NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
NOTE 1 — DESCRIPTION OF THE BUSINESS
Customers Bancorp, Inc. (the “Bancorp” or “Customers Bancorp”) is a bank holding company engaged in banking activities through its wholly owned subsidiary, Customers Bank (the “Bank”), collectively referred to as “Customers” herein. The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).
Customers Bancorp, Inc. and its wholly owned subsidiaries, Customers Bank, and non-bank subsidiaries, serve residents and businesses in Southeastern Pennsylvania (Bucks, Berks, Chester, Philadelphia and Delaware Counties); Rye Brook, New York (Westchester County); Hamilton, New Jersey (Mercer County); Boston, Massachusetts; Providence, Rhode Island; Portsmouth, New Hampshire (Rockingham County); Manhattan and Melville, New York; Washington, D.C.; Chicago, Illinois; and nationally for certain loan and deposit products. The Bank has
13
full-service branches and provides commercial banking products, primarily loans and deposits. In addition, Customers Bank also administratively supports loan and other financial products to customers through its limited-purpose offices in Boston, Massachusetts, Providence, Rhode Island, Portsmouth, New Hampshire, Manhattan and Melville, New York, Philadelphia, Pennsylvania, Washington, D.C., and Chicago, Illinois. The Bank also provides liquidity to residential mortgage originators nationwide through commercial loans to mortgage companies.
Through BankMobile, a division of Customers Bank, Customers offers state of the art high tech digital banking services to consumers, students, and the "under banked" nationwide. In October 2017, Customers announced its intent to spin-off its BankMobile business directly to Customers’ shareholders, to be followed by a merger of BankMobile into Flagship Community Bank ("Flagship"), as the most favorable option for disposition of BankMobile to Customers' shareholders rather than selling the business directly to a third party. Until execution of the spin-off and merger transaction, the assets and liabilities of BankMobile will be reported as held and used for all periods presented. Previously, Customers had stated its intention to sell BankMobile and, accordingly, all BankMobile operating results and cash flows for the quarter ended March 31, 2017 were presented as discontinued operations. All prior period amounts have been reclassified to conform with the current period consolidated financial statement presentation. See
NOTE 2
SPIN-OFF AND MERGER for more discussion regarding the spin-off and merger transaction.
Customers is subject to regulation of the Pennsylvania Department of Banking and Securities and the Federal Reserve Bank and is periodically examined by those regulatory authorities. Customers Bancorp has made certain equity investments through its wholly owned subsidiaries CB Green Ventures Pte Ltd. and CUBI India Ventures Pte Ltd.
NOTE 2
– SPIN-OFF AND MERGER
In third quarter 2017, Customers decided that the best strategy for its shareholders to realize the value of the BankMobile business was to divest BankMobile through a spin-off of BankMobile to Customers’ shareholders to be followed by a merger with Flagship Community Bank ("Flagship"). An Amended and Restated Purchase and Assumption Agreement and Plan of Merger (the "Amended Agreement") with Flagship to effect the spin-off and merger and Flagship's related purchase of BankMobile deposits from Customers was executed on November 17, 2017. Per the provisions of the Amended Agreement, the spin-off will be followed by a merger of Customers' BankMobile Technologies, Inc. ("BMT") subsidiary into Flagship, with Customers' shareholders first receiving shares of BMT as a dividend in the spin-off and then receiving shares of Flagship common stock in the merger of BMT into Flagship in exchange for shares of BMT common stock they receive in the spin-off. Flagship will separately purchase BankMobile deposits directly from Customers for cash. Following completion of the spin-off and merger and other transactions contemplated in the Amended Agreement between Customers and Flagship, BMT's shareholders would receive collectively more than
50%
of Flagship common stock. The common stock of the merged entities, expected to be called BankMobile, is expected to be listed on a national securities exchange after completion of the transactions. In connection with the signing of the Amended Agreement on November 17, 2017, Customers deposited
$1.0 million
in an escrow account with a third party to be reserved for payment to Flagship in the event the Amended Agreement is terminated for reasons described in the Amended Agreement. This
$1.0 million
is considered restricted cash and is presented in cash and cash equivalents in the accompanying
March 31, 2018
consolidated balance sheet. The Amended Agreement provides that completion of the transactions will be subject to the receipt of all necessary closing conditions. Customers expects the transaction to close in the third quarter of 2018
.
