |
| | 59,170 |
|
Non-interest expense | 94,704 |
| | 66,114 |
| | 160,818 |
|
Income before income tax expense (benefit) | 105,814 |
| | (14,356 | ) | | 91,458 |
|
Income tax expense (benefit) | 39,584 |
| | (5,348 | ) | | 34,236 |
|
Net income (loss) | 66,230 |
| | (9,008 | ) | | 57,222 |
|
Preferred stock dividends | 10,844 |
| | — |
| | 10,844 |
|
Net income (loss) available to common shareholders | $ | 55,386 |
| | $ | (9,008 | ) | | $ | 46,378 |
|
| | | | | |
As of September 30, 2017 | | | | | |
Goodwill and other intangibles | $ | 3,632 |
| | $ | 12,972 |
| | $ | 16,604 |
|
Total assets | $ | 10,405,452 |
| | $ | 66,377 |
| (2 | ) | $ | 10,471,829 |
|
Total deposits | $ | 6,815,994 |
| | $ | 781,082 |
| | $ | 7,597,076 |
|
| | | | | |
|
| | | | | | | | | | | | |
| Nine Months Ended September 30, 2016 |
| Community Business Banking | | BankMobile | | Consolidated |
Interest income | $ | 234,513 |
| | $ | 4,418 |
| (1 | ) | $ | 238,931 |
|
Interest expense | 53,539 |
| | 22 |
| | 53,561 |
|
Net interest income | 180,974 |
| | 4,396 |
| | 185,370 |
|
Provision for loan losses | 2,605 |
| | 249 |
| | 2,854 |
|
Non-interest income | 22,241 |
| | 18,996 |
| | 41,237 |
|
Non-interest expense | 101,053 |
| | 27,253 |
| | 128,306 |
|
Income (loss) before income tax expense (benefit) | 99,557 |
| | (4,110 | ) | | 95,447 |
|
Income tax expense (benefit) | 38,134 |
| | (1,562 | ) | | 36,572 |
|
Net income (loss) | 61,423 |
| | (2,548 | ) | | 58,875 |
|
Preferred stock dividends | 5,900 |
| | — |
| | 5,900 |
|
Net income (loss) available to common shareholders | $ | 55,523 |
| | $ | (2,548 | ) | | $ | 52,975 |
|
| | | | | |
As of September 30, 2016 | | | | | |
Goodwill and other intangibles | $ | 3,642 |
| | $ | 13,282 |
| | $ | 16,924 |
|
Total assets | $ | 9,532,281 |
| | $ | 70,329 |
| (2 | ) | $ | 9,602,610 |
|
Total deposits | $ | 6,855,788 |
| | $ | 533,182 |
| | $ | 7,388,970 |
|
| | | | | |
(1) - Amounts reported include funds transfer pricing of $9.7 million and $4.4 million for the nine months ended September 30, 2017 and 2016, respectively, credited to BankMobile for the value provided to the Community Business Banking segment for the use of low/no cost deposits.
(2) - Amounts reported exclude intra company receivables.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations
Cautionary Note Regarding Forward-Looking Statements
This report and all attachments hereto, as well as other written or oral communications made from time to time by us, may contain forward-looking information within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements relateinclude statements with respect to Customers Bancorp, Inc.’s strategies, goals, beliefs, expectations, estimates, intentions, capital raising efforts, financial condition and results of operations, future performance and business. Statements preceded by, followed by, or that include the words “may,” “could,” “should,” “pro forma,” “looking forward,” “would,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” or similar expressions generally indicate a forward-looking statement. These forward-looking statements involve risks and uncertainties that are subject to change based on various important factors (some of which, in whole or in part, are beyond Customers Bancorp, Inc.’s control). Numerous competitive, economic, regulatory, legal and technological events or future predictions, including events or predictions relating to futureand factors, among others, could cause Customers Bancorp, Inc.’s financial performance to differ materially from the goals, plans, objectives, intentions 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 underlyingexpectations expressed in such forward-looking statements, will accurately reflect future conditions,including: the adverse impact on the U.S. economy, including the markets in which we operate, of the coronavirus outbreak, and the impact of a slowing U.S. economy and increased unemployment on the performance of our loan and lease portfolio, the market value of our investment securities, the demand for our products and services and the availability of sources of funding; the effects of actions by the federal government, including the Board of Governors of the Federal Reserve System and other government agencies, that affect market interest rates and the money supply; actions that we and our customers take in response to these developments and the effects such actions have on our operations, products, services and customer relationships; and the effects of changes in accounting standards or policies. Customers Bancorp, Inc. cautions that any guidance, goals, targets or projected results will be realized. The assumptions, estimatesthe foregoing factors are not exclusive, and forecasts underlyingneither such factors nor any such forward-looking statements involve judgments with respect to, among other things,statement takes into account the impact of any future economic, competitive, regulatory and financial market conditions and future business decisions, which may not be realized and which are inherently subject to significant business, economic, competitive and regulatory uncertainties and known and unknown risks, including the risks described under “Risk Factors” in Customers Bancorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the “2016 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 and Current Reports on Form 8-K. Our actual results may differ materially from those reflected in the forward-looking statements. You are cautioned not to place undue reliance on anyevents. All forward-looking statements we make, whichand information set forth herein are based on management’s current beliefs and assumptions as of the date hereof and speak only as of the date they are made. We doFor a more complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review Customers Bancorp, Inc.’s filings with the Securities and Exchange Commission, including its most recent annual report on Form 10-K for the year ended December 31, 2020, subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K, including any amendments thereto, that update or provide information in addition to the information included in the Form 10-K and Form 10-Q filings, if any. Customers Bancorp, Inc. does not undertake any obligation to release publicly or otherwise provide any revisions toupdate any forward-looking statements westatement whether written or oral, that may make, including any forward-looking financial information,be made from time to reflect eventstime by Customers Bancorp, Inc. or circumstances occurring after the date hereofby or to reflect the occurrenceon behalf of unanticipated events,Customers Bank, except as may be required under applicable law.
Management’s discussion and analysis represents an overview of the financial condition and results of operations, and highlights the significant changes in the financial condition and results of operations, as presented in the accompanying consolidated financial statements for Customers Bancorp, Inc. (the "Bancorp" or "Customers Bancorp"), a financial holding company, and its wholly owned subsidiaries, including Customers Bank (the "Bank"), collectively referred to as "Customers" herein. This information is intended to facilitate your understanding and assessment of significant changes and trends related to Customers' financial condition and results of operations as of and for the three and ninesix months ended SeptemberJune 30, 2017.2021. All quarterly information in this Management’s Discussion and Analysis is unaudited. You should read this section in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Customers' 20162020 Form 10-K.
Overview
Like most financial institutions, 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 interest income on its interest-earning assets and the interest 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 amount of average interest earning assets, which is referred to as net interest margin.
On January 4, 2021, Customers Bancorp completed the previously announced divestiture of BankMobile Technologies, Inc., 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’ 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 consolidated financial statements and prior period amounts have been reclassified to conform with the current period presentation. For additional information refer to "NOTE 3 – DISCONTINUED OPERATIONS" to Customers' unaudited consolidated financial statements.
There is credit risk inherent in loans and leases 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 on loan and lease 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' unaudited consolidated 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 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, have 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 an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future.
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 are experiencing varying degrees of financial distress, which is expected to continue in the coming months. In order to protect the health of its customers and team members, and to comply with applicable government directives, Customers has modified its business practices, including restricting team member travel, directing team members to work from home insofar as is possible and implementing its business continuity plans and protocols to the extent necessary. Customers also has made donations that have resulted in more than $1 million, either directly or indirectly, to communities in its footprint for urgent basic needs and has been re-targeting existing sponsorship and grants to non-profit organizations to support COVID-19 related activities.
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 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 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 June 30, 2021, Customers has helped thousands of small businesses by originating approximately $9.5 billion in PPP loans directly or through fintech partnerships.
In response to the COVID-19 pandemic, Customers has also implemented a short-term loan modification program to provide temporary payment relief to certain of its borrowers who meet the program's qualifications. This program allows 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. As of June 30, 2021, total commercial deferments declined to $89.8 million, or 0.8% of total loans and leases, excluding PPP loans, from a peak of $1.2 billion and total consumer deferments declined to $8.4 million, or 0.1% of total loans and leases, excluding PPP loans, from a peak of $108 million. Customers had no pending commercial loan deferment requests as of June 30, 2021. As of December 31, 2020, total commercial deferments were $202.1 million, or 1.8% 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.
| | | | | | | | | | | |
| | | |
(dollars in thousands) | June 30, 2021 | | December 31, 2020 |
Loans held for sale (GAAP) | $ | 34,540 | | | $ | 79,086 | |
Loans receivable, mortgage warehouse, at fair value (GAAP) | 2,855,284 | | | 3,616,432 | |
Loans and leases receivable (GAAP) | 14,077,198 | | | 12,136,733 | |
Total loans and leases receivable (GAAP) | 16,967,022 | | | 15,832,251 | |
Less: Loans receivable, PPP | 6,305,056 | | | 4,561,365 | |
Total loans and leases, excluding PPP (Non-GAAP) | $ | 10,661,966 | | | $ | 11,270,886 | |
| | | |
Commercial deferments (GAAP) | $ | 89,800 | | | $ | 202,100 | |
Consumer deferments (GAAP) | 8,400 | | | 16,400 | |
Total deferments (GAAP) | $ | 98,200 | | | $ | 218,500 | |
| | | |
Commercial deferments to total loans and leases, excluding PPP (Non-GAAP) | 0.8 | % | | 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) | 0.9 | % | | 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 0.00% 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 has also established, or has taken steps to establish, 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 has been participating in these facilities and programs, and it may participate in some or all of these facilities or programs, including as a lender, agent, or intermediary on behalf of clients or customers at various times in the future. As of June 30, 2021 and December 31, 2020, Customers had $3.9 billion and $4.4 billion in borrowings from the PPPLF, respectively.
Significant uncertainties as to future economic conditions exist, and Customers has taken deliberate actions in response, including higher levels of on-balance sheet liquidity and maintaining strong capital ratios. Additionally, the economic pressures, coupled with the implementation of an expected lifetime loss methodology for determining our provision for credit losses as required by CECL have contributed to an increased provision for credit losses on loans and leases and off-balance sheet credit exposures in 2020. Customers continues to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act, the CAA and the American Rescue Plan Act of 2021; however, the extent to which the COVID-19 pandemic will impact Customers' operations and financial results during the remainder of 2021 is highly uncertain.
New Accounting Pronouncements
For information about the impact that recently adopted or issued accounting guidance will have on us, please refer to "NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION" to Customers' unaudited consolidated financial statements.
Critical Accounting Policies
Customers has adopted various accounting policies that govern the application of accounting principles generally accepted in the United States of AmericaU.S. 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 PRESENTATION”PRESENTATION" in Customers' audited consolidated financial statements included in its 20162020 Form 10-K and updated in this report on Form 10-Q for the quarterly period ended SeptemberJune 30, 2017.2021 in "NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION" in Customers' unaudited consolidated financial statements.
Certain accounting policies may 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 judgment and assumptions used are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions management makes, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of Customers' assetsassets.
The critical accounting policy that is both important to the portrayal of Customers' financial condition and liabilitiesresults of operations and requires complex, subjective judgments is the ACL. This critical accounting policy and material estimate, along with the related disclosures, are reviewed by Customers' Audit Committee of the Board of Directors.
Allowance for Credit Losses
Customers' ACL at June 30, 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 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 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 loan and lease portfolio, credit underwriting policy exceptions, peer comparison, industry data, and model and data limitations. The qualitative allowance for economic forecast risk is further informed by multiple alternative scenarios to arrive at a composite scenario supporting the period-end ACL balance. The evaluation process is inherently imprecise and subjective as it requires significant management judgment 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 established in accordance with our ACL policy. The ACL Committee, which includes the Bank's Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, Chief Lending Officer, and Chief Credit Officer, among others, reviews the adequacy of the ACL 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 Board of Directors.
The net decrease in our estimated ACL as of June 30, 2021 as compared to our December 31, 2020 estimate was primarily attributable to the continuing improvement in macroeconomic forecasts affecting the commercial loan portfolio. The increase in ACL in our installment loan portfolio is mainly due to loan growth. There was a $3.3 million and $0.4 million provision for credit losses on loans and leases for the three and six months ended June 30, 2021, respectively, resulting in an ACL ending balance of $126.5 million ($125.4 million for loans and leases and $1.1 million for unfunded lending-related commitments) as of June 30, 2021.
To determine the ACL as of June 30, 2021, Customers utilized Moody's June 2021 Baseline forecast to generate its modelled expected losses by loan portfolio in order to reflect management's reasonable expectations of current and future economic conditions. The Baseline forecast at June 2021 assumed continued improvement in forecasts of macroeconomic conditions compared to the first quarter forecasts of macroeconomic conditions used by Customers; the Federal Reserve maintaining a target range for the fed funds rate at 0.00% to 0.25% into 2023; the tapering of quantitative easing not beginning until 2022; an improving U.S. economy from $1.9 trillion of stimulus from the federal government enacted in March 2021 and a federal spending legislation on infrastructure and social benefits in the second half of 2021; and the acceleration in consumer prices is expected to be transitory along with the U.S. labor supply constraints. Customers continues to monitor the impact of the COVID-19 pandemic and related policy measures on the economy and, if pace of the expected recovery is worse than expected, further meaningful provisions for credit losses could be required.
One of the most significant judgments influencing the ACL is the macroeconomic forecasts from Moody's. Changes in the economic forecasts could significantly affect the estimated credit losses which 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 diminish more slowly than the Baseline projections, leading to a much slower re-opening of the economy. Under this scenario, as an example, the unemployment rate is estimated at 6.9% and 9.0% at the end of 2021 and 2022, respectively. These numbers represent a 1.5% and 5.2% higher unemployment estimate than Baseline scenario projections of 5.4% and 3.7%, 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 modeled results. This would result in an incremental quantitative impact to the ACL of approximately $49.7 million. 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 Customers' markets, such as the 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 capital could be materially adversely affected which, in turn could have a material adverse effect on Customers' financial condition and results of operations. The extent to which the current COVID-19 pandemic has and will continue to negatively impact Customers' businesses, financial condition, liquidity and results will depend on future developments, which are highly uncertain and cannot be forecasted with precision at this time.
For more information, see "NOTE 8 – LOANS AND LEASES RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES" to the unaudited consolidated financial statements.
Results of Operations
The following table sets forth the condensed statements of income for the three and six months ended June 30, 2021 and 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | QTD | | Six Months Ended June 30, | | YTD |
(dollars in thousands) | 2021 | | 2020 | | Change | | % Change | | 2021 | | 2020 | | Change | | % Change |
Net interest income | $ | 138,757 | | | $ | 91,982 | | | $ | 46,775 | | | 50.9 | % | | $ | 271,488 | | | $ | 173,302 | | | $ | 98,186 | | | 56.7 | % |
Provision for credit losses on loans and leases | 3,291 | | | 20,946 | | | (17,655) | | | (84.3) | % | | 372 | | | 52,732 | | | (52,360) | | | (99.3) | % |
Total non-interest income | 16,822 | | | 11,711 | | | 5,111 | | | 43.6 | % | | 35,290 | | | 22,871 | | | 12,419 | | | 54.3 | % |
Total non-interest expense | 70,823 | | | 49,791 | | | 21,032 | | | 42.2 | % | | 132,750 | | | 98,758 | | | 33,992 | | | 34.4 | % |
Income before income tax expense | 81,465 | | | 32,956 | | | 48,509 | | | 147.2 | % | | 173,656 | | | 44,683 | | | 128,973 | | | 288.6 | % |
Income tax expense | 20,124 | | | 7,980 | | | 12,144 | | | 152.2 | % | | 37,684 | | | 11,254 | | | 26,430 | | | 234.8 | % |
Net income from continuing operations | 61,341 | | | 24,976 | | | 36,365 | | | 145.6 | % | | 135,972 | | | 33,429 | | | 102,543 | | | 306.7 | % |
Loss from discontinued operations before income tax expense | — | | | (3,190) | | | 3,190 | | | (100.0) | % | | (20,354) | | | (9,911) | | | (10,443) | | | 105.4 | % |
Income tax expense (benefit) from discontinued operations | — | | | (932) | | | 932 | | | (100.0) | % | | 17,682 | | | (2,299) | | | 19,981 | | | (869.1) | % |
Net loss from discontinued operations | — | | | (2,258) | | | 2,258 | | | (100.0) | % | | (38,036) | | | (7,612) | | | (30,424) | | | 399.7 | % |
Net income | 61,341 | | | 22,718 | | | 38,623 | | | 170.0 | % | | 97,936 | | | 25,817 | | | 72,119 | | | 279.3 | % |
Preferred stock dividends | 3,299 | | | 3,581 | | | (282) | | | (7.9) | % | | 6,690 | | | 7,196 | | | (506) | | | (7.0) | % |
Net income available to common shareholders | $ | 58,042 | | | $ | 19,137 | | | $ | 38,905 | | | 203.3 | % | | $ | 91,246 | | | $ | 18,621 | | | $ | 72,625 | | | 390.0 | % |
Customers reported net income available to common shareholders of $4.1$58.0 million or $0.13 per fully diluted common share for third quarter 2017. The reported results were impacted by several notable charges in third quarter 2017. First, Customers' previously-announced strategic decision to spin-off its BankMobile business directly to Customers’ shareholders, to be followed by a merger of BankMobile into Flagship Community Bank rather than sell the business directly to a third party resulted in including BankMobile segment results as part of the continuing Customers’ business rather than as discontinued operations. The reclassification as part of the continuing business resulted in the capture of depreciation and amortization expense not recognized during the period the related assets were classified as held for sale ($4.2 million pre-tax, or $0.08 per diluted share). In addition, Customers' decision to spin-off and then merge the BankMobile business eliminated Customers’ tax strategy to offset capital losses on disposition of the Religare common stock with capital gains from the sale of BankMobile. Customers’ decision to pursue the spin-off and merger reduced earnings by $7.7 million after tax ($0.24 per diluted share) in the third quarter due to the reversal of $4.6 million of previously recognized deferred tax assets, and inability to recognize deferred tax benefits of $3.1 million for the third quarter 2017 impairment charge of $8.3 million ($0.16 per diluted share), equal to the third quarter 2017 decrease in market value of Customers’ investment in Religare.
Asset quality remained exceptional with non-performing loans of $29.8 million, or 0.33% of total loans, and total non-performing assets (non-performing loans and other real estate owned) only 0.30% of total assets at September 30, 2017, reflecting Customers' conservative lending practices and continued focus on credit risk management. Customers' level of non-performing loans at September 30, 2017 remained well below industry average non-performing loans of 1.42% and Customers' peer group non-performing loans of 0.88%. Customers' capital ratios at the holding company and its bank subsidiary continue to exceed the “well-capitalized” threshold established by regulation at the Bank and exceed the applicable Basel III regulatory threshold ratios for the Bancorp and the Bank at September 30, 2017. Customers Bancorp's Tier 1 leverage ratio was 8.36%, and its total risk-based capital ratio was 12.40% at September 30, 2017.
Customers ended the quarter with $10.5 billion in total assets, stable asset quality trends, and stronger capital. Customers expects to strategically reduce assets below $10 billion as of December 31, 2017 to eliminate the risk of not receiving full interchange fees by qualifying for the small issuer exemption under the Durbin Amendment to the Dodd Frank legislation.
Results of Operations
Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016
Net income available to common shareholders decreased $14.5 million, or 77.8%, to $4.1$91.2 million for the three and six months ended SeptemberJune 30, 2017 when2021, respectively, compared to net income available to common shareholders of $18.7$19.1 million and $18.6 million for the three and six months ended September 30, 2016. The decreased net income available to common shareholders primarily resulted from certain notable third quarter 2017 charges totaling $15.6 million including:
Change in BankMobile disposition strategy ($10.4 million after tax). As further described under the "Third Quarter Events of Note" above, Customers' reclassification of BankMobile as part of the continuing business resulted in the capture of depreciation and amortization expense not recognized during the period the related assets were classified as held for sale ($4.2 million pre-tax and $2.6 million after tax). In addition, Customers' decision to spin-off and then merge the BankMobile business eliminated Customers’ tax strategy to offset capital losses on disposition of the Religare common stock with capital gains from the sale of BankMobile, reducing earnings by $7.7 million after tax in third quarter 2017.
Religare investment impairment charge of $8.3 million ($5.2 million after tax). Customers recorded an other-than-temporary impairment loss of $8.3 million for three months ended September 30, 2017 for the full amount of the decline in fair value of the Religare investment below the cost basis established at June 30, 2017.
Other contributors2020, respectively. Factors contributing to the decreasechange in net income available to common shareholders includedfor the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020 were as follows.
Net interest income
Net interest income increased $46.8 million for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 as average interest-earning assets increased by $4.7 billion, and NIM increased by 33 basis point to 2.98% for the three months ended June 30, 2021 from 2.65% for the three months ended June 30, 2020. The increase in interest-earning assets was driven by increases in the origination of the latest round of PPP loans, commercial loans to mortgage companies, commercial and industrial loans and leases, investment securities and installment loans, offset in part by a decrease in multi-family loans. There was also PPP loan forgiveness from the first two rounds which accelerated the recognition of net deferred loan origination fees that contributed to the NIM increase. The shift in the mix of interest-earning assets and interest-bearing liabilities in a lower interest rate environment drove an 11 basis point decline in the yield on interest-earning assets and a 50 basis point decline in the cost of interest-bearing liabilities for the three months ended June 30, 2021. The largest shift in the mix of interest-earning assets and interest-bearing liabilities was $6.3 billion ($6.1 billion average balance) of PPP loans yielding 2.69% and related PPPLF borrowings of $3.9 billion ($3.9 billion average balance) costing 0.35%. Customers' total cost of funds, including non-interest bearing deposits was 0.54% and 0.99% for the three months ended June 30, 2021 and 2020, respectively.
Net interest income increased $98.2 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 as average interest-earning assets increased by $5.8 billion, and NIM increased by 19 basis point to 2.99% for the six months ended June 30, 2021 from 2.80% for the six months ended June 30, 2020. The increase in interest-earning assets was driven by increases in the origination of PPP loans, commercial loans to mortgage companies, investment securities, commercial and industrial loans and leases and installment loans, offset in part by decreases in multi-family loans. The shift in the mix of interest-earning assets and interest-bearing liabilities in a lower interest rate environment drove a 48 basis point decline in the yield on interest-earning assets and a 80 basis point decline in the cost of interest-bearing liabilities for the six months ended June 30, 2021. The largest shift in the mix of interest-earning assets and interest-bearing liabilities was $6.3 billion ($5.4 billion average balance) of PPP loans yielding 3.00% and related PPPLF borrowings of $3.9 billion ($3.9 billion average balance) costing 0.35%. There was also PPP loan forgiveness from the first two rounds which accelerated the recognition of net deferred loan origination fees that contributed to the NIM increase. Customers' total cost of funds, including non-interest bearing deposits was 0.61% and 1.30% for the six months ended June 30, 2021 and 2020, respectively.
Provision for credit losses on loans and leases
The $17.7 million decrease in the provision for loancredit losses for the three months ended June 30, 2021 compared to the three months ended June 30, 2020, reflects the continuing improvement in macroeconomic forecasts since the beginning of $2.3COVID-19 pandemic in first quarter 2020. 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 primarily as a result of growthand $3.4 million, respectively. The ACL on off-balance sheet credit exposures is presented within accrued interest payable and other liabilities in the loan portfolioconsolidated balance sheet and provisionsthe related provision is presented as part of other non-interest expense on impairedthe consolidated income statement. The ACL on loans and increasesleases held for investment represented 1.18% of total loans and leases receivable, excluding PPP loans (non-GAAP measure, please refer to the non-GAAP reconciliation within Loans and Leases - Asset Quality), at June 30, 2021, compared to 2.20% at June 30, 2020. Net charge-offs for the three months ended June 30, 2021 were $6.6 million, or 16 basis points of average loans and leases on an annualized basis, compared to net charge-offs of $10.3 million, or 32 basis points on an annualized basis, for the three months ended June 30, 2020. The decrease in net charge-offs for the three months ended June 30, 2021, compared to the three months ended June 30, 2020, was primarily due to a charge-off of $2.8 million for one commercial real estate collateral dependent loan during the three months ended June 30, 2020.
The $52.4 million decrease in the provision for credit losses for the six months ended June 30, 2021 compared to the six months ended June 30, 2020, reflects the continuing improvement in macroeconomic forecasts since the beginning of COVID-19 pandemic in first quarter 2020. Net charge-offs for the six months ended June 30, 2021 were $19.1 million, or 24 basis points of average loans and leases on an annualized basis, compared to net charge-offs of $29.0 million, or 52 basis points on an annualized basis, for the six months ended June 30, 2020. The decrease in net charge-offs for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, was primarily due to a charge-off of $12.8 million for one commercial real estate collateral dependent loan during the six months ended June 30, 2020.
Non-interest income
The $5.1 million increase in non-interest expensesincome for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 primarily resulted from increases of $4.8$3.7 million primarily driven by increases in salariesunrealized gain (loss) on derivatives, $1.9 million in gain (loss) on sale of SBA and employee benefitsother loans, $1.2 million in other non-interest income, $1.0 million in bank-owned life insurance, $0.8 million in commercial lease income, $0.7 million in mortgage warehouse transactional fees and technology-related expenses, including core process system and conversion costs and noncapitalizable software development costs.$0.5 million in unrealized gain (loss) on investment securities. These increases were offset in part by increased gainsa $2.8 million loss from the sale of foreign subsidiaries and a decrease of $2.5 million in gain (loss) on sale of investment securities.
The $12.4 million increase in non-interest income for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily resulted from increases of $17.1 million in gain (loss) on sale of investment securities, $7.4 million in unrealized gain (loss) on derivatives, $3.4 million in gain (loss) on sale of $5.4SBA and other loans, $3.0 million in mortgage warehouse transactional fees, $2.9 million in unrealized gain (loss) on investment securities, $2.4 million in other non-interest income, $1.7 million in commercial lease income and an$0.9 million in bank-owned life insurance. These increases were offset in part by $24.5 million of loss on cash flow hedge derivative terminations and $2.8 million of loss on sale of foreign subsidiaries for the six months ended June 30, 2021.
Non-interest expense
The $21.0 million increase in net interest income of $3.4 million.
Net interest income of $68.0 million increased $3.4 million, or 5.3%,non-interest expense for the three months ended SeptemberJune 30, 2017 when2021 compared to net interest incomethe three months ended June 30, 2020 primarily resulted from increases of $64.6$8.5 million in technology, communication and bank operations, $5.3 million in professional services, $4.8 million in salaries and employee benefits, $3.3 million in other non-interest expense and $0.8 million in commercial lease depreciation. These increases were offset in part by a decrease of $1.7 million in loan workout expenses for the three months ended SeptemberJune 30, 2016. This increase resulted primarily from an2021 compared to the three months ended June 30, 2020.
The $34.0 million increase in non-interest expense for the average balancesix months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily resulted from increases of interest-earning assets of $1.2 billion for third quarter 2017,$18.0 million in technology, communication and bank operations, $8.3 million in salaries and employee benefits, $8.0 million in professional services and $1.6 million in commercial lease depreciation. These increases were offset in part by a 21decrease of $2.3 million in loan workout expenses for the six months ended June 30, 2021 compared to the six months ended June 30, 2020.
Income tax expense
Customers' effective tax rate from continuing operations was 24.7% for the three months ended June 30, 2021 compared to 24.2% for the three months ended June 30, 2020. The increase in the effective tax rate primarily resulted from an increase in compensation expense associated with an executive's retirement that exceeded the limit for tax deduction purposes.
Customers' effective tax rate from continuing operations was 21.7% for the six months ended June 30, 2021 compared to 25.2% for the six months ended June 30, 2020. The decrease in the effective tax rate primarily resulted from an increase in investment tax credits in 2021 and the recording of net discrete tax benefits associated with the divestiture of BMT and the recognition of a deferred tax asset related to the outside basis point declinedifference of foreign subsidiaries for the six months ended June 30, 2021, offset in part by 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 Megalith, 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 margin (tax-equivalent)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 2.62%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 consolidated financial statements and prior period amounts have been reclassified to conform with the current period presentation.
Customers had no loss from discontinued operations, net of income taxes for third quarter 2017 from 2.83% for third quarter 2016.
The provision for loan losses of $2.4 million increasedthe three months ended June 30, 2021 compared to $2.3 million for the three months ended SeptemberJune 30, 2017 when2020. The $2.3 million decrease was a result of the divestiture of BMT during the three months ended March 31, 2021.
Customers' loss from discontinued operations, net of income taxes was $38.0 million for the six months ended June 30, 2021 compared to $7.6 million for the provisionsix months ended June 30, 2020. The $30.4 million increase primarily resulted from restricted stock awards of BM Technologies' common stock granted to certain team members of BMT and the effect of the divestiture being treated as a taxable asset sale for loan losses of $0.1tax purposes, offset in part by a tax benefit related to the restricted stock awards during the three months ended March 31, 2021. See "NOTE 3 – DISCONTINUED OPERATIONS" to the unaudited consolidated financial statements for additional information.
Preferred stock dividends
Preferred stock dividends were $3.3 million and $3.6 million for the three months ended SeptemberJune 30, 2016. The third quarter 2017 provision expense included provisions of $1.42021 and 2020, respectively. Preferred stock dividends were $6.7 million for loan portfolio growth and reserves of $0.8 million for impaired loans.
Non-interest income of $18.0 million decreased $9.5 million, or 34.4%, for the three months ended September 30, 2017 when compared to non-interest income of $27.5$7.2 million for the threesix months ended SeptemberJune 30, 2016. This decrease was primarily the result of an $8.3 million other-than-temporary impairment loss related2021 and 2020, respectively. There were no changes to the Religare investment, decreases in other non-interest income of $2.4 million, due to a $2.2 million recovery of a previously recorded loss in third quarter 2016, decreases in interchange and card revenue and deposit fees of $2.0 million and $1.6 million, respectively, driven by lower business volumes in BankMobile Disbursements. These decreases were offset in part by increased gains on sales of investment securities of $5.4 million.
Non-interest expense of $61.0 million increased $4.8 million, or 8.6%, for the three months ended September 30, 2017 when compared to non-interest expense of $56.2 million for the three months ended September 30, 2016. This increase resulted primarily from increases in salaries and employee benefits of $2.1 million, driven primarily by salary increases as the average number of full-time equivalent employees remained relatively consistent over the past year, and increases in technology, communications and bank operations and other expenses of $1.9 million and $0.9 million, respectively, driven by technology enhancements and the capture of depreciation and amortization expenses related to BankMobile due to the reclassification of BankMobile as held and used as of September 30, 2017.
Income tax expense of $14.9 million increased $0.3 million, or 2.3%, for the three months ended September 30, 2017 when compared to income tax expense of $14.6 million for the three months ended September 30, 2016. The increase in income tax expense was driven primarily by the elimination of deferred tax benefits from other-than-temporary impairment losses on investment securities totaling $7.7 million, offset in part by a decrease in pre-tax income of $13.1 million in third quarter 2017 compared to third quarter 2016.
Preferred stock dividends of $3.6 million increased $1.1 million, or 41.7%, for the three months ended September 30, 2017 when compared to preferred stock dividends of $2.6 million for the three months ended September 30, 2016. This increase was the resultamount of preferred stock issuances aggregating $85.0 million in September 2016 with dividendsoutstanding during the three and six months ended June 30, 2021 and 2020.
On June 15, 2020, the Series C Preferred Stock became floating at 6.00%three-month LIBOR plus 5.300%, compared to a fixed rate of 7.00%. 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 Preferred Stock became floating at three-month LIBOR plus 5.14%, compared to a fixed rate of 6.45%.
Net Interest Income
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, andnet interest margin for the periods indicated.
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2017 | | 2016 |
| Average Balance | | Interest Income or Expense | | Average Yield or Cost (%) | | Average Balance | | Interest Income or Expense | | Average Yield or Cost (%) |
(dollars in thousands) | | | | | | | | | | | |
Assets | | | | | | | | | | | |
Interest-earning deposits | $ | 280,845 |
| | $ | 923 |
| | 1.30 | % | | $ | 237,753 |
| | $ | 326 |
| | 0.55 | % |
Investment securities (A) | 1,017,065 |
| | 7,307 |
| | 2.87 | % | | 534,333 |
| | 3,528 |
| | 2.64 | % |
Loans: | | | | | | | | | | | |
Commercial loans to mortgage companies | 1,956,587 |
| | 21,099 |
| | 4.28 | % | | 2,142,986 |
| | 18,990 |
| | 3.53 | % |
Multifamily loans | 3,639,566 |
| | 33,301 |
| | 3.63 | % | | 3,283,007 |
| | 31,373 |
| | 3.80 | % |
Commercial and industrial | 1,476,083 |
| | 15,792 |
| | 4.24 | % | | 1,193,906 |
| | 11,887 |
| | 3.96 | % |
Non-owner occupied commercial real estate | 1,294,996 |
| | 12,706 |
| | 3.89 | % | | 1,236,054 |
| | 12,295 |
| | 3.96 | % |
All other loans | 561,911 |
| | 5,842 |
| | 4.12 | % | | 385,511 |
| | 4,554 |
| | 4.70 | % |
Total loans (B) | 8,929,143 |
|
| 88,740 |
| | 3.94 | % | | 8,241,464 |
|
| 79,099 |
| | 3.82 | % |
Other interest-earning assets | 125,341 |
| | 1,315 |
| | 4.16 | % | | 90,010 |
| | 1,259 |
| | 5.56 | % |
Total interest-earning assets | 10,352,394 |
|
| 98,285 |
| | 3.77 | % | | 9,103,560 |
|
| 84,212 |
| | 3.68 | % |
Non-interest-earning assets | 389,797 |
| | | | | | 336,013 |
| | | | |
Total assets | $ | 10,742,191 |
| | | | | | $ | 9,439,573 |
| | | | |
Liabilities | | | | | | | | | | | |
Interest checking accounts | $ | 351,422 |
| | 708 |
| | 0.80 | % | | $ | 202,645 |
| | 278 |
| | 0.55 | % |
Money market deposit accounts | 3,427,682 |
| | 9,866 |
| | 1.14 | % | | 3,115,076 |
| | 5,200 |
| | 0.66 | % |
Other savings accounts | 40,310 |
| | 29 |
| | 0.28 | % | | 36,516 |
| | 22 |
| | 0.24 | % |
Certificates of deposit | 2,361,069 |
| | 7,778 |
| | 1.31 | % | | 2,796,028 |
| | 7,509 |
| | 1.07 | % |
Total interest-bearing deposits | 6,180,483 |
| | 18,381 |
| | 1.18 | % | | 6,150,265 |
| | 13,009 |
| | 0.84 | % |
Borrowings | 2,414,086 |
| | 11,885 |
| | 1.96 | % | | 1,586,262 |
| | 6,618 |
| | 1.66 | % |
Total interest-bearing liabilities | 8,594,569 |
| | 30,266 |
| | 1.40 | % | | 7,736,527 |
| | 19,627 |
| | 1.01 | % |
Non-interest-bearing deposits | 1,158,911 |
| | | | | | 863,435 |
| | | | |
Total deposits and borrowings | 9,753,480 |
| | | | 1.23 | % | | 8,599,962 |
| | | | 0.91 | % |
Other non-interest-bearing liabilities | 66,220 |
| | | | | | 129,208 |
| | | | |
Total liabilities | 9,819,700 |
| | | | | | 8,729,170 |
| | | | |
Shareholders’ Equity | 922,491 |
| | | | | | 710,403 |
| | | | |
Total liabilities and shareholders’ equity | $ | 10,742,191 |
| | | | | | $ | 9,439,573 |
| | | | |
Net interest earnings | | | 68,019 |
| | | | | | 64,585 |
| | |
Tax-equivalent adjustment (C) | | | 203 |
| | | | | | 96 |
| | |
Net interest earnings | | | $ | 68,222 |
| | | | | | $ | 64,681 |
| | |
Interest spread | | | | | 2.54 | % | | | | | | 2.77 | % |
Net interest margin | | | | | 2.61 | % | | | | | | 2.82 | % |
Net interest margin tax equivalent (C) | | | | | 2.62 | % | | | | | | 2.83 | % |
| |
(A) | 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. |
| |
(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 three and six months ended June 30, 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.
|
| | | | | | | | | | | |
| Three Months Ended September 30, |
| 2017 vs. 2016 |
| Increase (Decrease) due to Change in | | |
| Rate | | Volume | | Total |
(amounts in thousands) | | | | | |
Interest income | | | | | |
Interest-earning deposits | $ | 528 |
| | $ | 69 |
| | $ | 597 |
|
Investment securities | 335 |
| | 3,444 |
| | 3,779 |
|
Loans: | | | | | |
Commercial loans to mortgage companies | 3,853 |
| | (1,744 | ) | | 2,109 |
|
Multifamily loans | (1,440 | ) | | 3,368 |
| | 1,928 |
|
Commercial and industrial | 908 |
| | 2,997 |
| | 3,905 |
|
Non-owner occupied commercial real estate | (195 | ) | | 606 |
| | 411 |
|
All other loans | (610 | ) | | 1,898 |
| | 1,288 |
|
Total loans | 2,516 |
|
| 7,125 |
|
| 9,641 |
|
Other interest-earning assets | (365 | ) | | 421 |
| | 56 |
|
Total interest income | 3,014 |
|
| 11,059 |
|
| 14,073 |
|
Interest expense | | | | | |
Interest checking accounts | 167 |
| | 263 |
| | 430 |
|
Money market deposit accounts | 4,095 |
| | 571 |
| | 4,666 |
|
Other savings accounts | 4 |
| | 3 |
| | 7 |
|
Certificates of deposit | 1,539 |
| | (1,270 | ) | | 269 |
|
Total interest-bearing deposits | 5,805 |
| | (433 | ) | | 5,372 |
|
Borrowings | 1,337 |
| | 3,930 |
| | 5,267 |
|
Total interest expense | 7,142 |
| | 3,497 |
| | 10,639 |
|
Net interest income | $ | (4,128 | ) | | $ | 7,562 |
| | $ | 3,434 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Three Months Ended June 30, |
| 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 | $ | 646,342 | | | $ | 188 | | | 0.12 | % | | $ | 384,622 | | | $ | 113 | | | 0.12 | % | | $ | — | | | $ | 75 | | | $ | 75 | |
Investment securities (1) | 1,512,644 | | | 8,327 | | | 2.20 | % | | 705,389 | | | 6,155 | | | 3.49 | % | | (2,900) | | | 5,072 | | | 2,172 | |
Loans and leases: | | | | | | | | | | | | | | | | | |
Commercial loans to mortgage companies | 2,737,629 | | | 21,069 | | | 3.09 | % | | 2,456,067 | | | 17,740 | | | 2.91 | % | | 1,166 | | | 2,163 | | | 3,329 | |
Multi-family loans | 1,551,370 | | | 15,013 | | | 3.88 | % | | 2,009,847 | | | 19,345 | | | 3.87 | % | | 50 | | | (4,382) | | | (4,332) | |
Commercial and industrial loans and leases (2) | 2,878,045 | | | 25,786 | | | 3.59 | % | | 2,460,060 | | | 24,775 | | | 4.05 | % | | (2,977) | | | 3,988 | | | 1,011 | |
PPP loans | 6,133,184 | | | 41,137 | | | 2.69 | % | | 2,754,920 | | | 11,706 | | | 1.71 | % | | 9,374 | | | 20,057 | | | 29,431 | |
Non-owner occupied commercial real estate loans | 1,368,695 | | | 13,187 | | | 3.86 | % | | 1,392,131 | | | 13,179 | | | 3.81 | % | | 199 | | | (191) | | | 8 | |
Residential mortgages | 346,284 | | | 3,127 | | | 3.62 | % | | 429,609 | | | 3,771 | | | 3.53 | % | | 95 | | | (739) | | | (644) | |
Installment loans | 1,467,595 | | | 34,289 | | | 9.37 | % | | 1,288,999 | | | 27,931 | | | 8.72 | % | | 2,224 | | | 4,134 | | | 6,358 | |
Total loans and leases (3) | 16,482,802 | | | 153,608 | | | 3.74 | % | | 12,791,633 | | | 118,447 | | | 3.72 | % | | 10,131 | | | 25,030 | | | 35,161 | |
Other interest-earning assets | 57,208 | | | 758 | | | 5.32 | % | | 98,377 | | | 503 | | | 2.06 | % | | 536 | | | (281) | | | 255 | |
Total interest-earning assets | 18,698,996 | | | 162,881 | | | 3.49 | % | | 13,980,021 | | | 125,218 | | | 3.60 | % | | 7,767 | | | 29,896 | | | 37,663 | |
Non-interest-earning assets | 607,952 | | | | | | | 616,683 | | | | | | | | | | | |
Assets of discontinued operations | — | | | | | | | 78,880 | | | | | | | | | | | |
Total assets | $ | 19,306,948 | | | | | | | $ | 14,675,584 | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | |
Interest checking accounts | $ | 3,503,242 | | | 6,653 | | | 0.76 | % | | $ | 2,482,222 | | | 4,605 | | | 0.75 | % | | 64 | | | 1,984 | | | 2,048 | |
Money market deposit accounts | 4,859,614 | | | 5,650 | | | 0.47 | % | | 3,034,457 | | | 6,449 | | | 0.85 | % | | (3,639) | | | 2,840 | | | (799) | |
Other savings accounts | 1,456,777 | | | 2,076 | | | 0.57 | % | | 1,177,554 | | | 5,677 | | | 1.94 | % | | (4,718) | | | 1,117 | | | (3,601) | |
Certificates of deposit | 658,698 | | | 1,274 | | | 0.78 | % | | 1,734,062 | | | 6,507 | | | 1.51 | % | | (2,293) | | | (2,940) | | | (5,233) | |
Total interest-bearing deposits (4) | 10,478,331 | | | 15,653 | | | 0.60 | % | | 8,428,295 | | | 23,238 | | | 1.11 | % | | (10,586) | | | 3,001 | | | (7,585) | |
FRB PPP liquidity facility | 3,858,733 | | | 3,367 | | | 0.35 | % | | 942,258 | | | 822 | | | 0.35 | % | | — | | | 2,545 | | | 2,545 | |
Borrowings | 531,757 | | | 5,104 | | | 3.85 | % | | 2,282,761 | | | 9,176 | | | 1.62 | % | | 6,468 | | | (10,540) | | | (4,072) | |
Total interest-bearing liabilities | 14,868,821 | | | 24,124 | | | 0.65 | % | | 11,653,314 | | | 33,236 | | | 1.15 | % | | (4,118) | | | (4,994) | | | (9,112) | |
Non-interest-bearing deposits (4) | 2,889,781 | | | | | | | 1,890,955 | | | | | | | | | | | |
Total deposits and borrowings | 17,758,602 | | | | | 0.54 | % | | 13,544,269 | | | | | 0.99 | % | | | | | | |
Other non-interest-bearing liabilities | 328,251 | | | | | | | 88,913 | | | | | | | | | | | |
Liabilities of discontinued operations | — | | | | | | | 53,268 | | | | | | | | | | | |
Total liabilities | 18,086,853 | | | | | | | 13,686,450 | | | | | | | | | | | |
Shareholders' equity | 1,220,095 | | | | | | | 989,134 | | | | | | | | | | | |
Total liabilities and shareholders' equity | $ | 19,306,948 | | | | | | | $ | 14,675,584 | | | | | | | | | | | |
Net interest income | | | 138,757 | | | | | | | 91,982 | | | | | $ | 11,885 | | | $ | 34,890 | | | $ | 46,775 | |
Tax-equivalent adjustment (5) | | | 289 | | | | | | | 225 | | | | | | | | | |
Net interest earnings | | | $ | 139,046 | | | | | | | $ | 92,207 | | | | | | | | | |
Interest spread | | | | | 2.95 | % | | | | | | 2.61 | % | | | | | | |
Net interest margin | | | | | 2.98 | % | | | | | | 2.65 | % | | | | | | |
Net interest margin tax equivalent (5) | | | | | 2.98 | % | | | | | | 2.65 | % | | | | | | |
Net interest margin tax equivalent, excluding PPP loans (6) | | | | | 3.30 | % | | | | | | 2.97 | % | | | | | | |
| | | | | | | | | | | | | | | | | |
(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.
Net(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 incomebearing and non-interest-bearing) were 0.47% and 0.91% for the three months ended SeptemberJune 30, 2017 was $68.0 million,2021 and 2020, respectively.
(5)Non-GAAP tax-equivalent basis, using an increaseestimated marginal tax rate of $3.4 million, or 5.3%, from26% for the three months ended June 30, 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.
(6)Non-GAAP tax-equivalent basis, as described in note (5) for the three months ended June 30, 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 $64.6these non-GAAP measures provides additional clarity when assessing Customers’ financial results. These disclosures should not be viewed as substitutes for results determined to be in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other entities.
Net interest income increased $46.8 million for the three months ended SeptemberJune 30, 2016,2021 compared to the three months ended June 30, 2020 as average interest-earning assets increased by $4.7 billion, primarily related to PPP loan originations and security balances increased $1.2 billion. Net interest margin (tax equivalent) narrowedincreases in investment securities, installment loans, commercial and industrial loans and commercial loans to mortgage companies, partially offset by 21 basis pointsa decrease in multi-family loans as the loan mix improved year-over-year. The commercial loans to 2.62% for third quarter 2017 comparedmortgage companies trend has been a function of greater refinance activity due to 2.83% for third quarter 2016. The net interest margin (tax equivalent) compression largely resulted from a $1.4 million reduction in prepayment penalties in the multi-family portfolio. Net interest margin (tax equivalent) was also impacted by Customers Bancorp's issuance of $100 million principal amount of 3.95% senior notes on June 30, 2017 and a one-time interest expense adjustment of approximately $0.3 million.
Interest expense on total interest-bearing deposits increased $5.4 million in third quarter 2017 compared to third quarter 2016. The increase was mainly driven by the average rate on interest-bearing deposits, which increased 34 basis points for third quarter 2017 compared to third quarter 2016, reflecting highersharply lower interest rates, offeredan increase in home purchase volumes, and market share gains from other banks.
The NIM increased by Customers on its money market deposit accounts and certificates of deposits in order33 basis point to remain competitive and attract new and retain existing deposit customers. Deposit volumes remained relatively stable, as average interest-bearing deposits increased $30.2 million2.98% for the three months ended SeptemberJune 30, 2017 compared to average interest-bearing deposits2021 from 2.65% for the three months ended SeptemberJune 30, 2016.
Interest expense on borrowings increased $5.3 million in third quarter 2017 compared to third quarter 2016. This increase was primarily driven by a higher average2020 resulting from the Federal Reserve interest rate on borrowings, which increased 30cuts of 225 basis points for third quarter 2017 compared to third quarter 2016, primarily as a result of an increasebeginning in August 2019, and the shift in the borrowing rate for short term advances, including FHLB advancesmix of interest-earning assets and federal funds purchased, and an increaseinterest-bearing liabilities drove a 11 basis point decline in the outstanding balanceyield on interest-earning assets and a 50 basis point decline in the cost of senior note borrowings.