As of and for the three month period ended March 31, 2017, BankMobile met the criteria to be classified as held for sale, and accordingly the operating results and associated cash flows of BankMobile were presented as “Discontinued operations” for the three month period ended
March 31, 2017
. However, generally accepted accounting principles require that assets, liabilities, operating results, and cash flows associated with a business to be disposed of through a spin-off/merger transaction should not be reported as held for sale or discontinued operations until execution of the spin-off/merger transaction. As a result, beginning in third quarter 2017, the period in which Customers decided to spin-off BankMobile rather than selling directly to a third party, BankMobile's operating results and cash flows were no longer reported as held for sale or discontinued operations but instead will be reported as held and used. At September 30, 2017, Customers measured the business at the lower of its (i) carrying amount before it was classified as held for sale, adjusted for depreciation and amortization expense that would have been recognized had the business been continuously classified as held and used, or (ii) fair value at the date the decision not to sell was made.
Amounts previously reported as discontinued operations for the three month period ended
March 31, 2017
have been reclassified to conform with the current period presentation within the accompanying consolidated financial statements as summarized below. Customers will continue reporting the Community Business Banking and BankMobile segment results. See
NOTE 12 - BUSINESS SEGMENTS
.
The following summarizes the effect of the reclassification from held for sale classification to held and used classification on the previously reported consolidated statements of income for the
three
months ended
March 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
|
|
Effect of Reclassification From Held For Sale to Held and Used
|
|
|
(amounts in thousands)
|
As Previously Reported
|
|
|
After Reclassification
|
Interest income
|
$
|
83,094
|
|
|
$
|
—
|
|
|
$
|
83,094
|
|
Interest expense
|
20,670
|
|
|
6
|
|
|
20,676
|
|
Net interest income
|
62,424
|
|
|
(6
|
)
|
|
62,418
|
|
Provision for loan losses
|
3,050
|
|
|
—
|
|
|
3,050
|
|
Non-interest income
|
5,427
|
|
|
17,327
|
|
|
22,754
|
|
Non-interest expenses
|
30,147
|
|
|
19,219
|
|
|
49,366
|
|
Income from continuing operations before income taxes
|
34,654
|
|
|
(1,898
|
)
|
|
32,756
|
|
Provision for income taxes
|
7,730
|
|
|
(721
|
)
|
|
7,009
|
|
Net income from continuing operations
|
26,924
|
|
|
(1,177
|
)
|
|
25,747
|
|
Loss from discontinued operations before income taxes
|
(1,898
|
)
|
|
1,898
|
|
|
—
|
|
Income tax benefit from discontinued operations
|
(721
|
)
|
|
721
|
|
|
—
|
|
Net loss from discontinued operations
|
(1,177
|
)
|
|
1,177
|
|
|
—
|
|
Net income
|
25,747
|
|
|
—
|
|
|
25,747
|
|
Preferred stock dividend
|
3,615
|
|
|
—
|
|
|
3,615
|
|
Net income available to common shareholders
|
$
|
22,132
|
|
|
$
|
—
|
|
|
$
|
22,132
|
|
|
|
|
|
|
|
NOTE 3
— SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation
The interim unaudited consolidated financial statements of Customers Bancorp and subsidiaries have been prepared 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, 2017
consolidated balance sheet presented in this report has been derived from Customers Bancorp’s audited
2017
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
2017
consolidated financial statements of Customers Bancorp and subsidiaries included in Customers' Annual Report on Form 10-K for the year ended
December 31, 2017
filed with the SEC on February 23,
2018
(the "Form 10-K"). That 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; Loans Held for Sale and Loans at Fair Value; Loans Receivable; Purchased Loans; Allowance for Loan Losses; Goodwill and Other Intangible Assets; Investments in FHLB, Federal Reserve Bank, and Other Restricted Stock; Other Real Estate Owned; Bank-Owned Life Insurance; Bank Premises and Equipment; Operating Leases; Treasury Stock; Income Taxes; Share-Based Compensation; Transfer of Financial Assets; Business Segments; Derivative Instruments and Hedging; Comprehensive Income (Loss); Earnings per Share; and Loss Contingencies. Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year.
Reclassifications
As described in
NOTE 2
- SPIN-OFF AND MERGER, beginning in third quarter 2017, Customers reclassified BankMobile, a segment previously classified as held for sale, to held and used as it no longer met the held-for-sale criteria. Certain prior period amounts and note disclosures (including
NOTE 4
,
NOTE 8
and
NOTE 10
) have been reclassified to conform with the current period presentation. Except for these reclassifications, there have been no material changes to Customers' significant accounting policies as disclosed in Customers' Annual Report on Form 10-K for the year ended
December 31, 2017
.