Provision for Loan Losses
The provision for loan losses of $2.4 million increased by $2.3 millioninterest-bearing liabilities for the three months ended SeptemberJune 30, 2017,2021 compared to the three months ended June 30, 2020. The largest shift in the mix of interest-earning assets and interest-bearing liabilities was $6.3 billion ($6.1 billion average balance) of PPP loans yielding 2.69% and related PPPLF borrowings of $3.9 billion ($3.9 billion average balance) costing 0.35%. There was also PPP loan forgiveness from the first two rounds which accelerated the recognition of net deferred loan origination fees that contributed to the NIM increase. Customers' total cost of funds, including non-interest bearing deposits was 0.54% and 0.99% for the three months ended June 30, 2021 and 2020, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | Six Months Ended June 30, |
| 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 | $ | 910,362 | | | $ | 490 | | | 0.11 | % | | $ | 578,435 | | | $ | 2,974 | | | 1.03 | % | | $ | (3,577) | | | $ | 1,093 | | | $ | (2,484) | |
Investment securities (1) | 1,435,529 | | | 16,306 | | | 2.27 | % | | 635,838 | | | 11,132 | | | 3.50 | % | | (4,932) | | | 10,106 | | | 5,174 | |
Loans and leases: | | | | | | | | | | | | | | | | | |
Commercial loans to mortgage companies | 2,928,802 | | | 44,860 | | | 3.09 | % | | 2,148,863 | | | 35,254 | | | 3.30 | % | | (2,375) | | | 11,981 | | | 9,606 | |
Multi-family loans | 1,619,891 | | | 30,861 | | | 3.84 | % | | 2,111,853 | | | 41,712 | | | 3.97 | % | | (1,337) | | | (9,514) | | | (10,851) | |
Commercial and industrial loans and leases (2) | 2,863,268 | | | 53,637 | | | 3.78 | % | | 2,460,435 | | | 53,513 | | | 4.37 | % | | (7,835) | | | 7,959 | | | 124 | |
PPP loans | 5,382,370 | | | 79,969 | | | 3.00 | % | | 1,377,460 | | | 11,706 | | | 1.71 | % | | 14,063 | | | 54,200 | | | 68,263 | |
Non-owner occupied commercial real estate loans | 1,358,871 | | | 25,981 | | | 3.86 | % | | 1,363,795 | | | 27,616 | | | 4.07 | % | | (1,528) | | | (107) | | | (1,635) | |
Residential mortgages | 359,815 | | | 6,612 | | | 3.71 | % | | 437,782 | | | 8,171 | | | 3.75 | % | | (88) | | | (1,471) | | | (1,559) | |
Installment loans | 1,396,126 | | | 63,805 | | | 9.22 | % | | 1,274,024 | | | 56,555 | | | 8.93 | % | | 1,835 | | | 5,415 | | | 7,250 | |
Total loans and leases (3) | 15,909,143 | | | 305,725 | | | 3.88 | % | | 11,174,212 | | | 234,527 | | | 4.22 | % | | 2,735 | | | 68,463 | | | 71,198 | |
Other interest-earning assets | 68,521 | | | 1,475 | | | 4.34 | % | | 89,890 | | | 1,928 | | | 4.31 | % | | 13 | | | (466) | | | (453) | |
Total interest-earning assets | 18,323,555 | | | 323,996 | | | 3.56 | % | | 12,478,375 | | | 250,561 | | | 4.04 | % | | (5,761) | | | 79,196 | | | 73,435 | |
Non-interest-earning assets | 594,936 | | | | | | | 565,304 | | | | | | | | | | | |
Assets of discontinued operations | — | | | | | | | 80,816 | | | | | | | | | | | |
Total assets | $ | 18,918,491 | | | | | | | $ | 13,124,495 | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | | | | | | |
Interest checking accounts | $ | 3,099,725 | | | 12,252 | | | 0.80 | % | | $ | 1,888,160 | | | 9,221 | | | 0.98 | % | | (1,946) | | | 4,977 | | | 3,031 | |
Money market deposit accounts | 4,648,942 | | | 11,709 | | | 0.51 | % | | 3,335,006 | | | 22,662 | | | 1.37 | % | | (17,698) | | | 6,745 | | | (10,953) | |
Other savings accounts | 1,435,681 | | | 4,477 | | | 0.63 | % | | 1,159,479 | | | 11,483 | | | 1.99 | % | | (9,238) | | | 2,232 | | | (7,006) | |
Certificates of deposit | 662,447 | | | 2,873 | | | 0.87 | % | | 1,629,416 | | | 14,225 | | | 1.76 | % | | (5,223) | | | (6,129) | | | (11,352) | |
Total interest-bearing deposits (4) | 9,846,795 | | | 31,311 | | | 0.64 | % | | 8,012,061 | | | 57,591 | | | 1.45 | % | | (34,105) | | | 7,825 | | | (26,280) | |
FRB PPP liquidity facility | 3,899,996 | | | 6,769 | | | 0.35 | % | | 471,129 | | | 822 | | | 0.35 | % | | — | | | 5,947 | | | 5,947 | |
Borrowings | 850,024 | | | 14,428 | | | 3.42 | % | | 1,756,080 | | | 18,846 | | | 2.16 | % | | 7,955 | | | (12,373) | | | (4,418) | |
Total interest-bearing liabilities | 14,596,815 | | | 52,508 | | | 0.72 | % | | 10,239,270 | | | 77,259 | | | 1.52 | % | | (26,150) | | | 1,399 | | | (24,751) | |
Non-interest-bearing deposits (4) | 2,855,019 | | | | | | | 1,732,163 | | | | | | | | | | | |
Total deposits and borrowings | 17,451,834 | | | | | 0.61 | % | | 11,971,433 | | | | | 1.30 | % | | | | | | |
Other non-interest-bearing liabilities | 288,246 | | | | | | | 92,218 | | | | | | | | | | | |
Liabilities of discontinued operations | — | | | | | | | 53,600 | | | | | | | | | | | |
Total liabilities | 17,740,080 | | | | | | | 12,117,251 | | | | | | | | | | | |
Shareholders' equity | 1,178,411 | | | | | | | 1,007,244 | | | | | | | | | | | |
Total liabilities and shareholders' equity | $ | 18,918,491 | | | | | | | $ | 13,124,495 | | | | | | | | | | | |
Net interest income | | | 271,488 | | | | | | | 173,302 | | | | | $ | 20,389 | | | $ | 77,797 | | | $ | 98,186 | |
Tax-equivalent adjustment (5) | | | 581 | | | | | | | 430 | | | | | | | | | |
Net interest earnings | | | $ | 272,069 | | | | | | | $ | 173,732 | | | | | | | | | |
Interest spread | | | | | 2.96 | % | | | | | | 2.74 | % | | | | | | |
Net interest margin | | | | | 2.99 | % | | | | | | 2.79 | % | | | | | | |
Net interest margin tax equivalent (5) | | | | | 2.99 | % | | | | | | 2.80 | % | | | | | | |
Net interest margin tax equivalent, excluding PPP loans (6) | | | | | 3.14 | % | | | | | | 2.98 | % | | | | | | |
| | | | | | | | | | | | | | | | | |
(1)For presentation in this table, average balances and the corresponding average yields for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.
(2)Includes owner occupied commercial real estate loans.
(3)Includes non-accrual loans, the effect of which is to reduce the yield earned on loans and leases, and deferred loan fees.
(4)Total costs of deposits (including interest bearing and non-interest-bearing) were 0.50% and 1.19% for the six months ended June 30, 2021 and 2020, respectively.
(5)Non-GAAP tax-equivalent basis, using an estimated marginal tax rate of 26% for the six months ended June 30, 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.
(6)Non-GAAP tax-equivalent basis, as described in note (5) for the six months ended June 30, 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.
Net interest income increased $98.2 million for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 as average interest-earning assets increased by $5.8 billion, primarily related to PPP loan originations, increases in commercial loans to mortgage companies, investment securities, commercial and industrial loans, and installment loans, partially offset by a decrease in multi-family loans as the loan mix improved year-over-year. The commercial loans to mortgage companies trend has been a function of greater refinance activity due to sharply lower interest rates, an increase in home purchase volumes, and market share gains from other banks.
The NIM increased by 19 basis point to 2.99% for the six months ended June 30, 2021 from 2.80% for the six months ended June 30, 2020 resulting from the Federal Reserve interest rate cuts of 225 basis points beginning in August 2019, and the shift in the mix of interest-earning assets and interest-bearing liabilities drove a 48 basis point decline in the yield on interest-earning assets and a 80 basis point decline in the cost of interest-bearing liabilities for the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The largest shift in the mix of interest-earning assets and interest-bearing liabilities was $6.3 billion ($5.4 billion average balance) of PPP loans yielding 3.00% and related PPPLF borrowings of $3.9 billion ($3.9 billion average balance) costing 0.35%. There was also PPP loan forgiveness from the first two rounds which accelerated the recognition of net deferred loan origination fees that contributed to the NIM increase. Customers' total cost of funds, including non-interest bearing deposits was 0.61% and 1.30% for the six months ended June 30, 2021 and 2020, 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 present 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 net interest margin tax equivalent and net interest margin tax equivalent, excluding PPP loans for the three and six months ended June 30, 2021 and 2020 is set forth below. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(dollars in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Net interest income (GAAP) | $ | 138,757 | | | $ | 91,982 | | | $ | 271,488 | | | $ | 173,302 | |
Tax-equivalent adjustment | 289 | | | 225 | | | 581 | | | 430 | |
Net interest income tax equivalent (Non-GAAP) | 139,046 | | | 92,207 | | | 272,069 | | | 173,732 | |
Loans receivable, PPP net interest income | (35,785) | | | (9,308) | | | (70,627) | | | (9,308) | |
Net interest income tax equivalent, excluding PPP loans (Non-GAAP) | $ | 103,261 | | | $ | 82,899 | | | $ | 201,442 | | | $ | 164,424 | |
| | | | | | | |
Average total interest-earning assets (GAAP) | $ | 18,698,996 | | | $ | 13,980,021 | | | $ | 18,323,555 | | | $ | 12,478,375 | |
Average PPP loans | (6,133,184) | | | (2,754,920) | | | (5,382,370) | | | (1,377,460) | |
Adjusted average total interest-earning assets (Non-GAAP) | $ | 12,565,812 | | | $ | 11,225,101 | | | $ | 12,941,185 | | | $ | 11,100,915 | |
| | | | | | | |
Net interest margin (GAAP) | 2.98 | % | | 2.65 | % | | 2.99 | % | | 2.79 | % |
Net interest margin tax equivalent (Non-GAAP) | 2.98 | % | | 2.65 | % | | 2.99 | % | | 2.80 | % |
Net interest margin tax equivalent, excluding PPP loans (Non-GAAP) | 3.30 | % | | 2.97 | % | | 3.14 | % | | 2.98 | % |
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 and lease portfolio at the balance sheet date. During first quarter 2020, Customers adopted ASC 326. 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.
Customers recorded a provision for credit losses during the three months ended June 30, 2021, which resulted primarily from an increase in provision for consumer installment loans from continued growth, offset by a benefit or release of the reserve for the commercial loans from continued improvement in forecasts of macroeconomic conditions. Customers recorded a provision for credit losses of $3.3 million and $0.1 million for loans and leases and lending-related commitments, respectively, for the same period in 2016. Thethree months ended June 30, 2021. Customers recorded $20.9 million of provision for loancredit losses for loans and leases and a credit or release of $2.4 million in third quarter 2017 included provisionsthe reserve of $1.4$0.4 million for loanlending-related commitments, respectively, for the three months ended June 30, 2020. The decrease resulted primarily from the impact of reserve build for the COVID-19 pandemic, portfolio growth, and reservesnet-charge-offs for the three months ended June 30, 2020. Net charge-offs for the three months ended June 30, 2021 were $6.6 million, or 16 basis points of $0.8average loans and leases on an annualized basis, primarily due to $8.0 million of charge-offs for consumer installment loans consistent with the loan growth. Net charge-offs for the three months ended June 30, 2020 were $10.3 million, or 32 basis points of average loans and leases on an annualized basis, primarily due to a partial charge off of $2.8 million for impaired loans. In third quarter 2016,one commercial real estate collateral dependent loan and $8.3 million of charge-offs for consumer installment loans consistent with the loan growth.
Customers recorded $0.4 million of provision for credit losses for loans and leases and $1.2 million of credit or release of the reserve for lending-related commitments, respectively, for the six months ended June 30, 2021. Customers recorded $52.7 million and $0.4 million of provision for credit losses for loans and leases and lending-related commitments, respectively, for the six months ended June 30, 2020. Net charge-offs for the six months ended June 30, 2021 were $19.1 million, or 24 basis points of average loans and leases on an annualized basis, primarily due to $20.6 million of charge-offs for consumer installment loans consistent with the loan lossesgrowth. Net charge-offs for the six months ended June 30, 2020 were $29.0 million, or 52 basis points of $0.1average loans and leases on an annualized basis, primarily due to partial charge offs totaling $15.6 million wasfor two commercial real estate collateral dependent loans and $14.6 million of charge-offs for consumer installment loans consistent with the result of minimal loan growth during the quarter, as planned, as well as exceptional asset quality.growth.
For more information about the provision and allowance for loan lossesACL and our loss experience, see “Credit Risk” and “Asset Quality” herein.
Non-Interest Income
NON-INTEREST INCOME
The table below presents the components of non-interest income for the three and six months ended SeptemberJune 30, 20172021 and 2016.2020. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | QTD | | Six Months Ended June 30, | | YTD |
(dollars in thousands) | 2021 | | 2020 | | Change | | % Change | | 2021 | | 2020 | | Change | | % Change |
Interchange and card revenue | $ | 84 | | | $ | 193 | | | $ | (109) | | | (56.5) | % | | $ | 169 | | | $ | 463 | | | $ | (294) | | | (63.5) | % |
Deposit fees | 891 | | | 502 | | | 389 | | | 77.5 | % | | 1,754 | | | 1,054 | | | 700 | | | 66.4 | % |
Commercial lease income | 5,311 | | | 4,508 | | | 803 | | | 17.8 | % | | 10,516 | | | 8,776 | | | 1,740 | | | 19.8 | % |
Bank-owned life insurance | 2,765 | | | 1,757 | | | 1,008 | | | 57.4 | % | | 4,444 | | | 3,519 | | | 925 | | | 26.3 | % |
Mortgage warehouse transactional fees | 3,265 | | | 2,582 | | | 683 | | | 26.5 | % | | 7,512 | | | 4,533 | | | 2,979 | | | 65.7 | % |
Gain (loss) on sale of SBA and other loans | 1,900 | | | 23 | | | 1,877 | | | 8,160.9 | % | | 3,475 | | | 34 | | | 3,441 | | | 10,120.6 | % |
Mortgage banking income | 386 | | | 38 | | | 348 | | | 915.8 | % | | 849 | | | 334 | | | 515 | | | 154.2 | % |
| | | | | | | | | | | | | | | |
Gain (loss) on sale of investment securities | 1,812 | | | 4,353 | | | (2,541) | | | (58.4) | % | | 25,378 | | | 8,328 | | | 17,050 | | | 204.7 | % |
Unrealized gain (loss) on investment securities | 1,746 | | | 1,200 | | | 546 | | | 45.5 | % | | 2,720 | | | (178) | | | 2,898 | | | (1,628.1) | % |
Loss on sale of foreign subsidiaries | (2,840) | | | — | | | (2,840) | | | NM | | (2,840) | | | — | | | (2,840) | | | NM |
Unrealized gain (loss) on derivatives | (439) | | | (4,158) | | | 3,719 | | | (89.4) | % | | 2,098 | | | (5,304) | | | 7,402 | | | (139.6) | % |
Loss on cash flow hedge derivative terminations | — | | | — | | | — | | | NM | | (24,467) | | | — | | | (24,467) | | | NM |
Other | 1,941 | | | 713 | | | 1,228 | | | 172.2 | % | | 3,682 | | | 1,312 | | | 2,370 | | | 180.6 | % |
Total non-interest income | $ | 16,822 | | | $ | 11,711 | | | $ | 5,111 | | | 43.6 | % | | $ | 35,290 | | | $ | 22,871 | | | $ | 12,419 | | | 54.3 | % |
Commercial lease income
Commercial lease income represents income earned on commercial operating leases originated by Customers' Equipment Finance Group in which Customers is the lessor. The $0.8 million increase in commercial lease income for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 primarily resulted from the continued growth of Customers' equipment finance business.
|
| | | | | | | |
| Three Months Ended September 30, |
| 2017 | | 2016 |
(amounts in thousands) | | | |
Interchange and card revenue | $ | 9,570 |
| | $ | 11,547 |
|
Gain (loss) on sale of investment securities | 5,349 |
| | (1 | ) |
Deposit fees | 2,659 |
| | 4,218 |
|
Mortgage warehouse transactional fees | 2,396 |
| | 3,080 |
|
Bank-owned life insurance | 1,672 |
| | 1,386 |
|
Gain on sale of SBA and other loans | 1,144 |
| | 1,206 |
|
Mortgage banking income | 257 |
| | 287 |
|
Impairment loss on investment securities | (8,349 | ) | | — |
|
Other | 3,328 |
| | 5,763 |
|
Total non-interest income | $ | 18,026 |
| | $ | 27,486 |
|
The $1.7 million increase in commercial lease income for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily resulted from the continued growth of Customers' equipment finance business.Non-interestBank-owned life insurance
Bank-owned life insurance income decreased $9.5represents income earned on life insurance policies owned by Customers including an increase in cash surrender value of the policies and any benefits paid by insurance carriers under the policies. The $1.0 million increase in bank-owned life insurance income for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 resulted from the increase in cash surrender value of existing and new policies and benefits paid by insurance carriers under the policies.
The $0.9 million increase in commercial lease income for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 resulted from the increase in cash surrender value of existing and new policies purchased and benefits paid by insurance carrier under the policies.
Mortgage warehouse transactional fees
The $0.7 million increase in mortgage warehouse transactional fees for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 primarily resulted from a continued increase in refinancing activity driven by the decline in market interest rates that began in March 2020.
The $3.0 million increase in mortgage warehouse transactional fees for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily resulted from a continued increase in refinancing activity driven by the decline in market interest rates that began in March 2020.
Gain (loss) on sale of SBA and other loans
The $1.9 million increase in gain on sale of SBA and other loans for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 reflects an increase in sales of $14.5 million of SBA loans and $28.8 million of installment loans during the three months ended June 30, 2021 compared to the three months ended June 30, 2020.
The $3.4 million increase in gain on sale of SBA and other loans for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 reflects an increase in sales of $35.7 million of SBA loans and $28.8 million of installment loans during the six months ended June 30, 2021 compared to the six months ended June 30, 2020.
Gain (loss) on sale of investment securities
The $2.5 million decrease in gain on sale of investment securities for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 reflects the gains realized from the sale of $53.7 million in AFS debt securities during the three months ended June 30, 2021 compared to $109.2 million during the three months ended SeptemberJune 30, 2017 to $18.02020.
The $17.1 million increase in gain on sale of investment securities for the six months ended June 30, 2021 compared to $27.5 million for the threesix months ended SeptemberJune 30, 2016. This decrease was primarily due to an $8.3 million other-than-temporary-impairment loss on equity securities, a decrease in other non-interest income of $2.4 million due to a $2.2 million recovery of a previously recorded loss in third quarter 2016, decreases in interchange and card revenue and deposit fees of $2.0 million and $1.6 million, respectively, driven by lower business volumes in BankMobile Disbursements, and a decrease in mortgage warehouse transactional fees of $0.7 million driven by a reduction in2020 reflects the volume of warehouse transactions. These decreases were offset in part by increases in gains realized from the sale of $407.6 million in AFS debt securities during the six months ended June 30, 2021 compared to $109.2 million during the six months ended June 30, 2020.
Unrealized gain (loss) on investment securities
The $0.5 million increase in unrealized gain (loss) on investment securities for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 reflects an increase in the unrealized gain of $5.4equity securities issued by a foreign entity that were held by CB Green Ventures Pte Ltd. and CUBI India Ventures Pte Ltd. for the three months ended June 30, 2021.
The $2.9 million increase in unrealized gain (loss) on investment securities for the six months ended June 30, 2021 compared to the six months ended June 30, 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. for the six months ended June 30, 2021.
Loss on sale of foreign subsidiaries
The $2.8 million increase in loss on sale of foreign subsidiaries for the three months ended June 30, 2021 compared to the three months ended June 30, 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. Customers sold all outstanding shares in CB Green Ventures Pte Ltd. and CUBI India Ventures Pte Ltd. for $3.8 million in June 2021.
The $2.8 million increase in loss on sale of foreign subsidiaries for the six months ended June 30, 2021 compared to the three months ended June 30, 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.
Unrealized gain (loss) on derivatives
The $3.7 million increase in unrealized gain (loss) on derivatives for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 primarily resulted from increases of $4.0 million in credit valuation adjustment and credit derivatives due to changes in market interest rates, partially offset by $0.3 million decrease in interest rate swap fees.
The $7.4 million increase in unrealized gain (loss) on derivatives for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily resulted from increases of $8.4 million in credit valuation adjustment and credit derivatives due to changes in market interest rates, partially offset by $1.0 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 six months ended June 30, 2021 compared to six months ended June 30, 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 $1.2 million increase in other non-interest income for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 primarily resulted from bank-owned life insurance policiesa market value adjustment loss of $0.3 million.$1.5 million on a commercial real estate loan held for sale during the three months ended June 30, 2020.
The $2.4 million increase in other non-interest income for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily resulted from an increase of $0.8 million in gain from the sales of commercial lease assets and a market value adjustment loss of $1.5 million on a commercial real estate loan held for sale during the six months ended June 30, 2020.
Non-Interest Expense
NON-INTEREST EXPENSE
The table below presents the components of non-interest expense for the three and six months ended SeptemberJune 30, 20172021 and 2016.2020. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | QTD | | Six Months Ended June 30, | | YTD |
(dollars in thousands) | 2021 | | 2020 | | Change | | % Change | | 2021 | | 2020 | | Change | | % Change |
Salaries and employee benefits | $ | 28,023 | | | $ | 23,192 | | | $ | 4,831 | | | 20.8 | % | | $ | 51,994 | | | $ | 43,716 | | | $ | 8,278 | | | 18.9 | % |
Technology, communication and bank operations | 19,618 | | | 11,103 | | | 8,515 | | | 76.7 | % | | 39,606 | | | 21,642 | | | 17,964 | | | 83.0 | % |
Professional services | 8,234 | | | 2,974 | | | 5,260 | | | 176.9 | % | | 14,523 | | | 6,519 | | | 8,004 | | | 122.8 | % |
Occupancy | 2,482 | | | 2,639 | | | (157) | | | (5.9) | % | | 5,103 | | | 5,252 | | | (149) | | | (2.8) | % |
Commercial lease depreciation | 4,415 | | | 3,643 | | | 772 | | | 21.2 | % | | 8,706 | | | 7,070 | | | 1,636 | | | 23.1 | % |
FDIC assessments, non-income taxes and regulatory fees | 2,602 | | | 2,368 | | | 234 | | | 9.9 | % | | 5,321 | | | 5,235 | | | 86 | | | 1.6 | % |
Merger and acquisition related expenses | — | | | — | | | — | | | — | % | | 418 | | | — | | | 418 | | | NM |
Loan workout | 102 | | | 1,808 | | | (1,706) | | | (94.4) | % | | (159) | | | 2,175 | | | (2,334) | | | (107.3) | % |
Advertising and promotion | 313 | | | 372 | | | (59) | | | (15.9) | % | | 874 | | | 1,795 | | | (921) | | | (51.3) | % |
Other | 5,034 | | | 1,692 | | | 3,342 | | | 197.5 | % | | 6,364 | | | 5,354 | | | 1,010 | | | 18.9 | % |
Total non-interest expense | $ | 70,823 | | | $ | 49,791 | | | $ | 21,032 | | | 42.2 | % | | $ | 132,750 | | | $ | 98,758 | | | $ | 33,992 | | | 34.4 | % |
Salaries and employee benefits |
| | | | | | | |
| Three Months Ended September 30, |
| 2017 | | 2016 |
(amounts in thousands) | | | |
Salaries and employee benefits | $ | 24,807 |
| | $ | 22,681 |
|
Technology, communication and bank operations | 14,401 |
| | 12,525 |
|
Professional services | 7,403 |
| | 7,006 |
|
Occupancy | 2,857 |
| | 2,450 |
|
FDIC assessments, taxes, and regulatory fees | 2,475 |
| | 2,726 |
|
Provision for operating losses | 1,509 |
| | 1,406 |
|
Loan workout | 915 |
| | 592 |
|
Other real estate owned | 445 |
| | 1,192 |
|
Advertising and promotion | 404 |
| | 591 |
|
Acquisition related expenses | — |
| | 144 |
|
Other | 5,824 |
| | 4,905 |
|
Total non-interest expense | $ | 61,040 |
| | $ | 56,218 |
|
Non-interest expense was $61.0The $4.8 million increase in salaries and employee benefits for the three months ended SeptemberJune 30, 2017, an increase of $4.8 million from non-interest expense of $56.2 million for2021 compared to the three months ended SeptemberJune 30, 2016.
Salaries and employee benefits, which represent the largest component of non-interest expense, increased $2.1 million, or 9.4%, to $24.8 million for the three months ended September 30, 2017 from $22.7 million for the three months ended September 30, 2016. The increase was primarily attributable to increases in salaries as the average number of full-time equivalent employees remained relatively consistent over the past year.
Technology, communication and bank operations expenses increased by $1.9 million, or 15.0%, to $14.4 million for the three months ended September 30, 2017 from $12.5 million for the three months ended September 30, 2016. The increase was primarily attributable to increased core processing system expenses and non-capitalizable software development costs of $2.0 million and $1.5 million, respectively, as well as the recapture of $3.2 million of depreciation expense in third quarter 2017 related to BankMobile for the period it was classified as held for sale. These increases were offset in part by a $3.9 million one-time expense in third quarter 2016 for technology-related services.
Income Taxes
Income tax expense increased $0.3 million for the three months ended September 30, 2017 to $14.9 million, compared to $14.6 million in the same period of 2016. This increase was driven primarily by the elimination of deferred tax benefits from other-than-temporary impairment losses on investment securities totaling $7.7 million, offset in part by a decrease in pre-tax income of $13.1 million in third quarter 2017 compared to third quarter 2016.
Preferred Stock Dividends
Preferred stock dividends of $3.6 million increased $1.1 million, or 41.7%, for the three months ended September 30, 2017 when compared to preferred stock dividends of $2.6 million for the three months ended September 30, 2016. This increase was the result of preferred stock issuances totaling $85.0 million issued in September 2016 with dividends at 6.00%.
Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016
Net income available to common shareholders decreased $6.6 million, or 12.5%, to $46.4 million for the nine months ended September 30, 2017 when compared to net income available to common shareholders of $53.0 million for the nine months ended September 30, 2016. The decreased net income available to common shareholders2020 primarily resulted from an increase in non-interest expense of $32.5 million,average full-time equivalent team members needed for future growth, annual merit increases, an increase in preferred stock dividendsincentive 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.
The $8.3 million increase in salaries and employee benefits for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily resulted from an increase in average full-time equivalent team members needed for future growth, annual merit increases, 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, communication, and bank operations
The $8.5 million increase in technology, communication, and bank operations expense for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 primarily resulted from increases in deposit servicing fees and interchange maintenance fees paid to BM Technologies, the successor entity to BMT that was divested on January 4, 2021, due to higher deposits and debit card transactions.
The $18.0 million increase in technology, communication, and bank operations expense for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily resulted from increases in deposit servicing fees and interchange maintenance fees paid to BM Technologies, the successor entity to BMT that was divested on January 4, 2021, due to higher deposits and debit card transactions. See "NOTE 3 – DISCONTINUED OPERATIONS" to the unaudited consolidated financial statements for additional information.
Professional services
The $5.3 million increase in professional services for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 was primarily due to outside professional services used to support the PPP forgiveness process and our participation in the latest round of PPP.
The $8.0 million increase in professional services for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 was primarily due to outside professional services used to support the PPP forgiveness process and our participation in the latest round of PPP.
Commercial lease depreciation
The $0.8 million increase in commercial lease depreciation for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 primarily resulted from the continued growth of the operating lease arrangements originated by Customers' Equipment Finance Group in which Customers is the lessor.
The $1.6 million increase in commercial lease depreciation for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily resulted from the continued growth of the operating lease arrangements originated by Customers' Equipment Finance Group in which Customers is the lessor.
Loan workout
The $1.7 million decrease in loan workout for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 primarily resulted from expenses incurred for two commercial relationships during the three months ended June 30, 2020.
The $2.3 million decrease in loan workout for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily resulted from expenses incurred for two commercial relationships during the six months ended June 30, 2020.
Other non-interest expense
The $3.3 million increase in other non-interest expense for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 primarily resulted from increases in expenses related to the participation in the latest round of PPP, consumer installment servicing, and other miscellaneous expenses. The provision or addition to the reserve for loan lossesunfunded commitments for the three months ended June 30, 2021 was $0.1 million, compared to a credit or release of $3.1 million.the reserve for unfunded commitments of $0.4 million during the three months ended June 30, 2020.
The $1.0 million increase in other non-interest expense for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 primarily resulted from increases in expenses related to the participation in the latest round of PPP, consumer installment servicing, and other miscellaneous expenses. These increases were offset by a credit or release of the reserve for unfunded commitments of $1.2 million during the six months ended June 30, 2021 compared to a provision or addition to the reserve for unfunded commitments of $0.4 million during the six months ended June 30, 2020.
INCOME TAXES
The table below presents income tax expense and the effective tax rate for the three and six months ended June 30, 2021 and 2020. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | QTD | | Six Months Ended June 30, | | YTD |
(dollars in thousands) | 2021 | | 2020 | | Change | | % Change | | 2021 | | 2020 | | Change | | % Change |
Income before income tax expense | $ | 81,465 | | | $ | 32,956 | | | $ | 48,509 | | | 147.2 | % | | $ | 173,656 | | | $ | 44,683 | | | $ | 128,973 | | | 288.6 | % |
Income tax expense | 20,124 | | | 7,980 | | | 12,144 | | | 152.2 | % | | 37,684 | | | 11,254 | | | 26,430 | | | 234.8 | % |
Effective tax rate | 24.70 | % | | 24.21 | % | | | | | | 21.70 | % | | 25.19 | % | | | | |
The $12.1 million increase in income tax expense for the three months ended June 30, 2021, when compared to the same period in the prior year, primarily resulted from an increase in pre-tax income. The increase in the effective tax rate for the three months ended June 30, 2021, when compared to the same period in the prior year, primarily resulted from an increase in compensation expense associated with an executive's retirement that exceeded the limit for tax deduction purposes.
The $26.4 million increase in income tax expense for the six months ended June 30, 2021, when compared to the same period in the prior year, primarily resulted from an increase in pre-tax income. The decrease in the effective tax rate for the six months ended June 30, 2021, when compared to the same period in the prior year, primarily resulted from an increase in investment tax credits in 2021 and the recording of net discrete tax benefits associated with the divestiture of BMT and the recognition of a deferred tax asset related to the outside basis difference of foreign subsidiaries, offset in part by 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 Megalith, 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 $13.7 million, largely reflecting the growth in interest earning assets over the past twelve months, an increase in non-interest income of $17.9 million largelyoperations as a result of a full nine months of BankMobile Disbursements operations, and a decrease in income tax expense of $2.3 million.
Net interest income increased $13.7 million, or 7.4%, for the nine months ended September 30, 2017 to $199.0 million when compared to net interest income of $185.4 million for the nine months ended September 30, 2016. This increase resulted principally from an increase in the average balance of interest-earning assets of $1.1 billion offset in part by a 13 basis point decrease in the net interest margin (tax equivalent) to 2.71% for the first nine months of 2017 when compared to the first nine months of 2016.single reportable segment.
The provision for loan losses increased $3.1 million to $5.9 million for the nine months ended September 30, 2017 when compared to the provision for loan losses of $2.9 million for the same period in 2016. The provision for loan losses of $5.9 million included $2.3 million for loan portfolio growth and $3.9 million for impaired loans, offset in part by a $0.8 million release resulting from improved asset quality and lower incurred losses than previously estimated.
Non-interest income increased $17.9 million, or 43.5%, for the nine months ended September 30, 2017 to $59.2 million when compared to $41.2 million for the nine months ended September 30, 2016. The increase was primarily a result of an increase in interchange and card revenue of $17.9 million reflecting a full nine months of BankMobile Disbursements operations, an increase in gains on sales of investment securities of $8.5 million, an increase in deposit fees of $2.7 million, and increased bank-owned life insurance income of $1.7 million, offset in part by other-than-temporary impairment losses of $12.9 million related to the decline in market value of the Religare investment and a decrease in mortgage warehouse transactional fees of $1.6 million.
Non-interest expense increased $32.5 million, or 25.3%, for the nine months ended September 30, 2017 to $160.8 million when compared to non-interest expense of $128.3 million for the nine months ended September 30, 2016. The increase primarily resulted from increased BankMobile expenses of $38.9 million due to the acquisition of the Disbursements business in June 2016 compared to a full nine months of BankMobile Disbursements operations in 2017, offset in part by decreased FDIC assessments, taxes, and regulatory fees of $4.6 million and a one-time expense of $3.9 million in third quarter 2016 for technology-related services. The increased BankMobile expenses, largely the result of a full nine months of BankMobile Disbursements operations in 2017 and only three months in 2016, included $10.5 million of increased salaries and employee benefits, $17.0 million of increased technology, communications, and bank operations, $6.4 million of increased professional services, and $5.5 million of increased other operating expenses. Excluding the effect of BankMobile, non-interest expense decreased $6.3 million period over period as management continued its efforts to control expenses.
Income tax expense decreased $2.3 million for the nine months ended September 30, 2017 to $34.2 million when compared to income tax expense of $36.6 million for the same period of 2016. The decrease in income tax expense was driven primarily by a decrease in pre-tax income of $4.0 million in the first nine months of 2017 as well as the $4.6 million of tax benefits recognized for the increase in fair value of restricted stock units vesting and the exercise of stock options since the award date compared to $0.6 million for the the same period in 2016. Customers' effective tax rate decreased to 37.4% for the nine months ended September 30, 2017, compared to 38.3% for the same period of 2016.
Preferred stock dividends increased $4.9 million for the nine months ended September 30, 2017 to $10.8 million when compared to preferred stock dividends of $5.9 million in the same period of 2016. This increase was the result of preferred stock issuances totaling $142.5 million issued in April 2016 with dividends at 6.45% and in September 2016 with dividends at 6.00%.
Net Interest Income
Net interest income (the difference between the interest earned on loans, investments and interest-earning deposits with banks, and interest paid on deposits, borrowed funds and subordinated debt) is the primary source of Customers' earnings.
The following table summarizes Customers' net interest income and related spread and margin for the periods indicated. |
| | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
| 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 | $ | 327,154 |
| | $ | 2,446 |
| | 1.00 | % | | $ | 211,971 |
| | $ | 845 |
| | 0.53 | % |
Investment securities (A) | 971,710 |
| | 21,017 |
| | 2.88 | % | | 548,921 |
| | 10,875 |
| | 2.64 | % |
Loans: | | | | | | | | | | | |
Commercial loans to mortgage companies | 1,734,874 |
| | 53,860 |
| | 4.15 | % | | 1,931,892 |
| | 50,767 |
| | 3.51 | % |
Multifamily loans | 3,496,276 |
| | 96,570 |
| | 3.69 | % | | 3,235,689 |
| | 91,611 |
| | 3.78 | % |
Commercial and industrial | 1,402,650 |
| | 44,034 |
| | 4.20 | % | | 1,127,622 |
| | 33,626 |
| | 3.98 | % |
Non-owner occupied commercial real estate | 1,290,762 |
| | 37,654 |
| | 3.90 | % | | 1,170,996 |
| | 33,759 |
| | 3.85 | % |
All other loans | 515,567 |
| | 16,590 |
| | 4.30 | % | | 399,202 |
| | 14,356 |
| | 4.80 | % |
Total loans (B) | 8,440,129 |
| | 248,708 |
| | 3.94 | % | | 7,865,401 |
|
| 224,119 |
| | 3.81 | % |
Other interest-earning assets | 102,590 |
| | 3,061 |
| | 3.99 | % | | 90,911 |
| | 3,092 |
| | 4.54 | % |
Total interest earning assets | 9,841,583 |
|
| 275,232 |
| | 3.74 | % | | 8,717,204 |
|
| 238,931 |
| | 3.66 | % |
Non-interest-earning assets | 367,595 |
| | | | | | 305,326 |
| | | | |
Total assets | $ | 10,209,178 |
| | | | | | $ | 9,022,530 |
| | | | |
Liabilities | | | | | | | | | | | |
Interest checking accounts | $ | 338,991 |
| | 1,839 |
| | 0.73 | % | | $ | 160,525 |
| | 681 |
| | 0.57 | % |
Money market deposit accounts | 3,347,661 |
| | 24,462 |
| | 0.98 | % | | 3,044,696 |
| | 13,674 |
| | 0.60 | % |
Other savings accounts | 41,685 |
| | 87 |
| | 0.28 | % | | 39,075 |
| | 66 |
| | 0.23 | % |
Certificates of deposit | 2,489,970 |
| | 22,546 |
| | 1.21 | % | | 2,556,935 |
| | 19,944 |
| | 1.04 | % |
Total interest-bearing deposits | 6,218,307 |
| | 48,934 |
| | 1.05 | % | | 5,801,231 |
| | 34,365 |
| | 0.79 | % |
Borrowings | 1,836,654 |
| | 27,255 |
| | 1.98 | % | | 1,693,455 |
| | 19,196 |
| | 1.51 | % |
Total interest-bearing liabilities | 8,054,961 |
| | 76,189 |
| | 1.26 | % | | 7,494,686 |
| | 53,561 |
| | 0.95 | % |
Non-interest-bearing deposits | 1,185,062 |
| | | | | | 800,358 |
| | | | |
Total deposits and borrowings | 9,240,023 |
| | | | 1.10 | % | | 8,295,044 |
| | | | 0.86 | % |
Other non-interest-bearing liabilities | 72,622 |
| | | | | | 76,774 |
| | | | |
Total liabilities | 9,312,645 |
| | | | | | 8,371,818 |
| | | | |
Shareholders’ Equity | 896,533 |
| | | | | | 650,712 |
| | | | |
Total liabilities and shareholders’ equity | $ | 10,209,178 |
| | | | | | $ | 9,022,530 |
| | | | |
Net interest earnings | | | 199,043 |
| | | | | | 185,370 |
| | |
Tax-equivalent adjustment (C) | | | 399 |
| | | | | | 298 |
| | |
Net interest earnings | | | $ | 199,442 |
| | | | | | $ | 185,668 |
| | |
Interest spread | | | | | 2.64 | % | | | | | | 2.80 | % |
Net interest margin | | | | | 2.70 | % | | | | | | 2.84 | % |
Net interest margin tax equivalent (C) | | | | | 2.71 | % | | | | | | 2.84 | % |
| |
(A) | 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. |
| |
(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. Information is provided for each categoryliabilities 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 segregatedBMT have been allocated proportionately topresented as "Assets of discontinued operations" and "Liabilities of discontinued operations" on the change due to volumeconsolidated balance sheet at December 31, 2020. BMT's operating results and the change due to rate.
|
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2017 vs. 2016 |
| Increase (Decrease) due to Change in | | |
| Rate | | Volume | | Total |
(amounts in thousands) | | | | | |
Interest income | | | | | |
Interest-earning deposits | $ | 989 |
| | $ | 612 |
| | $ | 1,601 |
|
Investment securities | 1,079 |
| | 9,063 |
| | 10,142 |
|
Loans: | | | | | |
Commercial loans to mortgage companies | 8,621 |
| | (5,528 | ) | | 3,093 |
|
Multifamily loans | (2,213 | ) | | 7,172 |
| | 4,959 |
|
Commercial and industrial | 1,879 |
| | 8,529 |
| | 10,408 |
|
Non-owner occupied commercial real estate | 434 |
| | 3,461 |
| | 3,895 |
|
All other loans | (1,616 | ) | | 3,850 |
| | 2,234 |
|
Total loans | 7,105 |
| | 17,484 |
| | 24,589 |
|
Other interest-earning assets | (402 | ) | | 371 |
| | (31 | ) |
Total interest income | 8,771 |
| | 27,530 |
| | 36,301 |
|
Interest expense | | | | | |
Interest checking accounts | 233 |
| | 925 |
| | 1,158 |
|
Money market deposit accounts | 9,313 |
| | 1,475 |
| | 10,788 |
|
Other savings accounts | 16 |
| | 5 |
| | 21 |
|
Certificates of deposit | 3,138 |
| | (536 | ) | | 2,602 |
|
Total interest-bearing deposits | 12,700 |
| | 1,869 |
| | 14,569 |
|
Borrowings | 6,333 |
| | 1,726 |
| | 8,059 |
|
Total interest expense | 19,033 |
| | 3,595 |
| | 22,628 |
|
Net interest income | $ | (10,262 | ) | | $ | 23,935 |
| | $ | 13,673 |
|
Net interest income for the nine months ended September 30, 2017 was $199.0 million, an increase of $13.7 million, or 7.4%, when compared to net interest income of $185.4 million for the nine months ended September 30, 2016. This increase was primarily driven by increased average loan and security balances of $1.0 billion.
Net interest margin (tax equivalent) narrowed by 13 basis points to 2.71% from the nine months ended September 30, 2016. The net interest margin compression largely resulted from a $1.6 million reduction in prepayment penalties in the multi-family portfolio during the nine months ended September 30, 2017 as compared to nine months ended September 30, 2016. Net interest margin (tax equivalent) was also impacted by Customers Bancorp's issuance of $100 million principal amount of 3.95% senior notes on June 30, 2017.
Interest expense on total interest-bearing deposits increased $14.6 million for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016. This increase primarily resulted from increased deposit volume as average interest-bearing deposits for the nine months ended September 30, 2017 increased by $417.1 million when compared to average interest-bearing deposits for the nine months ended September 30, 2016. The average rate on interest-bearing deposits increased 26 basis points for the nine months ended September 30, 2017 compared to the nine months ended September 30,
2016, reflecting higher interest rates offered by Customers on its money market deposit accounts and certificates of deposits in order to remain competitive and attract new and retain existing deposit customers.
Interest expense on borrowings increased $8.1 million for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016. This increase was driven by a 47 basis point increase in average rates for the period due primarily to higher rates on short term borrowings used to fund commercial loans to mortgage companies. This increase was also driven by increased volume as average borrowings increased by $143.2 million when compared to average borrowings for the nine months ended September 30, 2016.
Provision for Loan Losses
The provision for loan losses increased by $3.1 million to $5.9 million for the nine months ended September 30, 2017, compared to $2.9 million for the same period in 2016. The provision for loan losses of $5.9 million included $2.3 million for loan portfolio growth and $3.9 million for impaired loans, offset in part by a $0.8 million release resulting from improved asset quality and lower incurred losses than previously estimated. The provision for loan losses of $2.9 million for the nine months ended September 30, 2016 included provisions for loan portfolio growth and reserves on impaired loans of approximately $5.0 million, offset in part by increased estimatedassociated cash flows expectedhave been presented as "Discontinued operations" within the accompanying unaudited consolidated financial statements and prior period amounts have been reclassified to be collected on purchased credit-impaired loans, a reduction inconform with the estimated amounts owed to the FDIC for previous FDIC assisted transactions, and other recoveries of approximately $2.1 million.
For more information about the provision and allowance for loan losses and our loss experience, see “Credit Risk” and “Asset Quality” herein.
Non-Interest Incomecurrent period presentation.
The table below presents the componentsloss from discontinued operations, net of non-interest income taxes for the ninethree and six months ended SeptemberJune 30, 20172021 and 2016.2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | QTD | | Six Months Ended June 30, | | YTD |
(dollars in thousands) | 2021 | | 2020 | | Change | | % Change | | 2021 | | 2020 | | Change | | % Change |
Loss from discontinued operations before income taxes | $ | — | | | $ | (3,190) | | | $ | 3,190 | | | (100.0) | % | | $ | (20,354) | | | $ | (9,911) | | | $ | (10,443) | | | 105.4 | % |
Income tax expense (benefit) from discontinued operations | — | | | (932) | | | 932 | | | (100.0) | % | | 17,682 | | | (2,299) | | | 19,981 | | | (869.1) | % |
Net loss from discontinued operations | $ | — | | | $ | (2,258) | | | $ | 2,258 | | | (100.0) | % | | $ | (38,036) | | | $ | (7,612) | | | $ | (30,424) | | | 399.7 | % |
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
(amounts in thousands) | | | |
Interchange and card revenue | $ | 31,729 |
| | $ | 13,806 |
|
Gain on sale of investment securities | 8,532 |
| | 25 |
|
Deposit fees | 7,918 |
| | 5,260 |
|
Mortgage warehouse transactional fees | 7,139 |
| | 8,702 |
|
Bank-owned life insurance | 5,297 |
| | 3,629 |
|
Gain on sale of SBA and other loans | 3,045 |
| | 2,135 |
|
Mortgage banking income | 703 |
| | 737 |
|
Impairment loss on investment securities | (12,934 | ) | | — |
|
Other | 7,741 |
| | 6,943 |
|
Total non-interest income | $ | 59,170 |
| | $ | 41,237 |
|
Non-interestLoss from discontinued operations, net of income increased $17.9 million during the nine months ended September 30, 2017 to $59.2 million, compared to $41.2tax expense (benefit) decreased $2.3 million for the ninethree months ended SeptemberJune 30, 2016. This increase2021, when compared to the three months ended June 30, 2020 as the divestiture of BMT was primarilycompleted on January 4, 2021.
Loss from discontinued operations increased $10.4 million for the six months ended June 30, 2021, when compared to the six months ended June 30, 2020 due to a $17.9restricted 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 Bancorp 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 increased $20.0 million increase in interchange and card revenues reflecting a full ninefor the six months of BankMobile Disbursements business activity in 2017ended June 30, 2021, when compared to three fullthe six months in 2016, an $8.5 million increase in gains onended June 30, 2020 resulting from the effect of the divestiture being treated as a taxable asset sale of investment securities, an increase in deposit fees of $2.7 million, and increased income from bank-owned life insurance policies of $1.7 million,for tax purposes, offset in part by tax benefits related to the restricted stock awards in BM Technologies's common stock and vesting of restricted stock units of Customers Bancorp to certain team members of BMT.
In connection with the divestiture, Customers has also entered into various agreements with BM Technologies, including a $12.9 million other-than-temporary-impairment loss on equity securitiestransition services agreement, software license agreement, deposit servicing agreement, non-competition agreement and a decrease in mortgage warehouse transactional fees of $1.6 million driven by a reduction in the volume of warehouse transactions.
Non-Interest Expense
The table below presents the components of non-interest expenseloan agreement for the nine months ended September 30, 2017 and 2016.
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
(amounts in thousands) | | | |
Salaries and employee benefits | $ | 69,569 |
| | $ | 58,051 |
|
Technology, communication and bank operations | 33,227 |
| | 19,021 |
|
Professional services | 21,142 |
| | 13,213 |
|
Occupancy | 8,228 |
| | 7,248 |
|
FDIC assessments, taxes, and regulatory fees | 6,615 |
| | 11,191 |
|
Provision for operating losses | 4,901 |
| | 1,943 |
|
Loan workout | 1,844 |
| | 1,497 |
|
Advertising and promotion | 1,108 |
| | 1,178 |
|
Other real estate owned | 550 |
| | 1,663 |
|
Acquisition related expenses | — |
| | 1,195 |
|
Other | 13,634 |
| | 12,106 |
|
Total non-interest expense | $ | 160,818 |
| | $ | 128,306 |
|
Non-interest expense was $160.8 million for the nine months ended September 30, 2017, an increase of $32.5 millionperiods ranging from non-interest expense of $128.3 million for the nine months ended September 30, 2016.