Presented below are recently issued accounting standards that Customers has adopted as well as those that the Financial Accounting Standards Board (“FASB”) has issued but are not yet effective or that Customers has not yet adopted.
Recently Issued Accounting Standards
Accounting Standards Adopted on January 1, 2018
|
|
|
|
|
|
Standard
|
|
Summary of guidance
|
|
Effects on Financial Statements
|
ASU 2018-02,
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income/(Loss)
|
|
Allows for reclassification from AOCI to retained earnings for stranded tax effects resulting from the 2017 Tax Cut and Jobs Act.
Requires an entity to disclose whether it has elected to reclassify stranded tax effects from AOCI to retained earnings and its policy for releasing income tax effects from AOCI.
Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted.
|
|
Customers early adopted on January 1, 2018.
The adoption resulted in the reclassification of $0.3 million in stranded tax effects in Customers' AOCI related to net unrealized losses on its available-for-sale securities and cash flow hedges.
The adoption did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements.
|
Issued February 2018
|
|
|
ASU 2017-12,
Targeted Improvements to Accounting for Hedging Activities
|
|
Aligns the entity's risk management activities and financial reporting for hedging relationships.
Amends the existing hedge accounting model and expands an entity's ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest-rate risk.
Eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line item as the hedge item.
Changes certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness.
Effective for fiscal years beginning after December 15, 2018. Early adoption is permitted.
|
|
Customers early adopted on January 1, 2018.
With the early adoption, Customers is now able to pursue additional hedging strategies including the ability to apply fair value hedge accounting to a specified pool of assets by excluding the portion of the hedged items related to prepayments, defaults and other events.
These additional hedging strategies will allow Customers to better align its accounting and the financial reporting of its hedging activities with its economic objectives thereby reducing the earnings volatility resulting from these hedging activities.
The adoption did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements. Customers has updated its disclosures in NOTE 11 - DERIVATIVES INSTRUMENTS AND HEDGING ACTIVITIES as a result of early adopting this ASU.
|
Issued August 2017
|
|
|
ASU 2017-09,
Compensation - Stock Compensation: Scope of Modification Accounting
|
|
Clarifies when to account for a change to the terms or conditions of a share-based-payment award as a modification in ASC 718.
Provides that modification accounting is only required if the fair value, vesting conditions, or the classification of the award as equity or a liability changes as a result of the change in terms or conditions.
Effective January 1, 2018 on a prospective basis for awards modified on or after the adoption date.
|
|
Customers adopted on January 1, 2018.
Customers generally does not modify the terms or conditions of its share-based-payment awards.
The adoption did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements.
|
Issued May 2017
|
|
|
ASU 2017-05,
Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
|
|
Clarifies the scope and application of the accounting guidance on the sale of nonfinancial assets to non-customers, including partial sales.
Clarifies that if substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in substance nonfinancial assets within the scope of Subtopic 610-20.
Effective January 1, 2018 on a prospective basis.
|
|
Customers adopted on January 1, 2018.
The adoption did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements.
|
Issued February 2017
|
|
|
ASU 2017-01,
Clarifying the Definition of a Business
|
|
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.
Also clarifies that in order to be considered a business, an acquisition would have to include an input and a substantive process that together will significantly contribute to the ability to create an output.
Effective January 1, 2018 on a prospective basis.
|
|
Customers adopted on January 1, 2018.
The adoption did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements.
|
Issued January 2017
|
|
|
Accounting Standards Adopted on January 1, 2018 (continued)
|
|
|
|
|
|
Standard
|
|
Summary of guidance
|
|
Effects on Financial Statements
|
ASU 2016-18,
Statement of Cash Flows: Restricted Cash
|
|
Requires inclusion of restricted cash in cash and cash equivalents when reconciling the beginning-of-period total amounts shown on the statement of cash flows.
Effective January 1, 2018 and requires retrospective application to all periods presented.
|
|
Customers adopted on January 1, 2018.
The adoption did not result in any significant impact on Customers' consolidated financial statements, including its consolidated statement of cash flows, and therefore did not result in a retrospective application.
|
Issued November 2016
|
|
|
ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
|
|
Requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.
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.
Effective January 1, 2018 on a modified retrospective basis.
|
|
Customers adopted on January 1, 2018.
The adoption of the ASU did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements.
|
Issued October 2016
|
|
|
ASU 2016-15,
Statement of Cash Flow: Classification of Certain Cash Receipts and Cash Payments
|
|
Aims to reduce the existing diversity in practice with regards to the classification of the following specific items in the statement of cash flows:
1.
Cash payments for debt prepayment or extinguishment costs will be classified as an operating activity, while the portion of the payment attributable to principal will be classified as a financing activity.
2.
Cash paid by an acquirer soon after a business combination for the settlement of a contingent consideration liability recognized at the acquisition date will be classified in investing activities.
3.
Cash proceeds received from the settlement of insurance claims will be classified on the basis of the related insurance coverage (i.e., the nature of the loss).
4.
Cash proceeds received from the settlement of bank-owned life insurance policies will be classified as cash inflows from investing activities.
5.
A transferor's beneficial interest obtained in a securitization of financial assets will be disclosed as a non-cash activity, and cash received from beneficial interests will be classified in investing activities.
Effective January 1, 2018 and requires retrospective application to all periods presented.
|
|
Customers adopted on January 1, 2018.
The adoption did not result in any significant impact on Customers' consolidated financial statements, including its consolidated statement of cash flows, and therefore it did not result in a retrospective application.
|
Issued August 2016
|
|
|
Accounting Standards Adopted on January 1, 2018 (continued)
|
|
|
|
|
|
Standard
|
|
Summary of guidance
|
|
Effects on Financial Statements
|
ASU 2016-04,
Liabilities - Extinguishment of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products
|
|
Requires issuers of prepaid stored-value products (such as gift cards, telecommunication cards, and traveler's checks), to derecognize the financial liability related to those products for breakage. Breakage is the value of prepaid stored-value products that is not redeemed by consumers for goods, services or cash.
The amendments in this ASU provide a narrow scope exception to the guidance in Subtopic 405-20 to require that breakage be accounted for consistent with the breakage guidance in Topic 606.
Effective January 1, 2018 on a modified retrospective basis.
|
|
Customers adopted on January 1, 2018.
The adoption of this ASU did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements.
|
Issued March 2016
|
|
|
ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
|
|
Requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income.
Simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment.
Eliminates the requirement for public entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.
Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
Requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.
Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements.
Clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities.
Effective January 1, 2018 on a modified retrospective basis.
|
|
Customers adopted on January 1, 2018 using a modified retrospective approach.
The adoption of this ASU resulted in a cumulative-effect adjustment that resulted in a $1.0 million reduction in AOCI and a corresponding increase in retained earnings for the same amount.
The $1.0 million represented the net unrealized gain on Customers' investment in Religare equity securities at December 31, 2017, as disclosed in NOTE 6 - INVESTMENT SECURITIES.
Customers also refined its calculation to determine the fair value of its held-for- investment loan portfolio for disclosure purposes using an exit price notion as part of adopting this ASU. The refined calculation did not have a significant impact on Customers' fair value disclosures.
|
Issued January 2016
|
|
|
|
|
|
|
|
Accounting Standards Adopted on January 1, 2018 (continued)
|
|
|
|
|
|
Standard
|
|
Summary of guidance
|
|
Effects on Financial Statements
|
ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
Issued May 2014
|
|
Supersedes the revenue recognition requirements in ASC 605.
Requires an entity to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
The amendment includes a five-step process to assist an entity in achieving the main principle(s) of revenue recognition under ASC 605.
Reframed the structure of the indicators of when an entity is acting as an agent and focused on evidence that an entity is acting as the principal or agent in a revenue transaction.
Requires additional qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
Effective January 1 , 2018 and can be either applied retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption (modified retrospective approach).
|
|
Customers adopted on January 1, 2018 on a modified retrospective basis.
Because the ASU does not apply to revenue associated with leases and financial instruments (including loans and securities), Customers concluded that the new guidance did not have a material impact on the elements of its consolidated statements of operations most closely associated with leases and financial instruments (such as interest income, interest expense and securities gain).
Customers has identified its deposit-related fees, service charges, debit and prepaid card interchange income and university fees to be within the scope of the standard.
Customers has also completed its review of the related contracts and its evaluation of certain costs related to these revenue streams and determined that its debit and prepaid card interchange income, previously reported on a gross basis for periods prior to adoption, will need to be presented on a net basis under this ASU, as Customers is the agent.