Salaries and employee benefits, which represent the largest component of non-interest expense, increased $11.5 million, or 19.8%,one to $69.6 million for the nine months ended September 30, 2017, reflecting salary increases as well as a higher average number of full-time equivalent employees, primarily resulting from a full year of BankMobile Disbursements operations.
Technology, communication and bank operations increased by $14.2 million, or 74.7%, to $33.2 million for the nine months ended September 30, 2017 from $19.0 million for the nine months ended September 30, 2016. This increase was primarily attributable to increases in core processing system and conversionten years. Customers incurred expenses of $9.0 million, interchange expenses of $4.7 million, non-capitalizable software development costs of $3.4$14.3 million and depreciation expense primarily driven by$27.9 million to BM Technologies under the $3.2 catch-up adjustment recordeddeposit servicing agreement included in third quarter 2017 for the period BankMobile was classified as held for sale. These increases were partially offset by a $3.9 million one-time expense in third quarter 2016 for technology-related services. The increased technology, communication and bank operations expenses reflected a full nine months of BankMobile Disbursements activity in 2017 compared towithin the income from continuing operations during the three full months of activity for 2016.
Professional services expense increased by $7.9 million, or 60.0%, to $21.1 million for the nineand six months ended SeptemberJune 30, 2017 from $13.2 million for the nine months ended September 30, 2016. This increase was primarily driven by the transitional services agreement which was in effect for the twelve months following the acquisition of the Disbursement business from Higher One and ended in second quarter 2017 and increases in consulting and other professional services2021. Refer to support a $10.5 billion bank.
FDIC assessments, taxes, and regulatory fees decreased by $4.6 million, or 40.9%, to $6.6 million for the nine months ended September 30, 2017 from $11.2 million for the nine months ended September 30, 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.
Provision for operating losses increased by $3.0 million, or 152.2%, to $4.9 million for the nine months ended September 30, 2017 from $1.9 million for the nine months ended September 30, 2016. The provision for operating losses represents Customers' estimated liability for losses resulting from fraud or theft-based transactions that have generally been disputed by deposit account holders mainly from its BankMobile Disbursements business but where such disputes have not been resolved as of the end of the reporting period. The reserve is based on historical rates of loss on such transactions. The increase is mainly attributable"NOTE 3 – DISCONTINUED OPERATIONS" to the accrualunaudited consolidated financial statements for the estimated liability for a full nine months of operations of the BankMobile Disbursements business in 2017.additional information.
Income Taxes
Income tax expense decreased $2.3 million for the nine months ended September 30, 2017 to $34.2 million when compared to income tax expense of $36.6 million for the same period of 2016. The decrease in income tax expense was driven primarily by a decrease in pre-tax income of $4.0 million in the first nine months of 2017. Customers' effective tax rate decreased to 37.4% for the nine months ended September 30, 2017, compared to 38.3% for the same period of 2016. The decrease in the effective tax rate was primarily driven by the lower taxable income as well as the $4.6 million of tax benefits recognized during the nine months ended September 30, 2017 for the increase in fair value of restricted stock units vesting and the exercise of stock options since the award date compared to $0.6 million for the the same period in 2016.
Preferred Stock Dividends
PREFERRED STOCK DIVIDENDS
Preferred stock dividends increased $4.9were $3.3 million in the nine months ended September 30, 2017 to $10.8 million, compared to $5.9and $3.6 million for the ninethree months ended SeptemberJune 30, 2016. This increase was2021 and 2020, respectively. There were no changes to the resultamount of preferred stock issuances totaling $142.5outstanding during the three months ended June 30, 2021 and 2020.
Preferred stock dividends were $6.7 million issued in April 2016 with dividendsand $7.2 million for the six months ended June 30, 2021 and 2020, respectively. There were no changes to the amount of preferred stock outstanding during the six months ended June 30, 2021 and 2020.
On June 15, 2020, Series C Preferred Stock became floating at 6.45% and in September 2016 with dividendsthree-month LIBOR plus 5.30%, compared to a fixed rate of 7.00%. On March 15, 2021, Series D Preferred Stock became floating at 6.00%three-month LIBOR plus 5.09%, compared to a fixed rate of 6.50%. On June 15, 2021, the Series E Preferred Stock became floating at three-month LIBOR plus 5.14%, compared to a fixed rate of 6.45%.
Financial Condition
General
Customers crossed the $10 billion asset threshold during the second quarter of 2017 and continued to exceed $10 billion ofCustomers' total assets were $19.6 billion at SeptemberJune 30, 2017 with2021. This represented a $1.2 billion increase from total assets of $10.5 billion.$18.4 billion at December 31, 2020. The increase in total assets was primarily driven by increases of $1.7 billion in PPP loans, $316.5 million in investment securities, and $196.8 million in loans and leases receivable, partially offset by decreases of $761.1 million in loans receivable, mortgage warehouse, at fair value and $262.9 million in cash and cash equivalents.
Total liabilities were $18.4 billion at June 30, 2021. This represented a $1.1 billion or 11.6%, increase from total assets of $9.4$17.3 billion at December 31, 2016. The change in Customers' financial position occurred primarily as the result of an increase in total loans outstanding of $0.9 billion since December 31, 2016, or 10.9%, primarily driven by growth in multifamily, commercial and industrial loans, and consumer residential loans. Commercial loans held for investment increased $0.7 billion, or 11.5%, to $6.5 billion at September 30, 2017 compared to $5.9 billion at December 31, 2016, and consumer loans held for investment increased $233.2 million to $531.9 million at September 30, 2017 from $298.7 million at December 31, 2016.
Given the change in disposition strategy related to BankMobile as of September 30, 2017, Customers has decided to strategically reduce its total assets to below $10 billion as of December 31, 2017 in order to continue to qualify for the small issuer exemption rules of the Durbin Amendment to optimize interchange revenue through June 30, 2019. Customers plans to reduce total assets by approximately $500 million by year-end 2017 through normal seasonality of the mortgage warehouse business, which tends to decline in the winter months, selling multi-family and residential mortgage loans, and selling investment securities as needed. In addition, Customers expects to moderately grow its commercial and industrial loan portfolio while limiting growth in its multi-family loan portfolio by disciplined pricing.
Total liabilities were $9.6 billion at September 30, 2017. This represented a $1.0 billion, or 12.1%, increase from $8.5 billion at December 31, 2016.2020. The increase in total liabilities primarily resulted primarily from increases of $2.6 billion in total deposits and $186.7 million in accrued interest payable and other liabilities, partially offset by decreases of $850.0 million in FHLB borrowings, which increased by $0.6 billion, or 68.3%, to $1.5 billion at September 30, 2017 from $0.9 billion at December 31, 2016, other borrowings, which increased $99.1advances, $549.2 million or 113.8%, to $186.3in the PPPLF, and $250.0 million at September 30, 2017 from $87.1 million at December 31, 2016 resulting from the issuance of the $100 million senior notes on June 30, 2017, andin federal funds purchased, which increased $64.0 million, or 77.1%, to $147.0 million at September 30, 2017 from $83.0 million at December 31, 2016. Overall deposits increased $293.3 million, or 4.0%, to $7.6 billion at September 30, 2017 from $7.3 billion at December 31, 2016.purchased.
The following table sets forthpresents certain key condensed balance sheet data as of SeptemberJune 30, 20172021 and December 31, 2016:2020:
| | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | June 30, 2021 | | December 31, 2020 | | Change | | % Change |
Cash and cash equivalents | $ | 430,500 | | | $ | 693,354 | | | $ | (262,854) | | | (37.9) | % |
Investment securities, at fair value | 1,526,792 | | | 1,210,285 | | | 316,507 | | | 26.2 | % |
Loans held for sale | 34,540 | | | 79,086 | | | (44,546) | | | (56.3) | % |
Loans receivable, mortgage warehouse, at fair value | 2,855,284 | | | 3,616,432 | | | (761,148) | | | (21.0) | % |
Loans receivable, PPP | 6,305,056 | | | 4,561,365 | | | 1,743,691 | | | 38.2 | % |
Loans and leases receivable | 7,772,142 | | | 7,575,368 | | | 196,774 | | | 2.6 | % |
Allowance for credit losses on loan and leases | (125,436) | | | (144,176) | | | 18,740 | | | (13.0) | % |
Other assets | 362,661 | | | 338,438 | | | 24,223 | | | 7.2 | % |
Assets of discontinued operations | — | | | 62,055 | | | (62,055) | | | (100.0) | % |
Total assets | 19,635,108 | | | 18,439,248 | | | 1,195,860 | | | 6.5 | % |
Total deposits | 13,873,939 | | | 11,309,929 | | | 2,564,010 | | | 22.7 | % |
| | | | | | | |
Federal funds purchased | — | | | 250,000 | | | (250,000) | | | (100.0) | % |
FHLB advances | — | | | 850,000 | | | (850,000) | | | (100.0) | % |
Other borrowings | 124,240 | | | 124,037 | | | 203 | | | 0.2 | % |
Subordinated debt | 181,534 | | | 181,394 | | | 140 | | | 0.1 | % |
FRB PPP liquidity facility | 3,865,865 | | | 4,415,016 | | | (549,151) | | | (12.4) | % |
Accrued interest payable and other liabilities | 338,801 | | | 152,082 | | | 186,719 | | | 122.8 | % |
Liabilities of discontinued operations | — | | | 39,704 | | | (39,704) | | | (100.0) | % |
Total liabilities | 18,384,379 | | | 17,322,162 | | | 1,062,217 | | | 6.1 | % |
Total shareholders’ equity | 1,250,729 | | | 1,117,086 | | | 133,643 | | | 12.0 | % |
Total liabilities and shareholders’ equity | $ | 19,635,108 | | | $ | 18,439,248 | | | $ | 1,195,860 | | | 6.5 | % |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
(amounts in thousands) | | | |
Cash and cash equivalents | $ | 219,480 |
| | $ | 264,709 |
|
Investment securities available for sale, at fair value | 584,823 |
| | 493,474 |
|
Loans held for sale (includes $1,963,076 and $2,117,510, respectively, at fair value) | 2,113,293 |
| | 2,117,510 |
|
Loans receivable | 7,061,338 |
| | 6,154,637 |
|
Allowance for loan losses | (38,314 | ) | | (37,315 | ) |
Total assets | 10,471,829 |
| | 9,382,736 |
|
Total deposits | 7,597,076 |
| | 7,303,775 |
|
Federal funds purchased | 147,000 |
| | 83,000 |
|
FHLB advances | 1,462,343 |
| | 868,800 |
|
Other borrowings | 186,258 |
| | 87,123 |
|
Subordinated debt | 108,856 |
| | 108,783 |
|
Total liabilities | 9,561,187 |
| | 8,526,864 |
|
Total shareholders’ equity | 910,642 |
| | 855,872 |
|
Total liabilities and shareholders’ equity | 10,471,829 |
| | 9,382,736 |
|
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 $13.3Cash and due from banks were $36.8 million and $78.1 million at SeptemberJune 30, 2017. This represents a $24.2 million decrease from $37.5 million at2021 and December 31, 2016. These2020, respectively. Cash and due from banks balances vary from day to day, primarily due to variations in customers’ depositsdeposit activities with the Bank.
Interest-earning deposits consist of cash deposited at other banks, primarily the Federal Reserve Bank of Philadelphia.FRB. Interest-earning deposits were $206.2$393.7 million and $227.2$615.3 million at SeptemberJune 30, 20172021 and December 31, 2016,2020, respectively.
Included The balance of interest-earning deposits varies from day to day, depending on several factors, such as fluctuations in the reported balancescustomers' deposits with Customers, payment of cashchecks drawn on customers' accounts and cash equivalents at September 30, 2017strategic investment decisions made to maximize Customers' net interest income, while effectively managing interest-rate risk and liquidity. The decrease in interest-earning deposits since December 31, 2016 was $10.0 million and $20.0 million, respectively,2020 primarily resulted from the redeployment of restrictedexcess cash placed in escrow for payment to Higher One in connection with the acquisition of the Disbursement business.into interest-earning assets.
Investment Securities
The investment securities portfolio is an important source of interest income and liquidity. At September 30, 2017, investments consistedIt consists primarily of residential and commercial real estate mortgage-backed securities and collateralized mortgage obligations guaranteed by an agencyagencies of the United States government; United States government agencies securities; asset-backed securities; collateralized loan obligations; private label collateralized mortgage obligations and commercial mortgage-backed securities, state and political subdivision debt securities and corporate notes and marketable equity securities.notes. In addition to generating revenue, the investment portfolio is maintained to manage interest-rate risk, provide liquidity, andserve 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 SeptemberJune 30, 2017,2021, investment securities were $584.8 milliontotaled $1.5 billion compared to $493.5 million$1.2 billion at December 31, 2016, an increase of $91.3 million.2020. The increase wasin investment securities primarily resulted from the result of purchases of asset-backed securities, collateralized loan obligations, agency-guaranteed collateralized mortgage obligations and mortgage-backed securities, private label collateralized mortgage obligations, commercial mortgage-backed securities and corporate notes totaling $890.2 million, partially offset by the sale of $796.6$407.6 million during the nine months ended September 30, 2017, offset in part by salesof asset-backed securities, agency-guaranteed collateralized mortgage obligations and mortgage-backed securities, corporate notes, and maturities, calls and principal repayments totaling $172.8 million for the six months ended June 30, 2021.
For financial reporting purposes, AFS debt securities are carried at fair value. Unrealized gains and losses on AFS debt securities are included in other comprehensive income (loss) and reported as a separate component of $698.5 million and impairment charges of $12.9 million. Customers held allshareholders’ equity, net of the investmentrelated tax effect. Changes in the fair value of marketable equity securities soldand securities reported at fair value based on a fair value option election are recorded in 2017 for more than 90 days.non-interest income in the period in which they occur.
Loans
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; Westchester County andCounties); Rye Brook, New York City,(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, and the New England area.Orlando, Florida. The portfolio of loans to mortgage banking companiesbusinesses is a nation-wide portfolio.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.
Commercial Lending
Customers' commercial lending is divided into fourfive groups: Business Banking, Small and Middle Market Business Banking, Multi-familyMulti-Family and Commercial Real Estate Lending, and Mortgage Banking Lending.Lending, and Equipment Finance. This grouping is designed to allow for more effectivegreater resource deployment, higher standards of risk management, stronger oversight ofstrong asset quality, better management of interest ratelower interest-rate risk and higher productivity levels.
The commercial lending group focuses primarily on companies with annual revenues ranging from $1 million to $100 million, which typically have credit requirements between $0.5 million and $10 million.
As of June 30, 2021, Customers had $15.1 billion in commercial loans outstanding, totaling approximately 88.7% of its total loan and lease portfolio, which includes loans held for sale and 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 $15.1 billion and $14.2 billion in commercial loans outstanding as of June 30, 2021 and December 31, 2020, respectively, were $6.3 billion and $4.6 billion of PPP loans, respectively. The PPP loans are fully guaranteed by the SBA 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 risk management, product management, marketing, performance tracking and overall strategy. Credit and sales training has been established for Customers' sales force, ensuring that it has small business experts in place providing appropriate financial solutions to the small business owners in its communities. 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 tospreads, generate fee income in this business.
The goal of the mortgage banking business lending group is to provide liquidity to mortgage companies. These loans are primarily used by mortgage companies to fund their pipelines from closing of individual mortgage loans until their sale into the secondary market.and attract escrow deposits. The underlying residential loans are taken as collateral for the Bank’sCustomers' commercial loans to the mortgage companies. As of SeptemberJune 30, 2017,2021 and December 31, 2020, commercial loans in the warehouse lending portfolioto mortgage banking businesses totaled $2.0$2.9 billion and $3.6 billion, respectively, and are designatedreported as held for sale.loans receivable, mortgage warehouse, at fair value on the consolidated balance sheet.
Customers intends to continue to deemphasize its lower-yielding multi-family loan portfolio, and invest in high credit quality higher-yielding commercial and industrial loans with the Bank’smulti-family run-off. Customers' multi-family lending group iscontinues to buildfocus on retaining a portfolio of high-quality multi-family loans within the Bank’sCustomers' covered markets while cross sellingcross-selling other products and services. This productThese lending activities primarily targetstarget the refinancing existingof loans with other banks using conservative underwriting standards and providesprovide purchase money for new acquisitions by borrowers. The primary collateral for these loans is a first lien mortgage on the multi-family property, plus an assignment of all leases related to such property. As of SeptemberJune 30, 2017, the Bank2021, Customers had multi-family loans of $3.8$1.5 billion outstanding, making upcomprising approximately 41.1% of the Bank’s total loan portfolio, including loans held for sale, compared to $3.2 billion, or approximately 38.9%8.8% of the total loan and lease portfolio, including loans held for sale,compared to $1.8 billion, or approximately 11.1% of the total loan and lease portfolio, at December 31, 2016.2020.
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 SeptemberJune 30, 2017,2021 and December 31, 2020, Customers had $310.0 million and $288.4 million, respectively, of equipment finance loans outstanding. As of June 30, 2021 and December 31, 2020, Customers had $129.0 million and $108.0 million of equipment finance leases, respectively. As of June 30, 2021 and December 31, 2020, Customers had $102.8 million and $102.9 million, respectively, of operating leases entered into under this program, net of accumulated depreciation of $35.6 million and $28.9 million, respectively.
On March 27, 2020, the BankCARES 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, had $8.6$6.3 billion in commercialand $4.6 billion of PPP loans outstanding totaling approximately 94.2%as of its total loan portfolio, which includes loans held for sale, compared to $8.0 billion commercial loans outstanding, composing approximately 96.4% of its loan portfolio, including loans held for sale, atJune 30, 2021 and December 31, 2016.2020, respectively, which are fully guaranteed by the SBA and earn a fixed interest rate of 1.00%. The average loan size of the PPP portfolio from the first two rounds is approximately $50 thousand, and less than $20 thousand from the latest round.
Consumer Lending
Customers provides unsecured consumer installment loans, residential mortgage, and home equity and residential mortgage loans to customers. Underwriting standards forThe 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 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 SeptemberJune 30, 2017, the Bank2021, Customers had $533.8 million$1.9 billion in consumer loans outstanding, or 5.8%11.3% of the Bank’s 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 the three and six months ended June 30, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(amounts in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Purchases (1) | | | | | | | |
| | | | | | | |
Loan receivable, PPP | $ | 460,456 | | $ | — | | $ | 621,487 | | $ | — |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Residential real estate | — | | — | | — | | 495 |
| | | | | | | |
Installment (2) | — | | 18,008 | | 115,849 | | 209,768 |
Total | $ | 460,456 | | $ | 18,008 | | $ | 737,336 | | $ | 210,263 |
Sales (3) | | | | | | | |
Multi-family | $ | 19,443 | | $ | — | | $ | 19,443 | | $ | — |
Commercial and industrial | 10,059 | | — | | 28,990 | | — |
Commercial real estate owner occupied | 4,461 | | — | | 6,698 | | — |
Commercial real estate non-owner occupied | — | | — | | 18,366 | | — |
| | | | | | | |
Residential real estate | 11,623 | | — | | 28,186 | | — |
| | | | | | | |
Installment | 28,818 | | — | | 28,818 | | 1,822 |
Total | $ | 74,404 | | $ | — | | $ | 130,501 | | $ | 1,822 |
(1)Amounts reported in the above table are the unpaid principal balance at time of purchase. The purchase price was 102.0% and 98.5% of the loans' unpaid principal balance during the three months ended June 30, 2021 and 2020, respectively. The purchase price was 103.0% and 100.4% of the loans' unpaid principal balance during the six months ended June 30, 2021 and 2020, respectively.
(2)Installment loan purchases for the three and six months ended June 30, 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 considers sub-prime borrowers to be those with FICO scores below 660.
(3)Amounts reported in the above table are the unpaid principal balance at time of sale. The Bank plans to expand its product offeringsFor the three months ended June 30, 2021 and 2020, loan sales resulted in real estate secured consumer lending.net gains of $2.2 million and $0.3 million, respectively. For the six months ended June 30, 2021 and 2020, loan sales resulted in net gains of $4.3 million and $0.4 million, respectively.
Customers Bank has launched a community outreach program in Philadelphia to finance homeownership in urban communities. As partLoans Held for Sale
The composition of loans held for sale as of SeptemberJune 30, 20172021 and December 31, 20162020 was as follows:
| | | September 30, | | December 31, | |
| 2017 | | 2016 | | | | | | | | | | |
(amounts in thousands) | | (amounts in thousands) | June 30, 2021 | | December 31, 2020 |
Commercial loans: | | | | Commercial loans: | | | |
Mortgage warehouse loans, at fair value | $ | 1,961,248 |
| | $ | 2,116,815 |
| |
Multi-family loans at lower of cost or fair value | 150,217 |
| | — |
| |
| Commercial and industrial loans, at lower of cost or fair value | | Commercial and industrial loans, at lower of cost or fair value | $ | — | | | $ | 55,683 | |
Commercial real estate non-owner occupied loans, at lower of cost or fair value | | Commercial real estate non-owner occupied loans, at lower of cost or fair value | — | | | 17,251 | |
Total commercial loans held for sale | 2,111,465 |
| | 2,116,815 |
| Total commercial loans held for sale | — | | | 72,934 | |
Consumer Loans: | | | | |
Consumer loans: | | Consumer loans: | |
Home equity conversion mortgages, at lower of cost or fair value | | Home equity conversion mortgages, at lower of cost or fair value | 507 | | | 643 | |
Residential mortgage loans, at fair value | 1,828 |
| | 695 |
| Residential mortgage loans, at fair value | 6,074 | | | 5,509 | |
Installment loans, at lower of cost or fair value | | Installment loans, at lower of cost or fair value | 27,959 | | | — | |
Total consumer loans held for sale | | Total consumer loans held for sale | 34,540 | | | 6,152 | |
Loans held for sale | $ | 2,113,293 |
| | $ | 2,117,510 |
| Loans held for sale | $ | 34,540 | | | $ | 79,086 | |
At SeptemberJune 30, 2017,2021, loans held for sale totaled $2.1 billion,$34.5 million, or 23.0%0.2% 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, 2016.2020.
Mortgage warehouse loansLoans held for sale at September 30, 2017 decreased $155.6 million when compared to December 31, 2016. Mortgage warehouse loan balances are typically elevated during the summer months when home-purchasing activity is usually stronger. However, Customers expects that mortgage warehouse loan growth will moderate and return to more normal seasonal patterns as interest rates and the interest rate yield curve return to more normal levels and spreads.
Held-for-sale loans 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.
Total Loans and Leases Receivable
LoansThe composition of total loans and leases receivable (excluding loans held for sale), net was as follows: | | | | | | | | | | | |
(amounts in thousands) | June 30, 2021 | | December 31, 2020 |
Loans and leases receivable, mortgage warehouse, at fair value | $ | 2,855,284 | | | $ | 3,616,432 | |
Loans receivable, PPP | 6,305,056 | | | 4,561,365 | |
Loans receivable: | | | |
Commercial: | | | |
Multi-family | 1,497,485 | | | 1,761,301 | |
Commercial and industrial (1) | 2,360,656 | | | 2,289,441 | |
Commercial real estate owner occupied | 653,649 | | | 572,338 | |
Commercial real estate non-owner occupied | 1,206,646 | | | 1,196,564 | |
Construction | 179,198 | | | 140,905 | |
Total commercial loans and leases receivable | 5,897,634 | | | 5,960,549 | |
Consumer: | | | |
Residential real estate | 266,911 | | | 317,170 | |
Manufactured housing | 57,904 | | | 62,243 | |
Installment | 1,549,693 | | | 1,235,406 | |
Total consumer loans receivable | 1,874,508 | | | 1,614,819 | |
Loans and leases receivable (2) | 7,772,142 | | | 7,575,368 | |
Allowance for credit losses on loans and leases | (125,436) | | | (144,176) | |
Total loans and leases receivable, net of allowance for credit losses on loans and leases | $ | 16,807,046 | | | $ | 15,608,989 | |
(1)Includes direct finance equipment leases of the allowance for loan losses, increased by $905.7$129.0 million to $7.0 billionand $108.0 million at SeptemberJune 30, 2017 from $6.1 billion at December 31, 2016. Loans receivable as of September 30, 20172021 and December 31, 2016 consisted2020, respectively.