The adoption of this ASU, did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements. Additional discussion related to the adoption and the required quantitative and qualitative disclosures are included in NOTE 13 - NON-INTEREST REVENUES.
|
|
|
|
|
|
|
|
Accounting Standards Issued But Not Yet Adopted
|
|
|
|
|
|
Standard
|
|
Summary of guidance
|
|
Effects on Financial Statements
|
ASU 2018-03
Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10)
|
|
Clarifies certain aspects of the guidance issued in ASU 2016-01 including: the ability to irrevocably elect to change the measurement approach for equity securities measured using the practical expedient (at cost plus or minus observable transactions less impairment) to a fair value method in accordance with ASC 820, Fair Value Measurement.
Provides clarification that if an observable transaction occurs for such securities, the adjustment is as of the observable transaction date.
Effective July 1, 2018 on a prospective basis with early adoption permitted.
|
|
Customers currently does not have any significant equity securities without readily determinable fair values and, accordingly, does not expect the adoption of this ASU to have a significant impact on its financial condition, results of operations and consolidated financial statements; however, Customers will continue to evaluate the potential impact of this ASU through the adoption date.
|
Issued February 2018
|
|
|
ASU 2017-11,
Accounting for Certain Financial Instruments with Down Round Features
|
|
Changes 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 be accounted for as a derivative liability at fair value as a result of the existence of a down round feature.
For freestanding equity-classified financial instruments, the amendments require entities to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of net income available to common shareholders in basic earnings per share ("EPS").
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 and, accordingly, does not expect the adoption of this ASU to have a significant impact on its financial condition, results of operations and consolidated financial statements; however, Customers will continue to evaluate the potential impact of this ASU through the adoption date.
|
Issued July 2017
|
|
|
ASU 2017-08,
Receivables-Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities
|
|
Requires that premiums for certain callable debt securities held be amortized to their earliest call date.
Effective for Customers beginning after December 15, 2018, with early adoption permitted.
Adoption of this new guidance must be applied on a modified retrospective approach.
|
|
Customers currently has an immaterial amount of callable debt securities purchased at a premium and, accordingly, does not expect the adoption of this ASU to have a significant impact on its financial condition, results of operations and consolidated financial statements; however, Customers will continue to evaluate the potential impact through the adoption date.
|
Issued March 2017
|
|
|
|
|
|
|
|
Accounting Standards Issued But Not Yet Adopted (continued)
|
|
|
|
|
|
Standard
|
|
Summary of guidance
|
|
Effects on Financial Statements
|
ASU 2016-13
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
|
|
Requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate lifetime expected credit loss and record an allowance that, when deducted from the amortized cost basis of the financial asset (including HTM securities), presents the net amount expected to be collected on the financial asset.
Replaces today's "incurred loss" approach and is expected to result in earlier recognition of credit losses.
For available-for-sale debt securities, entities will be required to record allowances for credit losses rather than reduce the carrying amount, as they do today under the OTTI model, and will be allowed to reverse previously established allowances in the event the credit of the issuer improves.
Simplifies the accounting model for purchased credit-impaired debt securities and loans.
Effective beginning after December 15, 2019 with early adoption permitted.
Adoption can be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.
|
|
Customers is currently evaluating the impact of this ASU, initiating implementation efforts across the company and planning for loss modeling requirements consistent with lifetime expected loss estimates.
Customers expects that the new model will include different assumptions used in calculating credit losses, such as estimating losses over the estimated life of a financial asset and will consider expected future changes in macroeconomic conditions.
The adoption of this ASU may result in an increase to Customers' allowance for loan losses which will depend upon the nature and characteristics of Customers' loan portfolio at the adoption date, as well as the macroeconomic conditions and forecasts at that date.
Customers currently does not intend to early adopt this new guidance.
|
Issued June 2016
|
|
|
ASU 2016-02,
Leases
|
|
Supersedes the current lease accounting guidance for both lessees and lessors under ASC 840,
Leases.
From the lessee's perspective, the new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.
Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for lessees.
This ASU will require lessors to account for leases using an approach that is substantially similar to the existing guidance for sales-type, direct financing leases and operating leases.
Effective beginning after December 15, 2018 with early adoption permitted.
A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.
|
|
Customers is currently evaluating the impact of this ASU on its financial condition and results of operations and expects to recognize right-of-use assets and lease liabilities for substantially all of its operating lease commitments based on the present value of unpaid lease payments as of the date of adoption.
Customers does not intend to early adopt this ASU.
|
Issued February 2016
|
|
|
|
|
|
|
|
NOTE 4
— EARNINGS PER SHARE
The following are the components and results of Customers' earnings per common share calculations for the periods presented.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2018
|
|
2017
|
(amounts in thousands, except share and per share data)
|
|
|
|
Net income available to common shareholders
|
$
|
20,527
|
|
|
$
|
22,132
|
|
|
|
|
|
Weighted-average number of common shares outstanding - basic
|
31,424,496
|
|
|
30,407,060
|
|
Share-based compensation plans
|
840,561
|
|
|
2,344,929
|
|
Warrants
|
8,916
|
|
|
37,171
|
|
Weighted-average number of common shares - diluted
|
32,273,973
|
|
|
32,789,160
|
|
|
|
|
|
Basic earnings per common share
|
$
|
0.65
|
|
|
$
|
0.73
|
|
Diluted earnings per common share
|
$
|
0.64
|
|
|
$
|
0.67
|
|
The following is a summary of securities that could potentially dilute basic earnings per common share in future periods that were not included in the computation of diluted earnings per common share because to do so would have been anti-dilutive for the periods presented.
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2018
|
|
2017
|
Anti-dilutive securities:
|
|
|
|
Share-based compensation awards
|
1,059,225
|
|
|
—
|
|
Warrants
|
—
|
|
|
52,242
|
|
Total anti-dilutive securities
|
1,059,225
|
|
|
52,242
|
|
NOTE 5
— CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT
The following tables present the changes in accumulated other comprehensive income (loss) by component for the three months ended
March 31, 2018
and
2017
. All amounts are presented net of tax. Amounts in parentheses indicate reductions to accumulated other comprehensive income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
Available-for-sale securities
|
|
|
|
|
(amounts in thousands)
|
Unrealized Gains (Losses)
|
Foreign Currency Items
|
Total Unrealized Gains (Losses)
|
|
Unrealized
Gains (Losses) on Cash Flow Hedges
|
|
Total
|
Balance - December 31, 2017
|
$
|
(249
|
)
|
$
|
88
|
|
$
|
(161
|
)
|
|
$
|
(198
|
)
|
|
$
|
(359
|
)
|
Reclassification of the income tax effects of the Tax Cuts and Jobs Act (1)
|
(256
|
)
|
—
|
|
(256
|
)
|
|
(42
|
)
|
|
(298
|
)
|
Reclassification of net unrealized gains on equity securities (1)
|
(953
|
)
|
(88
|
)
|
(1,041
|
)
|
|
—
|
|
|
(1,041
|
)
|
Balance after reclassification adjustments on January 1, 2018
|
(1,458
|
)
|
—
|
|
(1,458
|
)
|
|
(240
|
)
|
|
(1,698
|
)
|
Other comprehensive income (loss) before reclassifications
|
(25,233
|
)
|
—
|
|
(25,233
|
)
|
|
646
|
|
|
(24,587
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss) to net income (2)
|
—
|
|
—
|
|
—
|
|
|
97
|
|
|
97
|
|
Net current-period other comprehensive income (loss)
|
(25,233
|
)
|
—
|
|
(25,233
|
)
|
|
743
|
|
|
(24,490
|
)
|
Balance - March 31, 2018
|
$
|
(26,691
|
)
|
$
|
—
|
|
$
|
(26,691
|
)
|
|
$
|
503
|
|
|
$
|
(26,188
|
)
|
(1) Amounts reclassified from accumulated other comprehensive income (loss) on January 1, 2018 as a result of the adoption of ASU 2018-02 and ASU 2016-01 resulted in a decrease in accumulated other comprehensive income of
$1.3 million
and a corresponding increase in retained earnings for the same amount. See NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION for more information.