(2)Includes deferred (fees) costs and unamortized (discounts) premiums, net of $(223.1) million and $(54.6) million at June 30, 2021 and December 31, 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 $6.3 billion and $4.6 billion of PPP loans outstanding as of June 30, 2021 and December 31, 2020, respectively, which are fully guaranteed by the SBA and earn a fixed interest rate of 1.00%. Customers recognized interest income, including origination fees, of $41.1 million and $79.9 million for the three and six months ended June 30, 2021, respectively. Customers recognized interest income, including origination fees, of $11.7 million for the three and six months ended June 30, 2020.
Loans receivable, mortgage warehouse, at fair value
The mortgage warehouse product line primarily provides financing to mortgage companies nationwide from the time of origination of the following: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 June 30, 2021, all of Customers' commercial mortgage warehouse loans were current in terms of payment.
|
| | | | | | | |
| September 30, | | December 31, |
| 2017 | | 2016 |
(amounts in thousands) | |
Commercial: | | | |
Multi-family | $ | 3,618,989 |
| | $ | 3,214,999 |
|
Commercial and industrial (including owner occupied commercial real estate) | 1,601,789 |
| | 1,382,343 |
|
Commercial real estate non-owner occupied | 1,237,849 |
| | 1,193,715 |
|
Construction | 73,203 |
| | 64,789 |
|
Total commercial loans | 6,531,830 |
| | 5,855,846 |
|
Consumer: | | | |
Residential real estate | 435,188 |
| | 193,502 |
|
Manufactured housing | 92,938 |
| | 101,730 |
|
Other | 3,819 |
| | 3,483 |
|
Total consumer loans | 531,945 |
| | 298,715 |
|
Total loans receivable | 7,063,775 |
| | 6,154,561 |
|
Deferred (fees)/costs and unamortized (discounts)/premiums, net | (2,437 | ) | | 76 |
|
Allowance for loan losses | (38,314 | ) | | (37,315 | ) |
Loans receivable, net of allowance for loan losses | $ | 7,023,024 |
| | $ | 6,117,322 |
|
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 $2.9 billion and $3.6 billion at June 30, 2021 and December 31, 2020, respectively.
Credit Risk
Customers manages credit risk by maintaining diversification in its loan and lease portfolio, establishing and enforcing prudent underwriting standards diligentand 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 charged to the allowance for loan lossescharged-off when they are identified, and provisions are added for current expected credit losses, to the allowance for loan losses when and as appropriate.ACL at least quarterly. The adequacy of the allowance for loan losses, maintained at a level to absorbACL is estimated incurred losses in the held-for-investment loan portfolio as of the last day of the reporting period, is evaluated at least quarterly.
The provision for loancredit losses on loans and leases was $2.4$3.3 million and $0.1$20.9 million for the three months ended SeptemberJune 30, 20172021 and 2016, respectively, and $5.9 million and $2.9 million for the nine months ended September 30, 2017 and 2016,2020, respectively. The allowance for loan lossesACL maintained for loans and leases receivable (excludes(excluding loans held for sale)sale and loans receivable, mortgage warehouse, at fair value and PPP loans) was $38.3$125.4 million, or 0.54%1.61% of loans and leases receivable, excluding PPP loans, at SeptemberJune 30, 20172021 and $37.3$144.2 million, or 0.61%1.90% of loans and leases receivable, at December 31, 2016.2020. 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 June 30, 2021, as compared to the impact of reserve build for the COVID-19 pandemic at June 30, 2020, offset in part by the increase in ACL for the consumer installment loan portfolio due to loan growth. Net charge-offs were $2.5$6.6 million for the three months ended SeptemberJune 30, 2017, an increase2021, a decrease of $2.2$3.7 million compared to the same period in 2016. Net2020. Commercial real estate non-owner occupied charge-offs for the three months ended June 30, 2020 were attributable to partial charge-offs of two collateral dependent loans, which are not indicative of the overall commercial real estate portfolio. Installment charge-offs were $4.9 millionattributable to unsecured consumer installment loans originated or purchased through arrangements with fintech companies and other market place lenders, which increased for the ninethree months ended SeptemberJune 30, 2017, an increase of $4.0 million2021 compared to the same period in 2016. The increase in net charge-offs period over period was largely driven by2020 consistent with the charge-offloan growth.
A reconciliation of the coverage of ACL for loans and $1.8 million duringleases held for investment to the third quarter 2017ACL for loans and second quarter 2017, respectively, related to two relationships in the commercialleases held for investment, excluding PPP loans as of June 30, 2021 and industrial post-2009 originated loan portfolio.
December 31, 2020 are set forth below. | | | | | | | | | | | |
(dollars in thousands) | June 30, 2021 | | December 31, 2020 |
Loans and leases receivable (GAAP) | $ | 14,077,198 | | | $ | 12,136,733 | |
Less: Loans receivable, PPP | 6,305,056 | | | 4,561,365 | |
Loans and leases held for investment, excluding PPP (Non-GAAP) | $ | 7,772,142 | | | $ | 7,575,368 | |
| | | |
ACL for loans and leases (GAAP) | $ | 125,436 | | | $ | 144,176 | |
| | | |
Coverage of ACL for loans and leases held for investment, excluding PPP (Non-GAAP) | 1.61 | % | | 1.90 | % |
The charttable below depictspresents changes in the Bank’s allowance for loan lossesCustomers' ACL for the periods indicated. The amounts presented for the provision for loan losses below do not include the effect of changes to estimated benefits resulting from the FDIC loss share arrangements for the covered loans for periods prior to the termination of the FDIC loss sharing agreements.
Analysis of the Allowance for Credit Losses on Loan Lossesand Leases | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
(amounts in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
Balance at beginning of the period | $ | 128,736 | | | $ | 149,283 | | | $ | 144,176 | | | $ | 56,379 | |
Cumulative effect of change in accounting principle | — | | | — | | | — | | | 79,829 | |
Loan and lease charge-offs (1) | | | | | | | |
Multi-family | — | | | — | | | 1,132 | | | — | |
Commercial and industrial | 2 | | | 20 | | | 637 | | | 117 | |
Commercial real estate owner occupied | 1 | | | — | | | 142 | | | — | |
Commercial real estate non-owner occupied | — | | | 2,801 | | | — | | | 15,598 | |
| | | | | | | |
Residential real estate | — | | | — | | | 50 | | | — | |
Installment | 7,958 | | | 8,304 | | | 20,645 | | | 14,550 | |
Total charge-offs | 7,961 | | | 11,125 | | | 22,606 | | | 30,265 | |
Loan and lease recoveries (1) | | | | | | | |
| | | | | | | |
Commercial and industrial | 285 | | | 25 | | | 545 | | | 79 | |
Commercial real estate owner occupied | 2 | | | 2 | | | 9 | | | 5 | |
Commercial real estate non-owner occupied | 59 | | | — | | | 69 | | | — | |
Construction | 114 | | | 113 | | | 119 | | | 116 | |
Residential real estate | 12 | | | 26 | | | 22 | | | 55 | |
Installment | 898 | | | 635 | | | 2,730 | | | 975 | |
Total recoveries | 1,370 | | | 801 | | | 3,494 | | | 1,230 | |
Total net charge-offs | 6,591 | | | 10,324 | | | 19,112 | | | 29,035 | |
Provision for credit losses on loans and leases | 3,291 | | | 20,946 | | | 372 | | | 52,732 | |
Balance at the end of the period | $ | 125,436 | | | $ | 159,905 | | | $ | 125,436 | | | $ | 159,905 | |
(1)Charge-offs and recoveries on PCD loans that are accounted for in pools are recognized on a net basis when the pool matures.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
(amounts in thousands) | | | | | | | |
Balance at the beginning of the period | $ | 38,458 |
| | $ | 38,097 |
| | $ | 37,315 |
| | $ | 35,647 |
|
Loan charge-offs (1) | | | | | | | |
Commercial and industrial | 2,032 |
| | 237 |
| | 4,079 |
| | 774 |
|
Commercial real estate non-owner occupied | 77 |
| | 140 |
| | 485 |
| | 140 |
|
Residential real estate | 120 |
| | 43 |
| | 410 |
| | 456 |
|
Other consumer | 356 |
| | 246 |
| | 602 |
| | 478 |
|
Total Charge-offs | 2,585 |
| | 666 |
| | 5,576 |
| | 1,848 |
|
Loan recoveries (1) | | | | | | | |
Commercial and industrial | 54 |
| | 62 |
| | 337 |
| | 173 |
|
Commercial real estate owner occupied | — |
| | — |
| | 9 |
| | — |
|
Commercial real estate non-owner occupied | — |
| | — |
| | — |
| | 8 |
|
Construction | 27 |
| | 8 |
| | 157 |
| | 465 |
|
Residential real estate | 7 |
| | 298 |
| | 34 |
| | 299 |
|
Other consumer | 1 |
| | 10 |
| | 101 |
| | 10 |
|
Total Recoveries | 89 |
| | 378 |
| | 638 |
| | 955 |
|
Total net charge-offs | 2,496 |
| | 288 |
| | 4,938 |
| | 893 |
|
Provision for loan losses | 2,352 |
| | 88 |
| | 5,937 |
| | 3,143 |
|
Balance at the end of the period | $ | 38,314 |
|
| $ | 37,897 |
| | $ | 38,314 |
| | $ | 37,897 |
|
| |
(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. |
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 credit riskinternal 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. See “Asset Quality”ACL. Refer to Critical Accounting Policies herein and "NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION" to Customers' unaudited consolidated financial statements, also, refer to "NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION" to Customers' audited consolidated financial statements in its 2020 Form 10-K for further discussion ofon management's methodology for estimating the allowance for loan losses.ACL.
Approximately 85%63% 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 fifteen15 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 ratingrisk-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 impaired and individually evaluated for impairment, the collateral value or discounted cash flow or loan market value analysis is generally used to estimatedetermine the amountestimated fair value of proceeds expected to be collected, and that estimated amount,the underlying collateral, net of estimated selling costs, as applicable, isand compared to the outstanding loan balance to estimatedetermine the amount of impairment,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, and compared, net of estimated selling costs, and compared to the outstanding loan balance to estimate the required reserve, if any.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 loans placed on non-accrual and restructured under troubled debt restructurings loans, or charged-off to their net realizable value, are considered in the methodology for determining the allowance for loan losses. ImpairedACL. Individually assessed loans are generally evaluated based on the expected future cash flows if principal is expected to come from the operation of such collateral or the fair value of the underlying collateral (less estimated costs to sell) if principal repayment is expected to come from the operation or sale 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.
Asset Quality
Customers divides its loan portfolio into two categories to analyze and understand loan activity and performance: loans that were originated and loans that were acquired. Customers further segments the originatedloan and acquired loan categorieslease receivables by loan product or other characteristic generally defining a shared characteristic with other loans in the same group. Customers' originated loans were subject to the current underwriting standards that were put in place in 2009. Management believes this segmentation better reflects the risk in the portfolio and the various types of reserves that are available to absorb loan losses that may emerge in future periods. Credit 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 marks,modifications 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 June 30, 2021, commercial and cash reserves. As described below, the allowance for loan losses is intendedconsumer deferments related to absorb only those losses estimatedCOVID-19 were $89.8 million and $8.4 million, respectively. At December 31, 2020, commercial and consumer deferments related 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 June 30, 2021.
Asset Quality at SeptemberJune 30, 20172021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 (b) | | NPA (a)+(b) | | NPL to Loan and Lease Type (%) | | NPA to Loans and Leases + OREO (%) |
Loan and Lease Type | | | | | | | | | | | | | | | | | |
Multi-family | $ | 1,497,485 | | | $ | 1,475,890 | | | $ | — | | | $ | — | | | $ | 21,595 | | | $ | — | | | $ | 21,595 | | | 1.44 | % | | 1.44 | % |
Commercial & industrial | 2,360,656 | | | 2,352,618 | | | 1,321 | | | — | | | 6,717 | | | 276 | | | 6,993 | | | 0.28 | % | | 0.30 | % |
Commercial real estate owner occupied | 653,649 | | | 650,961 | | | — | | | — | | | 2,688 | | | — | | | 2,688 | | | 0.41 | % | | 0.41 | % |
Commercial real estate non-owner occupied | 1,206,646 | | | 1,206,634 | | | 12 | | | — | | | — | | | — | | | — | | | — | % | | — | % |
Construction | 179,198 | | | 179,198 | | | — | | | — | | | — | | | — | | | — | | | — | % | | — | % |
Total commercial loans and leases receivable | 5,897,634 | | | 5,865,301 | | | 1,333 | | | — | | | 31,000 | | | 276 | | | 31,276 | | | 0.53 | % | | 0.53 | % |
Residential | 266,911 | | | 257,347 | | | 573 | | | — | | | 8,991 | | | 35 | | | 9,026 | | | 3.37 | % | | 3.38 | % |
Manufactured housing | 57,904 | | | 51,107 | | | 1,625 | | | 1,933 | | | 3,239 | | | 156 | | | 3,395 | | | 5.59 | % | | 5.85 | % |
Installment | 1,549,693 | | | 1,538,845 | | | 8,120 | | | — | | | 2,728 | | | — | | | 2,728 | | | 0.18 | % | | 0.18 | % |
Total consumer loans receivable | 1,874,508 | | | 1,847,299 | | | 10,318 | | | 1,933 | | | 14,958 | | | 191 | | | 15,149 | | | 0.80 | % | | 0.81 | % |
Loans and leases receivable (1) | 7,772,142 | | | 7,712,600 | | | 11,651 | | | 1,933 | | | 45,958 | | | 467 | | | 46,425 | | | 0.59 | % | | 0.60 | % |
Loans receivable, PPP | 6,305,056 | | | 6,305,056 | | | — | | | — | | | — | | | — | | | — | | | — | % | | — | % |
Loans receivable, mortgage warehouse, at fair value | 2,855,284 | | | 2,855,284 | | | — | | | — | | | — | | | — | | | — | | | — | % | | — | % |
Total loans held for sale | 34,540 | | | 34,011 | | | 22 | | | — | | | 507 | | | — | | | 507 | | | 1.47 | % | | 1.47 | % |
Total portfolio | $ | 16,967,022 | | | $ | 16,906,951 | | | $ | 11,673 | | | $ | 1,933 | | | $ | 46,465 | | | $ | 467 | | | $ | 46,932 | | | 0.27 | % | | 0.28 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loan Type | Total Loans | | Current | | 30-89 Days Past Due | | 90 Days or More Past Due and Accruing | | Non- accrual/ NPL (a) | | OREO (b) | | NPA (a)+(b) | | NPL to Loan Type (%) | | NPA to Loans + OREO (%) |
(amounts in thousands) | | | |
Originated Loans | | | | | | | | | | | | | | | | | |
Multi-Family | $ | 3,616,313 |
| | $ | 3,616,313 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | — | % | | — | % |
Commercial & Industrial (1) | 1,507,395 |
| | 1,484,400 |
| | — |
| | — |
| | 22,995 |
| | — |
| | 22,995 |
| | 1.53 | % | | 1.53 | % |
Commercial Real Estate Non-Owner Occupied | 1,215,099 |
| | 1,215,099 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — | % | | — | % |
Residential | 108,786 |
| | 107,569 |
| | 636 |
| | — |
| | 581 |
| | — |
| | 581 |
| | 0.53 | % | | 0.53 | % |
Construction | 73,203 |
| | 73,203 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — | % | | — | % |
Other consumer | 1,450 |
| | 1,437 |
| | 13 |
| | — |
| | — |
| | — |
| | — |
| | — | % | | — | % |
Total Originated Loans | 6,522,246 |
| | 6,498,021 |
| | 649 |
| | — |
| | 23,576 |
| | — |
| | 23,576 |
| | 0.36 | % | | 0.36 | % |
Loans Acquired | | | | | | | | | | | | | | |
|
| |
|
|
Bank Acquisitions | 153,772 |
| | 147,172 |
| | 1,352 |
| | 941 |
| | 4,307 |
| | 782 |
| | 5,089 |
| | 2.80 | % | | 3.29 | % |
Loan Purchases | 387,757 |
| | 379,026 |
| | 2,984 |
| | 3,788 |
| | 1,959 |
| | 277 |
| | 2,236 |
| | 0.51 | % | | 0.58 | % |
Total Loans Acquired | 541,529 |
| | 526,198 |
| | 4,336 |
| | 4,729 |
| | 6,266 |
| | 1,059 |
| | 7,325 |
| | 1.16 | % | | 1.35 | % |
Deferred fees and unamortized discounts, net | (2,437 | ) | | (2,437 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| |
|
| |
|
|
Total Loans Receivable | 7,061,338 |
| | 7,021,782 |
| | 4,985 |
| | 4,729 |
| | 29,842 |
| | 1,059 |
| | 30,901 |
| | 0.42 | % | | 0.44 | % |
Total Loans Held for Sale | 2,113,293 |
| | 2,113,293 |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
|
| |
|
|
Total Portfolio | $ | 9,174,631 |
| | $ | 9,135,075 |
| | $ | 4,985 |
| | $ | 4,729 |
| | $ | 29,842 |
| | $ | 1,059 |
| | $ | 30,901 |
| | 0.33 | % | | 0.34 | % |
(1) Commercial & industrial loans, including owner occupied commercial real estate loans.
Asset Quality at SeptemberJune 30, 20172021 (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Loan Type | Total Loans | | NPL | | ALL | | Cash Reserve | | Total Credit Reserves | | Reserves to Loans (%) | | Reserves to NPLs (%) |
(amounts in thousands) | |
Originated Loans | | | | | | | | | | | | | |
Multi-Family | $ | 3,616,313 |
| | $ | — |
| | $ | 12,696 |
| | $ | — |
| | $ | 12,696 |
| | 0.35 | % | | — | % |
Commercial & Industrial (1) | 1,507,395 |
| | 22,995 |
| | 13,084 |
| | — |
| | 13,084 |
| | 0.87 | % | | 56.90 | % |
Commercial Real Estate Non-Owner Occupied | 1,215,099 |
| | — |
| | 4,665 |
| | — |
| | 4,665 |
| | 0.38 | % | | — | % |
Residential | 108,786 |
| | 581 |
| | 2,130 |
| | — |
| | 2,130 |
| | 1.96 | % | | 366.61 | % |
Construction | 73,203 |
| | — |
| | 847 |
| | — |
| | 847 |
| | 1.16 | % | | — | % |
Other consumer | 1,450 |
| | — |
| | 59 |
| | — |
| | 59 |
| | 4.07 | % | | — | % |
Total Originated Loans | 6,522,246 |
| | 23,576 |
| | 33,481 |
| | — |
| | 33,481 |
| | 0.51 | % | | 142.01 | % |
Loans Acquired | | | | | | | | | | |
|
| |
|
|
Bank Acquisitions | 153,772 |
| | 4,307 |
| | 4,642 |
| | — |
| | 4,642 |
| | 3.02 | % | | 107.78 | % |
Loan Purchases | 387,757 |
| | 1,959 |
| | 191 |
| | 728 |
| | 919 |
| | 0.24 | % | | 46.91 | % |
Total Loans Acquired | 541,529 |
| | 6,266 |
| | 4,833 |
| | 728 |
| | 5,561 |
| | 1.03 | % | | 88.75 | % |
Deferred fees and unamortized discounts, net | (2,437 | ) | | — |
| | — |
| | — |
| | — |
| |
|
| |
|
|
Total Loans Receivable | 7,061,338 |
| | 29,842 |
| | 38,314 |
| | 728 |
| | 39,042 |
| | 0.55 | % | | 130.83 | % |
Total Loans Held for Sale | 2,113,293 |
| | — |
| | — |
| | — |
| | — |
| |
|
| |
|
|
Total Portfolio | $ | 9,174,631 |
| | $ | 29,842 |
| | $ | 38,314 |
| | $ | 728 |
| | $ | 39,042 |
| | 0.43 | % | | 130.83 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 | $ | 1,497,485 | | | $ | 21,595 | | | $ | 5,028 | | | | | | | 0.34 | % | | 23.28 | % |
Commercial & industrial | 2,360,656 | | | 6,717 | | | 8,127 | | | | | | | 0.34 | % | | 120.99 | % |
Commercial real estate owner occupied | 653,649 | | | 2,688 | | | 4,464 | | | | | | | 0.68 | % | | 166.07 | % |
Commercial real estate non-owner occupied | 1,206,646 | | | — | | | 7,374 | | | | | | | 0.61 | % | | — | % |
Construction | 179,198 | | | — | | | 2,643 | | | | | | | 1.47 | % | | — | % |
Total commercial loans and leases receivable | 5,897,634 | | | 31,000 | | | 27,636 | | | | | | | 0.47 | % | | 89.15 | % |
Residential | 266,911 | | | 8,991 | | | 2,299 | | | | | | | 0.86 | % | | 25.57 | % |
Manufactured housing | 57,904 | | | 3,239 | | | 4,372 | | | | | | | 7.55 | % | | 134.98 | % |
Installment | 1,549,693 | | | 2,728 | | | 91,129 | | | | | | | 5.88 | % | | 3,340.51 | % |
Total consumer loans receivable | 1,874,508 | | | 14,958 | | | 97,800 | | | | | | | 5.22 | % | | 653.83 | % |
Loans and leases receivable (1) | 7,772,142 | | | 45,958 | | | 125,436 | | | | | | | 1.61 | % | | 272.94 | % |
Loans receivable, PPP | 6,305,056 | | | — | | | — | | | | | | | — | % | | — | % |
Loans receivable, mortgage warehouse, at fair value | 2,855,284 | | | — | | | — | | | | | | | — | % | | — | % |
Total loans held for sale | 34,540 | | | 507 | | | — | | | | | | | — | % | | — | % |
Total portfolio | $ | 16,967,022 | | | $ | 46,465 | | | $ | 125,436 | | | | | | | 0.74 | % | | 269.96 | % |
(1) Commercial & industrialExcluding loans including owner occupied commercial real estate.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 that follow this table.
Originated LoansCustomers' asset quality table contains non-GAAP financial measures which exclude loans receivable, PPP from their calculations. Management uses these non-GAAP measures to present 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 (excluding held-for-sale loans) totaled $6.5and leases receivable, excluding loans receivable, PPP and other related amounts, at June 30, 2021, are 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 (b) | | NPA (a)+(b) | | NPL to Loan and Lease Type (%) | | NPA to Loans and Leases + OREO (%) |
Loans and leases receivable (GAAP) | $ | 16,967,022 | | | $ | 16,906,951 | | | $ | 11,673 | | | $ | 1,933 | | | $ | 46,465 | | | $ | 467 | | | $ | 46,932 | | | 0.27 | % | | 0.28 | % |
Less: Loans receivable, PPP | 6,305,056 | | | 6,305,056 | | | — | | | — | | | — | | | — | | | — | | | — | % | | — | % |
Loans receivable, excluding loans receivable, PPP (Non-GAAP) | $ | 10,661,966 | | | $ | 10,601,895 | | | $ | 11,673 | | | $ | 1,933 | | | $ | 46,465 | | | $ | 467 | | | $ | 46,932 | | | 0.44 | % | | 0.44 | % |
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| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | Total Loans and Leases | | Non-accrual / NPL | | ACL | | | | | | Reserves to Loans and Leases (%) | | Reserves to NPLs (%) |
Loans and leases receivable (GAAP) | $ | 16,967,022 | | | $ | 46,465 | | | $ | 125,436 | | | | | | | 0.74 | % | | 269.96 | % |
Less: Loans receivable, PPP | 6,305,056 | | | — | | | — | | | | | | | — | % | | — | % |
Loans receivable, excluding loans receivable, PPP (Non-GAAP) | $ | 10,661,966 | | | $ | 46,465 | | | $ | 125,436 | | | | | | | 1.18 | % | | 269.96 | % |
The total loan and lease portfolio was $17.0 billion at June 30, 2021 compared to $15.8 billion at December 31, 2020, and $46.5 million, or 92.4%0.27% of loans and leases, were non-performing at June 30, 2021 compared to $70.5 million, or 0.45% of loans and leases, at December 31, 2020. The loan and lease portfolio was supported by an ACL of $125.4 million (269.96% of NPLs and 0.74% of total loans receivable at September 30, 2017, compared to $5.8 billion, or 94.8%and leases) and $144.2 million (204.48% of NPLs and 0.91% of total loans receivableand leases), at December 31, 2016. The management team adopted new underwriting standards that management believes better limits risks of loss in 2009 and have worked to monitor these standards. Only $23.6 million, or 0.36% of post 2009 originated loans were non-performing at SeptemberJune 30, 2017, compared to $10.5 million, or 0.18% of post 2009 loans, at December 31, 2016. The post 2009 loans were supported by an allowance for loan losses of $33.5 million (0.51% of post 2009 originated loans) and $31.8 million (0.55% of post 2009 originated loans), respectively, at September 30, 20172021 and December 31, 2016.2020, respectively.