(2) Reclassification amounts for available-for-sale securities are reported as gain (loss) on sale of investment securities on the consolidated statements of income. Reclassification amounts for cash flow hedges are reported as interest expense on FHLB advances on the consolidated statements of income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Available-for-sale securities
|
|
|
|
|
(amounts in thousands)
|
Unrealized Gains (Losses)
|
Foreign Currency Items
|
Total Unrealized Gains (Losses)
|
|
Unrealized
Gains (Losses) on Cash Flow Hedges
|
|
Total
|
Balance - December 31, 2016
|
$
|
(2,681
|
)
|
$
|
—
|
|
$
|
(2,681
|
)
|
|
$
|
(2,211
|
)
|
|
$
|
(4,892
|
)
|
Other comprehensive income (loss) before reclassifications
|
(685
|
)
|
—
|
|
(685
|
)
|
|
201
|
|
|
(484
|
)
|
Amounts reclassified from accumulated other comprehensive income (loss) to net income (1)
|
—
|
|
—
|
|
—
|
|
|
504
|
|
|
504
|
|
Net current-period other comprehensive income (loss)
|
(685
|
)
|
—
|
|
(685
|
)
|
|
705
|
|
|
20
|
|
Balance - March 31, 2017
|
$
|
(3,366
|
)
|
$
|
—
|
|
$
|
(3,366
|
)
|
|
$
|
(1,506
|
)
|
|
$
|
(4,872
|
)
|
|
|
(1)
|
Reclassification amounts for available-for-sale securities are reported as gain (loss) on sale of investment securities on the consolidated statements of income. Reclassification amounts for cash flow hedges are reported as interest expense on FHLB advances on the consolidated statements of income.
|
NOTE 6
— INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities as of
March 31, 2018
and
December 31, 2017
are summarized in the tables below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
(amounts in thousands)
|
|
|
|
|
|
|
|
Available for Sale Debt Securities:
|
|
|
|
|
|
|
|
Agency-guaranteed residential mortgage-backed securities
|
$
|
505,113
|
|
|
$
|
—
|
|
|
$
|
(11,856
|
)
|
|
$
|
493,257
|
|
Agency-guaranteed commercial real estate mortgage-backed securities
|
334,643
|
|
|
—
|
|
|
(10,109
|
)
|
|
324,534
|
|
Corporate notes
|
374,611
|
|
|
947
|
|
|
(15,050
|
)
|
|
360,508
|
|
Available for Sale Debt Securities
|
$
|
1,214,367
|
|
|
$
|
947
|
|
|
$
|
(37,015
|
)
|
|
1,178,299
|
|
Equity Securities
(1)
|
|
|
|
|
|
|
3,362
|
|
Total Investment Securities, at Fair Value
|
|
|
|
|
|
|
$
|
1,181,661
|
|
(1) Includes equity securities issued by a foreign entity that are being measured at fair value with changes in fair value
recognized directly in earnings effective January 1, 2018 as a result of adopting ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
(see NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION for additional information related to the adoption of this new standard).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
(amounts in thousands)
|
|
|
|
|
|
|
|
Available for Sale:
|
|
|
|
|
|
|
|
Agency-guaranteed residential mortgage-backed securities
|
$
|
186,221
|
|
|
$
|
36
|
|
|
$
|
(2,799
|
)
|
|
$
|
183,458
|
|
Agency-guaranteed commercial real estate mortgage-backed securities
|
238,809
|
|
|
432
|
|
|
(769
|
)
|
|
238,472
|
|
Corporate notes (1)
|
44,959
|
|
|
1,130
|
|
|
—
|
|
|
46,089
|
|
Equity securities (2)
|
2,311
|
|
|
1,041
|
|
|
—
|
|
|
3,352
|
|
Total Available for Sale Securities, at Fair Value
|
$
|
472,300
|
|
|
$
|
2,639
|
|
|
$
|
(3,568
|
)
|
|
$
|
471,371
|
|
|
|
(1)
|
Includes subordinated debt issued by other bank holding companies.
|
|
|
(2)
|
Includes equity securities issued by a foreign entity.
|
There were no sales of securities during the three month periods ended March 31, 2018 and 2017.