Loans AcquiredDEPOSITS
At September 30, 2017, total acquired loans were $0.5 billion, or 7.7% of total loans receivable, compared to $0.3 billion, or 5.2% of total loans receivable, at December 31, 2016. Non-performing acquired loans totaled $6.3 million and $7.3 million, respectively, at September 30, 2017 and December 31, 2016. When loans are acquired, they are recorded on the balance sheet at fair value. Acquired loans include purchased portfolios, FDIC assisted failed-bank acquisitions, and unassisted acquisitions. Of the manufactured housing loans purchased from Tammac prior to 2012, $53.1 million were supported by a $0.7 million cash reserve at September 30, 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 the Bank. 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 the Bank the full payoff amount of the defaulted loan, including any principal, unpaid interest, or advances on the loans, once the borrower vacates the property. At September 30, 2017, $32.8 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. Customers has assigned these loans to its Special Assets Group, a team that focuses on workouts for these acquired non-performing assets. Total acquired loans were supported by reserves (allowance for loan losses and cash reserves) of $5.6 million (1.03% of total acquired loans) and $6.5 million (2.03% of total acquired loans), respectively, at September 30, 2017 and December 31, 2016.
Deposits
The Bank offers a variety of deposit accounts, including checking, savings, money market deposit accounts (“MMDA”)MMDA, and time deposits. Deposits are generallyprimarily obtained primarily from ourCustomers' geographic service area. Customers also acquires depositsarea and nationwide through digital banking, our white label relationship, deposit brokers, listing services and other relationships.
The components of deposits were as follows at the dates indicated: | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | June 30, 2021 | | December 31, 2020 | | Change | | % Change |
Demand, non-interest bearing | $ | 2,699,869 | | | $ | 2,356,998 | | | $ | 342,871 | | | 14.5 | % |
Demand, interest bearing | 4,206,355 | | | 2,384,691 | | | 1,821,664 | | | 76.4 | % |
Savings, including MMDA | 6,340,565 | | | 5,916,309 | | | 424,256 | | | 7.2 | % |
Non-time deposits | 13,246,789 | | | 10,657,998 | | | 2,588,791 | | | 24.3 | % |
Time, $100,000 and over | 501,213 | | | 470,923 | | | 30,290 | | | 6.4 | % |
Time, other | 125,937 | | | 181,008 | | | (55,071) | | | (30.4) | % |
Time deposits | 627,150 | | | 651,931 | | | (24,781) | | | (3.8) | % |
Total deposits | $ | 13,873,939 | | | $ | 11,309,929 | | | $ | 2,564,010 | | | 22.7 | % |
Total deposits were $7.6$13.9 billion at SeptemberJune 30, 2017,2021, an increase of $0.3$2.6 billion, or 4.0%22.7%, from $7.3$11.3 billion at December 31, 2016. Demand2020. Non-time deposits were $1.8increased by $2.6 billion, or 24.3%, to $13.2 billion at SeptemberJune 30, 2017, compared to $1.32021, from $10.7 billion at December 31, 2016, an2020. This increase primarily resulted from Customers' initiative to improve its net interest margin by expanding its sources of $484.1 million, or 37.1%.lower-cost funding. These amounts consist primarily ofefforts led to increases in non-interest bearing demand deposits.deposits of $342.9 million and interest bearing demand deposits of $1.8 billion. Savings, including MMDA totaled $3.5increased $424.3 million, or 7.2%, to $6.3 billion at SeptemberJune 30, 2017, an increase of $340.5 million, or 10.8%,2021, from $3.2$5.9 billion at December 31, 2016. This increase was primarily attributed to an increase in money market deposit accounts, including accounts held by municipalities. Total time2020. Time deposits were $2.3 billion at September 30, 2017, a decrease of $531.3decreased $24.8 million, or 18.8%3.8%, to $627.2 million at June 30, 2021, from $2.8 billion$651.9 million at December 31, 2016. 2020.
At SeptemberJune 30, 2017,2021, the Bank had $1.4$0.9 billion in state and municipal deposits to which Customers hasit had pledged $0.9 billion of available borrowing capacity through the FHLB to the depositor through a letter of credit arrangement. State and municipal deposits under this program decreased $44.5 million, or 3.1% from December 31, 2016.
The components of deposits were as follows at the dates indicated:
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
(amounts in thousands) | | | |
Demand | $ | 1,789,573 |
| | $ | 1,305,455 |
|
Savings, including MMDA | 3,507,063 |
| | 3,166,558 |
|
Time, $100,000 and over | 1,406,899 |
| | 2,106,905 |
|
Time, other | 893,541 |
| | 724,857 |
|
Total deposits | $ | 7,597,076 |
| | $ | 7,303,775 |
|
FHLB ADVANCES AND OTHER BORROWINGS
Borrowings
Borrowed funds from various sources are generally used to supplement deposit growth and meet other operating needs. Customers' borrowings generally include short-term and long-term advances from the FHLB, FRB, including from the PPPLF, federal funds purchased, senior unsecured notes and subordinated debt. Subordinated debt is also considered as Tier 2 capital for certain regulatory calculations. As of September
Short-term debt
Short-term debt at June 30, 20172021 and December 31, 2016, total outstanding2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
(dollars in thousands) | Amount | | Rate | | Amount | | Rate |
| | | | | | | |
FHLB advances | $ | — | | | — | % | | $ | 850,000 | | | 1.19 | % |
Federal funds purchased | — | | | — | % | | 250,000 | | | 0.09 | % |
Total short-term debt | $ | — | | | | | $ | 1,100,000 | | | |
During the three months ended June 30, 2021, Customers repaid FHLB advances and federal funds purchased due to sufficient liquidity.
Long-term debt
FHLB and FRB Advances
Long-term FHLB and FRB advances at June 30, 2021 and December 31, 2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| |
| June 30, 2021 | | December 31, 2020 |
(dollars in thousands) | Amount | | Rate | | Amount | | Rate |
| | | | | | | |
| | | | | | | |
FRB PPP Liquidity Facility advances | $ | 3,865,865 | | | 0.35 | % | | $ | 4,415,016 | | | 0.35 | % |
Total long-term FHLB and FRB advances | $ | 3,865,865 | | | | | $ | 4,415,016 | | | |
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 be pledged as collateral to the Federal Reserve Banks.
The maximum borrowing capacity with the FHLB and FRB at June 30, 2021 and December 31, 2020 was as follows: | | | | | | | | | | | |
(dollars in thousands) | June 30, 2021 | | December 31, 2020 |
Total maximum borrowing capacity with the FHLB | $ | 2,387,172 | | | $ | 2,729,516 | |
Total maximum borrowing capacity with the FRB (1) | 197,894 | | | 223,299 | |
Qualifying loans serving as collateral against FHLB and FRB advances (1) | 3,156,850 | | | 3,363,364 | |
(1) Amounts reported in the above table exclude borrowings under the PPPLF, which are limited to the face value of the loans originated under the PPP. At June 30, 2021, Customers had $3.9 billion of borrowings under the PPPLF, with a borrowing capacity of up to $6.3 billion, which is the remaining face value (following forgiveness) of the qualifying loans Customers has originated under the PPP. At December 31, 2020, Customers had $4.4 billion of borrowings under the PPPLF.
Senior Notes and Subordinated Debt
Long-term senior notes and subordinated debt at June 30, 2021 and December 31, 2020 were $1.9 billion and $1.1 billion, respectively, which represented an increase of $0.8 billion, or 65.9%. This increase was primarily the result of an increase in investments and loans receivable increasing the needas follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | June 30, 2021 | | December 31, 2020 | | | | | | | | | | |
(dollars in thousands) | | | | | | | | | | | | |
Issued by | | Ranking | | Amount | | Amount | | Rate | | Issued Amount | | Date Issued | | Maturity | | Price |
Customers Bancorp | | Senior | | $ | 24,612 | | | $ | 24,552 | | | 4.500 | % | | $ | 25,000 | | | September 2019 | | September 2024 | | 100.000 | % |
Customers Bancorp | | Senior | | 99,629 | | | 99,485 | | | 3.950 | % | | 100,000 | | | June 2017 | | June 2022 | | 99.775 | % |
| | | | | | | | | | | | | | | | |
Total other borrowings | | $ | 124,241 | | | $ | 124,037 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Customers Bancorp | | Subordinated (1)(2) | | $ | 72,313 | | | $ | 72,222 | | | 5.375 | % | | $ | 74,750 | | | December 2019 | | December 2034 | | 100.000 | % |
Customers Bank | | Subordinated (1)(3) | | 109,221 | | | 109,172 | | | 6.125 | % | | 110,000 | | | June 2014 | | June 2029 | | 100.000 | % |
Total subordinated debt | | $ | 181,534 | | | $ | 181,394 | | | | | | | | | | | |
(1)The subordinated notes qualify as Tier 2 capital for short-term borrowings. In June 2017, regulatory capital purposes.
(2)Customers Bancorp issued $100 millionhas the ability to call the subordinated notes, in whole, or in part, at a redemption price equal to 100% of seniorthe principal balance at certain times on or after December 30, 2029.
(3)The subordinated notes will bear an annual fixed rate of 6.125% until June 26, 2024. From June 26, 2024 until maturity, the notes will bear an annual interest rate equal to the three-month LIBOR plus 344.3 basis points. Customers Bank has the ability to call the subordinated notes, in whole, or in part, at 99.775%a redemption price equal to 100% of face value that will mature inthe principal balance at certain times on or after June 2022. Customers will use26, 2024.
SHAREHOLDERS' EQUITY
The components of shareholders' equity were as follows at the net proceeds for general corporate purposes, which may include working capital and the funding of organic growth at Customers Bank. For more information about Customers' borrowings, refer to NOTE 10 - BORROWINGS.
Capital Adequacy and Shareholders’ Equitydates indicated: | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | June 30, 2021 | | December 31, 2020 | | Change | | % Change |
Preferred stock | $ | 217,471 | | | $ | 217,471 | | | $ | — | | | — | % |
Common stock | 33,634 | | | 32,986 | | | 648 | | | 2.0 | % |
Additional paid in capital | 519,294 | | | 455,592 | | | 63,702 | | | 14.0 | % |
Retained earnings | 496,844 | | | 438,581 | | | 58,263 | | | 13.3 | % |
Accumulated other comprehensive income (loss), net | 5,266 | | | (5,764) | | | 11,030 | | | (191.4) | % |
Treasury stock | (21,780) | | | (21,780) | | | — | | | — | % |
Total shareholders' equity | $ | 1,250,729 | | | $ | 1,117,086 | | | $ | 133,643 | | | 12.0 | % |
Shareholders’ equity increased $54.8$133.6 million, or 12.0%, to $910.6 million$1.3 billion at SeptemberJune 30, 20172021 when compared to shareholders' equity of $855.9 million$1.1 billion at December 31, 2016, a 6.4%2020. The increase primarily resulted from increases of $63.7 million in the first nine months of 2017. The primary components of the net increase were as follows:
net income of $57.2additional paid in capital, $58.3 million for the nine months ended September 30, 2017;
in retained earnings, and $11.0 million in accumulated other comprehensive income (loss), net.
The increase in additional paid in capital resulted from the sale of $5.3BMT 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 nine months ended September 30, 2017, arising primarilyform of restricted stock awards in BM Technologies' common stock to certain team members of BMT, $7.9 million from unrealized gains on available-for-sale securities;
share-based compensation expense, of $4.5and $4.3 million forfrom the nine months ended September 30, 2017;
offset in part by preferred stock dividends of $10.8 million for the nine months ended September 30, 2017; and
issuance of common stock under share-based compensation arrangements for the six months ended June 30, 2021.
The increase in retained earnings resulted from net income of $2.0$97.9 million, offset in part by $6.7 million in preferred stock dividends and $33.0 million of special dividends in connection with the divestiture of BMT. Upon closing of the divestiture, Customers received cash consideration of $23.1 million and holders of Customers common stock who held their Customers shares as of the close of business on December 18, 2020 became entitled to receive an aggregate of 4,876,387 shares of BM Technologies' common stock. Customers distributed 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 as special dividends. No fractional shares of BMT common stock were issued; fractional share otherwise issuable were rounded to the nearest whole share. Customers received $3.7 million of additional cash consideration in May 2021.
The increase in accumulated other comprehensive income (loss), net primarily resulted from an increase of $12.3 million and 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 six months ended June 30, 2021, partially offset by reclassification of $25.4 million in gains and income tax effect of $6.6 million resulting from the sales of AFS debt securities during the six months ended June 30, 2021.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity for a financial institution is a measure of that institution’s ability to meet depositors’ needs for funds, to satisfy or fund loan and lease commitments, and for other operating purposes. Ensuring adequate liquidity is an objective of the asset/liability management process. Customers coordinates its management of liquidity with its interest rate sensitivity and capital position, and strives to maintain a strong liquidity position.
Customers' investment portfolio provides periodic cash flows through regular maturities and amortization and can be used as collateral to secure additional funding. Customers' principal sources of funds are deposits, borrowings, principal and interest payments on loans and leases, other funds from operations, and proceeds from common and preferred stock issuances. Borrowing arrangements are maintained with the FHLB and the FRB to meet short-term liquidity needs. Longer-term borrowing arrangements are also maintained with the FHLB and FRB. As of June 30, 2021, Customers' borrowing capacity with the FHLB was $2.4 billion, and $0.9 billion of available capacity was utilized to collateralize state and municipal deposits. During the three months ended June 30, 2021, Customers repaid FHLB advances and federal funds purchased due to sufficient liquidity. As of December 31, 2020, Customers' borrowing capacity with the FHLB was $2.7 billion, of which $0.9 billion was utilized in borrowings and $1.2 billion of available capacity was utilized to collateralize state and municipal deposits. As of June 30, 2021 and December 31, 2020, Customers' borrowing capacity with the FRB was $197.9 million and $223.3 million, 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 be pledged as collateral to the Federal Reserve Banks. As of June 30, 2021, Customers had $3.9 billion in borrowings under the PPPLF.
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. The table below summarizes Customers' cash flows from continuing operations for the six months ended June 30, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
(amounts in thousands) | 2021 | | 2020 | | Change | | % Change |
Net cash provided by (used in) continuing operating activities | $ | 289,325 | | | $ | 39,805 | | | $ | 249,520 | | | 626.9 | % |
Net cash provided by (used in) continuing investing activities | (1,469,817) | | | (5,375,723) | | | 3,905,906 | | | (72.7) | % |
Net cash provided by (used in) continuing financing activities | 940,429 | | | 6,191,020 | | | (5,250,591) | | | (84.8) | % |
Net increase (decrease) in cash and cash equivalents from continuing operations | $ | (240,063) | | | $ | 855,102 | | | $ | (1,095,165) | | | (128.1) | % |
Cash flows provided by (used in) continuing operating activities
Cash provided by continuing operating activities of $289.3 million for the ninesix months ended SeptemberJune 30, 2017.2021 resulted from an increase in accrued interest payable and other liabilities of $115.1 million, net income from continuing operations of $136.0 million, a decrease of $55.8 million in accrued interest receivable and other assets, partially offset by net non-cash operating adjustments of $17.6 million.
Cash provided by continuing operating activities of $39.8 million for the six months ended June 30, 2020 resulted from an increase of $81.8 million in accrued interest payable and other liabilities, net income from continuing operations of $33.4 million, and net non-cash operating adjustments of $38.4 million, partially offset by an increase in accrued interest receivable and other assets of $113.8 million.
Cash flows provided by (used in) continuing investing activities
Cash used in continuing investing activities of $1.5 billion for the six months ended June 30, 2021 primarily resulted from a net increase in loans and leases, excluding mortgage warehouse loans of $1.3 billion primarily from PPP loan originations, purchases of loans of $737.3 million, purchases of investment securities available for sale of $890.2 million and purchases of bank-owned life insurance of $46.5 million, partially offset by proceeds from net repayments of mortgage warehouse loans of $763.2 million, proceeds from sales of loans and leases of $130.5 million, proceeds from sales of investment securities available for sale of $407.6 million, proceeds from maturities, calls, and principal repayments of investment securities of $172.8 million and net proceeds from sale of FHLB, FRB, and other restricted stock of $31.5 million.
Cash used in continuing investing activities of $5.4 billion for the six months ended June 30, 2020 primarily resulted from a net increase in loans and leases, excluding mortgage warehouse loans of $4.5 billion primarily related to PPP loan originations, net originations of mortgage warehouse loans of $540.9 million, purchases of investment securities available for sale of $280.4 million, and purchases of loans of $211.1 million, partially offset by proceeds from sales of investment securities available for sale of $109.2 million and proceeds from maturities, calls and principal repayments of investment securities of $78.5 million.
Cash flows provided by (used in) continuing financing activities
Cash provided by continuing financing activities of $940.4 million for the six months ended June 30, 2021 primarily resulted from net increases in deposits of $2.6 billion, partially offset by decreases in short-term borrowed funds from the FHLB and federal funds purchased of $1.1 billion and a net decrease in long-term borrowed funds from the PPPLF of $549.2 million primarily from the forgiveness of PPP loans from the first two rounds.
Cash provided by continuing financing activities of $6.2 billion for the six months ended June 30, 2020 primarily resulted from net increases in long-term borrowed funds from the PPPLF of $4.4 billion primarily to finance the PPP loan originations, and deposits of $2.3 billion, partially offset by a net decrease in federal funds purchased of $538.0 million.
Cash flows from discontinued operations
The table below summarizes Customers' cash flows from discontinued operations for the six months ended June 30, 2021 and 2020: | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
(amounts in thousands) | 2021 | | 2020 | | Change | | % Change |
Net cash provided by (used in) discontinued operating activities | $ | (22,791) | | | $ | (329) | | | $ | (22,462) | | | 6,827.4 | % |
Net cash provided by (used in) discontinued investing activities | — | | | 52 | | | (52) | | | (100.0) | % |
| | | | | | | |
Net increase (decrease) in cash and cash equivalents from discontinued operations | $ | (22,791) | | | $ | (277) | | | $ | (22,514) | | | 8,127.8 | % |
Cash flows provided by (used in) discontinued operating activities
Cash used in discontinued operating activities of $22.8 million for the six months ended June 30, 2021 resulted from a net loss of $38.0 million and a decrease in accrued interest payable and other liabilities of $40.7 million, offset in part by non-cash operating activities of $20.3 million and a decrease in other assets of $35.6 million.
In connection with the divestiture, Customers has also 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. For additional information refer to "NOTE 3 – DISCONTINUED OPERATIONS" to Customers' unaudited consolidated financial statements.
CAPITAL ADEQUACY
The Bank and Customers Bancorp are subject to various regulatory capital requirements that are monitoredadministered by federal banking agencies. Failure to meet minimum capital requirements can lead to supervisoryresult in certain mandatory, and possibly additional discretionary, actions by regulators; any supervisory actionregulators that, if undertaken, could have a direct material effect on Customers' financial performance. At September 30, 2017,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 June 30, 2021 and December 31, 2020, the Bank and the Bancorp met all capital adequacy requirements to which they were subject. Capital levels continue
Generally, to exceedcomply with the well-capitalized threshold established by regulation atregulatory definition of adequately capitalized, or well capitalized, respectively, or to comply with the Bank and exceed the applicable Basel III regulatory thresholds for Customers Bancorpcapital requirements, an institution must at least maintain the common equity Tier 1, Tier 1, and total risk-based capital ratios and the Bank.
The capitalTier 1 leverage ratio in excess of the related minimum ratios forset forth in the Bank and the Bancorp at September 30, 2017 and December 31, 2016 were as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| Actual | | For Capital Adequacy Purposes (Minimum Plus Capital Buffer) | | To Be Well Capitalized Under Prompt Corrective Action Provisions |
(amounts in thousands) | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
As of September 30, 2017: | | | | | | | | | | | |
Common equity Tier 1 capital (to risk weighted assets) | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 677,976 |
| | 8.284 | % | | $ | 470,603 |
| | 5.750 | % | | N/A |
| | N/A |
|
Customers Bank | $ | 1,009,380 |
| | 12.342 | % | | $ | 470,242 |
| | 5.750 | % | | $ | 531,578 |
| | 6.500 | % |
Tier 1 capital (to risk weighted assets) | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 895,447 |
| | 10.941 | % | | $ | 593,369 |
| | 7.250 | % | | N/A |
| | N/A |
|
Customers Bank | $ | 1,009,380 |
| | 12.342 | % | | $ | 592,914 |
| | 7.250 | % | | $ | 654,250 |
| | 8.000 | % |
Total capital (to risk weighted assets) | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 1,014,784 |
| | 12.399 | % | | $ | 757,057 |
| | 9.250 | % | | N/A |
| | N/A |
|
Customers Bank | $ | 1,156,766 |
| | 14.145 | % | | $ | 756,477 |
| | 9.250 | % | | $ | 817,813 |
| | 10.000 | % |
Tier 1 capital (to average assets) | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 895,447 |
| | 8.355 | % | | $ | 428,709 |
| | 4.000 | % | | N/A |
| | N/A |
|
Customers Bank | $ | 1,009,380 |
| | 9.434 | % | | $ | 427,963 |
| | 4.000 | % | | $ | 534,954 |
| | 5.000 | % |
As of December 31, 2016: | | | | | | | | | | | |
Common equity Tier 1 capital (to risk weighted assets) | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 628,139 |
| | 8.487 | % | | $ | 379,306 |
| | 5.125 | % | | N/A |
| | N/A |
|
Customers Bank | $ | 857,421 |
| | 11.626 | % | | $ | 377,973 |
| | 5.125 | % | | $ | 479,380 |
| | 6.500 | % |
Tier 1 capital (to risk weighted assets) | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 844,755 |
| | 11.414 | % | | $ | 490,322 |
| | 6.625 | % | | N/A |
| | N/A |
|
Customers Bank | $ | 857,421 |
| | 11.626 | % | | $ | 488,599 |
| | 6.625 | % | | $ | 590,006 |
| | 8.000 | % |
Total capital (to risk weighted assets) | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 966,097 |
| | 13.053 | % | | $ | 638,343 |
| | 8.625 | % | | N/A |
| | N/A |
|
Customers Bank | $ | 1,003,609 |
| | 13.608 | % | | $ | 636,101 |
| | 8.625 | % | | $ | 737,508 |
| | 10.000 | % |
Tier 1 capital (to average assets) | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 844,755 |
| | 9.067 | % | | $ | 372,652 |
| | 4.000 | % | | N/A |
| | N/A |
|
Customers Bank | $ | 857,421 |
| | 9.233 | % | | $ | 371,466 |
| | 4.000 | % | | $ | 464,333 |
| | 5.000 | % |
following table: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Minimum Capital Levels to be Classified as: |
| Actual | | Adequately Capitalized | | Well Capitalized | | Basel III Compliant |
(dollars in thousands) | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
As of June 30, 2021: | | | | | | | | | | | | | | | |
Common equity Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 1,082,396 | | | 9.560 | % | | $ | 509,472 | | | 4.500 | % | | N/A | | N/A | | $ | 792,512 | | | 7.000 | % |
Customers Bank | $ | 1,403,324 | | | 12.395 | % | | $ | 509,460 | | | 4.500 | % | | $ | 735,886 | | | 6.500 | % | | $ | 792,493 | | | 7.000 | % |
Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 1,299,867 | | | 11.481 | % | | $ | 679,296 | | | 6.000 | % | | N/A | | N/A | | $ | 962,337 | | | 8.500 | % |
Customers Bank | $ | 1,403,324 | | | 12.395 | % | | $ | 679,279 | | | 6.000 | % | | $ | 905,706 | | | 8.000 | % | | $ | 962,313 | | | 8.500 | % |
Total capital (to risk-weighted assets) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 1,502,069 | | | 13.267 | % | | $ | 905,729 | | | 8.000 | % | | N/A | | N/A | | $ | 1,188,769 | | | 10.500 | % |
Customers Bank | $ | 1,559,161 | | | 13.772 | % | | $ | 905,706 | | | 8.000 | % | | $ | 1,132,132 | | | 10.000 | % | | $ | 1,188,739 | | | 10.500 | % |
Tier 1 capital (to average assets) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 1,299,867 | | | 8.389 | % | | $ | 619,832 | | | 4.000 | % | | N/A | | N/A | | $ | 619,832 | | | 4.000 | % |
Customers Bank | $ | 1,403,324 | | | 9.070 | % | | $ | 618,871 | | | 4.000 | % | | $ | 773,589 | | | 5.000 | % | | $ | 618,871 | | | 4.000 | % |
As of December 31, 2020: | | | | | | | | | | | | | | | |
Common equity Tier 1 capital (to risk-weighted assets) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 954,839 | | | 8.079 | % | | $ | 531,844 | | | 4.500 | % | | N/A | | N/A | | $ | 827,312 | | | 7.000 | % |
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) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 1,172,310 | | | 9.919 | % | | $ | 709,125 | | | 6.000 | % | | N/A | | N/A | | $ | 1,004,594 | | | 8.500 | % |
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) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 1,401,119 | | | 11.855 | % | | $ | 945,500 | | | 8.000 | % | | N/A | | N/A | | $ | 1,240,969 | | | 10.500 | % |
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) | | | | | | | | | | | | | | | |
Customers Bancorp, Inc. | $ | 1,172,310 | | | 8.597 | % | | $ | 545,485 | | | 4.000 | % | | N/A | | N/A | | $ | 545,485 | | | 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" adopted effective during first quarter 2015 and the capital conservation buffer effectivephased in beginning January 1, 2017.2016. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers. As of SeptemberJune 30, 2017,2021, the Bank and Customers Bancorp were in compliance with the Basel III requirements. See "NOTE 11 -– REGULATORY CAPITAL" to Customers' unaudited consolidated financial statements for additional discussion regarding regulatory capital requirements.
Off-Balance Sheet Arrangements
The BankOFF-BALANCE SHEET ARRANGEMENTS
Customers is involved with financial instruments and other commitments with off-balance sheet risks. Financial instruments with off-balance sheet risks are incurred in the normal course of business to meet the financing needs of the Bank's customers. These financial instruments include commitments to extend credit, including unused portions of lines of credit, and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the balance sheets.sheet.
With commitments to extend credit, exposuresexposure to credit loss in the event of non-performance by the other party to the financial instrument is represented by the contractual amount of those instruments. The same credit policies are used in making commitments and conditional obligations as for on-balance sheet instruments. Because they involve credit risk similar to extending a loan commitments to extend creditand lease, these financial instruments are subject to the Bank’s credit policy and other underwriting standards.
As of SeptemberJune 30, 20172021 and December 31, 2016,2020, the following off-balance sheet commitments, financial instruments and other arrangements were outstanding:
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
(amounts in thousands) | |
Commitments to fund loans | $ | 261,878 |
| | $ | 244,784 |
|
Unfunded commitments to fund mortgage warehouse loans | 1,385,192 |
| | 1,230,596 |
|
Unfunded commitments under lines of credit | 498,316 |
| | 480,446 |
|
Letters of credit | 38,842 |
| | 40,223 |
|
| | | | | | | | | | | |
(amounts in thousands) | June 30, 2021 | | December 31, 2020 |
Commitments to fund loans and leases | $ | 233,896 | | | $ | 262,153 | |
Unfunded commitments to fund mortgage warehouse loans | 2,619,979 | | | 1,933,067 | |
Unfunded commitments under lines of credit and credit cards | 1,200,497 | | | 1,009,031 | |
Letters of credit | 24,299 | | | 27,166 | |
Other unused commitments | 1,061 | | | 1,842 | |
Commitments to fund loans and leases, unfunded commitments to fund mortgage warehouse loans, unfunded commitments under lines of credit, and letters of credit, and credit cards are agreements to extend credit to or for the benefit of a customer in the ordinary course of the Bank's business.
Commitments to fund loans and leases and unfunded commitments under lines of credit may be obligations of the Bank as long as there is no violation of any condition established in the contract. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if the Bank deems it necessary upon extension of credit, is based upon management’s credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.
Mortgage warehouse loan commitments are agreements to fund the pipelines of mortgage banking businesses from closing of individual mortgage loans until their sale into the secondary market. Most of the individual mortgage loans are insured or guaranteed by the U.S. government through one of its programs such as FHA, VA, or are conventional loans eligible for sale to Fannie Mae and Freddie Mac. These commitments generally fluctuate monthly based on changes in interest rates, refinance activity, new home sales and laws and regulation.
Outstanding letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Letters of credit may obligate the Bank to fund draws under those letters of credit whether or not a customer continues to meet the conditions of the extension of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan and lease facilities to customers.
Liquidity and Capital Resources
LiquidityCustomers recognized a provision for a financial institution is a measurecredit losses on unfunded commitments 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.
Customers' investment portfolio provides periodic cash flows through regular maturities and amortization and can be used as collateral to secure additional liquidity funding. Our principal sources of funds are deposits, proceeds from debt issuances, principal and interest payments on loans, other funds from operations, and proceeds from stock issuances. Borrowing arrangements are maintained with the Federal Home Loan Bank and the Federal Reserve Bank of Philadelphia to meet short-term liquidity needs. Longer-term borrowing arrangements are also maintained with the Federal Home Loan Bank. As of September 30, 2017, our borrowing capacity with the Federal Home Loan Bank was $4.7 billion, of which $1.5 billion was utilized in borrowings and $1.9 billion of available capacity was utilized to collateralize state and municipal deposits. As of December 31, 2016, our borrowing capacity with the Federal Home Loan Bank was $4.1 billion, of which $0.9 billion was utilized in borrowings and $1.7 billion of available capacity was utilized to collateralize state and municipal deposits. As of September 30, 2017 and December 31, 2016, our borrowing capacity with the Federal Reserve Bank of Philadelphia was $151.1$0.1 million and $158.6 million, respectively.
Net cash flows provided by operating activities were $185.9a credit (benefit) to credit losses of $1.2 million during the ninethree and six months ended SeptemberJune 30, 2017, compared to net cash flows used2021 resulting in operating activitiesan ACL of $528.7$1.1 million during the nine months ended Septemberas of June 30, 2016. During the nine months ended September 30, 2017, proceeds from sales of loans held for sale exceeded originations of loans held for sale by $154.9 million. During the nine months ended September 30, 2016, originations of loans held for sale exceeded proceeds from sales of loans held for sale by $619.1 million.2021.
Investing activities used net cash flows of $1.3 billion during the nine months ended September 30, 2017, compared to net cash flows used in investing activities of $507.4 million during the nine months ended September 30, 2016. Purchases of investment securities available for sale totaled $796.6 million during the nine months ended September 30, 2017, compared to $5.0 million during the nine months ended September 30, 2016. Proceeds from sales of investment securities available for sale were $698.5 million for the nine month ended September 30, 2017, compared to $2.9 million during the nine months ended September 30, 2016. Purchases of loans held for investment and bank owned life insurance policies totaled $262.6 million and $90.0 million, respectively, for the nine months ended September 30, 2017, compared to no similar purchases during the nine months ended September 30, 2016. Proceeds from the sale of loans held for investment totaled $124.7 million during the nine months ended September 30, 2017, compared to $91.9 million during the nine months ended September 30, 2016. Cash flows used to fund new loans held for investment totaled $921.0 million and $641.1 million during the nine months ended September 30, 2017 and 2016, respectively.
Financing activities provided a net aggregate of $1.0 billion for each of the nine months ended September 30, 2017 and 2016. During the nine months ended September 30, 2017, increases in deposits provided net cash flows of $293.3 million, net increases in short-term borrowed funds provided $593.5 million, net increases in federal funds provided $64.0 million, proceeds from the issuance of five-year senior notes provided $98.6 million, payment of preferred stock dividends used $10.8 million, and net proceeds from the issuance of common stock provided $2.1 million. During the nine months ended September 30, 2016, increases in deposits provided $1.5 billion, net repayments of short-term borrowed funds used $663.6 million, net decrease in federal funds purchased used $18.0 million, net proceeds from long-term FHLB advances provided $75.0 million, net proceeds from the issuance of preferred stock provided $162.0 million, payment of preferred stock dividends used $5.5 million, and net proceeds from the issuance of common stock provided $7.3 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.
Effect of Government Monetary Policies
Our earnings are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. An important function of the Federal Reserve Board is to regulate the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities and changes in reserve requirements against member bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans and leases, investments, and deposits, and their use may also affect rates charged on loans and leases or paid for deposits.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity
The largest component of ourCustomers' net income is net interest income, and the majority of ourits financial instruments are interest rate sensitive assets and liabilities with various term structures and maturities. One of the primary objectives of management is to maximizeoptimize net interest income while minimizing interest rate risk. Interest rate risk is derived from timing differences in the repricing of assets and liabilities, loan prepayments, deposit withdrawals and differences in lending and funding rates. Our Asset/Liability CommitteeCustomers' asset/liability committee actively seeks to monitor and control the mix of interest rate sensitive assets and interest rate sensitive liabilities.
We useCustomers uses two complementary methods to analyze and measure interest rate sensitivity as part of the overall management of interest rate risk. Theyrisk; they are income simulationscenario 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 rate risk of ourCustomers' exposure to time factors and changes in interest rate environments.
Income simulationscenario modeling is used to measure our interest rate sensitivity and manage our interest 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, we haveCustomers has estimated the net interest income for the periodtwelve months ending SeptemberJune 30, 2018,2022 and December 31, 2021, based upon the assets, liabilities and off-balance sheet financial instruments in existence at SeptemberJune 30, 2017. We have2021 and December 31, 2020. Customers has also estimated changes to that estimated net interest income based upon interest rates rising or falling immediately (“rate shocks”). For upward rate shocks modeling a rising rate environment at June 30, 2021, current market interest rates were increased immediately by 100, 200, and 300 basis points. For downward rate shocks modeling a fallingIn the current interest rate environment, current marketparticularly 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.results. The following table reflects the estimated percentage change in estimated net interest income for the periodtwelve months ending SeptemberJune 30, 2018,2022 and December 31, 2021, resulting from changes in interest rates.
Net change in net interest income | | | | | | | | | | | |
| % Change |
Rate Shocks | June 30, 2021 | | December 31, 2020 |
Up 3% | 2.0% | | (2.7)% |
Up 2% | 2.3% | | (1.6)% |
Up 1% | 0.6% | | (0.8)% |
| | | |
| | | |
|
| | |
Rate Shocks | % Change |
Up 3% | (8.2 | )% |
Up 2% | (3.0 | )% |
Up 1% | (0.3 | )% |
Down 1% | (2.4 | )% |
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 June 30, 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 rate environment, that renders the Down 100, 200 and Down 300 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 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 SeptemberJune 30, 2017,2021 and December 31, 2020, resulting from shocks to interest rates.
|
| | |
Rate Shocks | From base |
Up 3% | (30.9 | )% |
Up 2% | (18.7 | )% |
Up 1% | (8.3 | )% |
Down 1% | 4.2 | % |
| | | | | | | | | | | |
| From base |
Rate Shocks | June 30, 2021 | | December 31, 2020 |
Up 3% | 29.5% | | (18.9)% |
Up 2% | 25.6% | | (12.2)% |
Up 1% | 12.7% | | (6.1)% |
| | | |
| | | |
Management believes that the assumptions and combination of methods utilized in evaluating estimated net interest income are reasonable. However, the interest rate sensitivity of our assets, liabilities and off-balance sheet financial instruments, as well as the estimated effect of changes in interest rates on estimated net interest income, could vary substantially if different assumptions are used or actual experience differs from the assumptions used in the model.
Item 4. Controls and Procedures
(a) Management's Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, Customers Bancorp carried out an evaluation, under the supervision and with the participation of Customers Bancorp’s management, including Customers Bancorp’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Customers Bancorp’s disclosure controls and procedures as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Customers Bancorp’s disclosure controls and procedures were effective at Septemberas of June 30, 2017.2021.
(b)Changes in Internal Control Over Financial Reporting. During the quarter ended SeptemberJune 30, 2017,2021, there have been no changes in Customers Bancorp’sBancorp's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Customers Bancorp’sBancorp's internal control over financial reporting.
The emergence of the COVID-19 pandemic during first quarter 2020 necessitated the execution of several Customers Bancorp contingency plans. Beginning in March 2020 and continuing through this filing date, Customers Bancorp had a substantial number of its team members working remotely under such contingency plans. The execution of these contingency plans have not materially affected, or are reasonably likely to materially affect, Customers' internal control over financial reporting.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material changesFor information on Customers' legal proceedings, refer to “NOTE 14 – LOSS CONTINGENCIES” to the legal proceedings disclosed within our 2016 Form 10-K, as supplemented and amended within our quarterly report on Form 10-Q for the quarter ended March 31, 2017.unaudited consolidated financial statements.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in “Risk Factors” included within the 20162020 Form 10-K and our quarterly reports on Form 10-Q for the quarter ended March 31, 2017 ("the March 31, 2017 Quarterly Report") and for the quarter ended June 30, 2017 ("the June 30, 2017 Quarterly Report").10-K. There are no material changes from the risk factors included within the 20162020 Form 10-K, March 31, 2017 Quarterly Report, and June 30, 2017 Quarterly Report other than the risks described below.10-K. The risks described within the 20162020 Form 10-K the March 31, 2017 Quarterly Report, the June 30, 2017 Quarterly Report and below are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial also may materially adversely affect our business, financial condition and/or operating results. See “Item 2 -– Management’s Discussion and Analysis of Financial Condition and Results of Operations -– Cautionary Note Regarding Forward-Looking Statements.”
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 BankMobile 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. While we currently expect to execute a definitive agreement with Flagship for this transaction, as of the date of filing of this Form 10-Q, a definitive agreement has not been executed. We expect that completion of the spin-off and merger will be subject to a number of conditions, including receipt of all necessary regulatory approvals, receipt by Flagship of shareholder approvals of certain matters relating to its acquisition of BMT, Flagship’s ability to raise approximately $100 million through the issuance of shares of its common stock, and other conditions. Certain of the conditions will not be within our control and we cannot guarantee you that we will enter into a definitive agreement or that we will be able to complete the spin-off and merger on the terms we have agreed to with Flagship, or at all.
Our announcement of the spin-off and merger and the steps we take to complete those transactions may adversely affect our business and the value of Customers and/or BankMobile. Uncertainty as to our ability to execute a definitive agreement or to complete the transactions and uncertainty as to the timing of the execution of a definitive agreement or the completion of the transactions may adversely affect analyst and shareholder views of our business and prospects, which could adversely affect our share price. These uncertainties also may adversely impact our relationships with our current and potential higher education institution customers and our BankMobile employees, and could result in the loss of customers and key employees. Because we cannot be certain of completing the spin-off and merger by July 1, 2018, we are also taking steps to reduce 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.
Executing the spin-off and merger also may 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 Customers and our shareholders may not receive the benefits we presently anticipate from these transactions.
If we are unable to reduce our total assets to below $10 billion as of December 31, 2017, our business and potential for future success could be materially adversely affected.
Under federal law and regulation, if our total assets exceed $10 billion as of December 31, 2017, we will no longer qualify as a small issuer of debit cards and we will not receive the optimal debit card processing fee. Failure to qualify for the small issuer exception would result in a significant reduction in interchange fee income beginning July 1, 2018 and could result in the BankMobile segment operating unprofitably or charging additional fees to students to replace the lost revenue. Customers plans to reduce total assets by approximately $500 million by year-end 2017 through normal seasonality of the mortgage warehouse business, which tends to decline in the winter months, selling multi-family and residential mortgage loans, and selling investment securities as needed. In addition, Customers expects to moderately grow its commercial and industrial loan portfolio while limiting growth in its multi-family loan portfolio by disciplined pricing. If Customers is unable to reduce total
assets to below $10 billion as of December 31, 2017, our financial condition and results of operations could be adversely affected.
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-temporary impairment.
As of September 30, 2017, the fair value of our investment securities portfolio was $584.8 million. We have historically followed a conservative investment strategy, with concentrations in securities that are backed by government sponsored enterprises. In the future, we may seek to increase yields through more aggressive strategies, which may include a greater percentage of corporate securities, structured credit products or non-agency mortgage backed securities. 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 hold the securities until recovery in fair value, could cause other-than-temporary impairments and realized and/or unrealized losses in future periods and declines in other comprehensive income, which could have a material adverse effect on us. The process for determining whether impairment of a security is other-than-temporary 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.
As of September 30, 2017, management evaluated its equity holdings issued by Religare for other-than-temporary impairment. Because management no longer has the intent to hold these securities until a recovery in fair value, Customers recorded other-than-temporary impairment losses of $8.3 million in third quarter 2017, $2.9 million in second quarter 2017, $1.7 million in first quarter 2017, and $7.3 million in fourth quarter 2016 for the full amount of the decline in fair value below the cost basis. The fair value of the equity securities at September 30, 2017 of $2.3 million became the new cost basis of the securities.
We may suffer losses due to minority investments in other financial institutions or related companies.
From time to time, we may make or consider making minority investments in other financial institutions or technology companies in the financial services business. 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 investment in Religare. As a result of that decision, we recorded an other-than-temporary impairment loss of $7.3 million in earnings in fourth quarter 2016 and adjusted our cost basis of the Religare securities to their estimated fair value of $15.2 million at December 31, 2016. In first quarter 2017, we recognized an other-than-temporary impairment loss of $1.7 million and adjusted our cost basis of the Religare securities to their estimated fair value of $13.5 million at March 31, 2017. In second quarter 2017, we recognized an other-than-temporary impairment loss of $2.9 million and adjusted our cost basis of the Religare securities to their estimated fair value of $10.7 million at June 30, 2017. In third quarter 2017, we recognized an other-than-temporary impairment loss of $8.3 million and adjusted our cost of the Religare equity securities to their estimated fair value of $2.3 million at September 30, 2017. To the extent we are unable to exit the Religare investment as planned, and pursuant to the terms contemplated, further declines in the market price per share of the Religare common stock and adverse changes in foreign currency exchange rates, may have an adverse effect on our financial condition and results of operations.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On November 26, 2013, Issuer Purchases of Equity Securities
Customers announced that the Board of Directors had authorized a stock repurchase plan in which the Bancorp could acquire up to 5% of its current outstandingdid not purchase any 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 its common stock under the program.
Duringduring the three and ninesix months ended SeptemberJune 30, 2017, 2021 pursuant to an existing stock repurchase plan.
Dividends on Common Stock
Customers didBancorp historically has not repurchasepaid any cash dividends on its shares of its shares. The maximumcommon stock 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 availableof preferred stock and other factors deemed relevant by the Board of 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 purchased underpaid will be limited to the plan is 750,551 shares.extent the Bank's capital ratios do not exceed the minimum required levels plus 250 basis points, as these requirements were phased in through January 1, 2019.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
None
Item 6. Exhibits
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Exhibit No. | | Description |
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Exhibit
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| | First Amendment to Agreement and Plan Merger, dated November 2, 2020, by and among Megalith Financial Acquisition Corp., MFAC Merger Sub, Inc., Customers Bank, BankMobile Technologies, and Customers Bancorp, incorporated by reference to Exhibit 2.1 to the Customers Bancorp 8-K filed with the SEC on November 2, 2020 |
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| | Second Amendment to Agreement and Plan Merger, dated December 8, 2020, by and among Megalith Financial Acquisition Corp., MFAC Merger Sub, Inc., Customers Bank, BankMobile Technologies, and Customers Bancorp, incorporated by reference to Exhibit 2.3 to the Customers Bancorp 8-K filed with the SEC on January 8, 2021 |
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| | Fourth Supplemental Indenture dated as of July 30, 2013, by andAugust 6, 2021 between Customers Bancorp, Inc., as Issuer, and Wilmington Trust, National Association, as Trustee, incorporated by reference to Exhibit 4.1 to the Customers Bancorp Form 8-K filed with the SEC on July 31, 2013 |
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| | First Supplemental Indenture, dated as of July 30, 2013, by and between Customers Bancorp, Inc., as Issuer, and Wilmington Trust, National Association, as Trustee, incorporated by reference to Exhibit 4.2 to the Customers Bancorp Form 8-K filed with the SEC on July 31, 2013 |
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| | Second Supplemental Indenture, dated as of June 30, 2017, by and between Customers Bancorp, Inc, as Issuer, and Wilmington Trust, National Association, As Trustee, incorporated by reference to Exhibit 4.1 to the Customers BancorpBancorp’s Form 8-K filed with the SEC on June 30, 20172021 |
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101 | | |
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101.INS104 | | Cover Page Interactive Data File - the cover page XBRL Instance Document.tags are embedded within the Inline XBRL document |
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101.SCH | | XBRL Taxonomy Extension Schema Document. |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.LAB101.DEF | | XBRL Taxonomy Extension Definitions Linkbase Document. |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
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101.DEF | | XBRL Taxonomy Extension Definitions Linkbase Document. |
* Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule will be furnished to the SEC upon its request.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| Customers Bancorp, Inc. |
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August 9, 2021 | By: | | /s/ Jay S. Sidhu |
| Name: | | Jay S. Sidhu |
| Title: | | Chairman and Chief Executive Officer (Principal Executive Officer) |
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| Customers Bancorp, Inc. |
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November 3, 2017 | By: | | /s/ Jay S. Sidhu |
| Name: | | Jay S. Sidhu |
| Title: | | Chairman and Chief Executive Officer
(Principal Executive Officer)
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November 3, 2017 | By: | | /s/ Robert E. Wahlman |
| Name: | | Robert E. Wahlman |
| Title: | | Chief Financial Officer
(Principal Financial Officer)
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Exhibit Index
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Exhibit
No. August 9, 2021 | By: | Description |
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| | Indenture, dated as of July 30, 2013, by and between Customers Bancorp, Inc., as Issuer, and Wilmington Trust, National Association, as Trustee, incorporated by reference to Exhibit 4.1 to the Customers Bancorp Form 8-K filed with the SEC on July 31, 2013 |
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| | First Supplemental Indenture, dated as of July 30, 2013, by and between Customers Bancorp, Inc., as Issuer, and Wilmington Trust, National Association, as Trustee, incorporated by reference to Exhibit 4.2 to the Customers Bancorp Form 8-K filed with the SEC on July 31, 2013 |
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| | Second Supplemental Indenture, dated as of June 30, 2017, by and between Customers Bancorp, Inc, as Issuer, and Wilmington Trust, National Association, As Trustee, incorporated by reference to Exhibit 4.1 to the Customers Bancorp Form 8-K filed with the SEC on June 30, 2017 |
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/s/ Carla A. Leibold |
| Name: | | Carla A. Leibold |
101 | Title: | The Exhibits filed as part of this report are as follows: |
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101.INS | | XBRL Instance Document. |
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101.SCH | | XBRL Taxonomy Extension Schema Document. |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
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101.DEF | | XBRL Taxonomy Extension Definitions Linkbase Document.Chief Financial Officer (Principal Financial Officer) |