The following table shows debt investment securities by stated maturity. Investment securities backed by mortgages have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay and, therefore, these debt securities are classified separately with no specific maturity date:
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
Amortized
Cost
|
|
Fair
Value
|
(amounts in thousands)
|
|
|
|
Due in one year or less
|
$
|
—
|
|
|
$
|
—
|
|
Due after one year through five years
|
—
|
|
|
—
|
|
Due after five years through ten years
|
119,980
|
|
|
117,332
|
|
Due after ten years
|
254,631
|
|
|
243,176
|
|
Agency-guaranteed residential mortgage-backed securities
|
505,113
|
|
|
493,257
|
|
Agency-guaranteed commercial real estate mortgage-backed securities
|
334,643
|
|
|
324,534
|
|
Total debt securities
|
$
|
1,214,367
|
|
|
$
|
1,178,299
|
|
Gross unrealized losses and fair value of Customers' available for sale debt investment securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at
March 31, 2018
and
December 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
|
Agency-guaranteed residential mortgage-backed securities
|
$
|
430,735
|
|
|
$
|
(8,161
|
)
|
|
$
|
62,522
|
|
|
$
|
(3,695
|
)
|
|
$
|
493,257
|
|
|
$
|
(11,856
|
)
|
Agency-guaranteed commercial real estate mortgage-backed securities
|
318,635
|
|
|
(9,831
|
)
|
|
5,899
|
|
|
(278
|
)
|
|
324,534
|
|
|
(10,109
|
)
|
Corporate notes
|
309,601
|
|
|
(15,050
|
)
|
|
—
|
|
|
—
|
|
|
309,601
|
|
|
(15,050
|
)
|
Total
|
$
|
1,058,971
|
|
|
$
|
(33,042
|
)
|
|
$
|
68,421
|
|
|
$
|
(3,973
|
)
|
|
$
|
1,127,392
|
|
|
$
|
(37,015
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Available for Sale Debt Securities:
|
|
|
|
|
|
|
|
|
|
|
|
Agency-guaranteed residential mortgage-backed securities
|
$
|
104,861
|
|
|
$
|
(656
|
)
|
|
$
|
66,579
|
|
|
$
|
(2,143
|
)
|
|
$
|
171,440
|
|
|
$
|
(2,799
|
)
|
Agency-guaranteed commercial real estate mortgage-backed securities
|
115,970
|
|
|
(740
|
)
|
|
6,151
|
|
|
(29
|
)
|
|
122,121
|
|
|
(769
|
)
|
Total
|
$
|
220,831
|
|
|
$
|
(1,396
|
)
|
|
$
|
72,730
|
|
|
$
|
(2,172
|
)
|
|
$
|
293,561
|
|
|
$
|
(3,568
|
)
|
At
March 31, 2018
, there were
sixty-two
available-for-sale debt investment securities in the less-than-twelve-month category and
sixteen
available-for-sale debt investment securities in the twelve-month-or-more category. The unrealized losses on the mortgage-backed securities are guaranteed by government-sponsored entities and primarily relate to changes in market interest rates. The unrealized losses on the corporate notes relate to securities with no company specific concentration. The unrealized losses were due to an upward shift in interest rates that resulted in a negative impact on the respective notes pricing. All amounts related to the mortgage-backed securities and the corporate notes are expected to be recovered when market prices recover or at maturity. Customers does not intend to sell these securities and it is not more likely than not that Customers will be required to sell the securities before recovery of the amortized cost basis.
During the three month period ended March 31, 2017, Customers recorded other-than-temporary impairment losses of
$1.7 million
related to its equity holdings in Religare for the full amount of the decline in fair value from the cost basis established at December 31, 2016 through March 31, 2017 because Customers no longer had the intent to hold these securities until a recovery in fair value. At December 31, 2017, the fair value of the Religare equity securities was
$3.4 million
which resulted in an unrealized gain of
$1.0 million
being recognized in accumulated other comprehensive income with no adjustment for deferred taxes as Customers currently does not have a tax strategy in place capable of generating sufficient capital gains to utilize any capital losses resulting from the Religare investment.
As described in NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION, the adoption of ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities,
on January 1, 2018 resulted in a cumulative effect adjustment to Customers' consolidated balance sheet with a
$1.0 million
reduction in accumulated other comprehensive income and a corresponding increase in retained earnings related to the December 31, 2017 unrealized gain on the Religare equity securities. In accordance with the new accounting guidance, changes in the fair value of the Religare equity securities from December 31, 2017 through March 31, 2018 were recorded directly in earnings, which resulted in an unrealized gain of
$10 thousand
being recognized in other non-interest income in the accompanying consolidated statements of income.
At
March 31, 2018
and
December 31, 2017
, Customers Bank had pledged investment securities aggregating
$701.5 million
and
$16.9 million
in fair value, respectively, as collateral against its borrowings primarily with the FHLB and an unused line of credit with another financial institution. These counterparties do not have the ability to sell or repledge these securities.
NOTE 7
– LOANS HELD FOR SALE
The composition of loans held for sale as of
March 31, 2018
and
December 31, 2017
was as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
(amounts in thousands)
|
|
|
|
Commercial loans:
|
|
|
|
Mortgage warehouse loans, at fair value
|
$
|
1,874,853
|
|
|
$
|
1,793,408
|
|
Multi-family loans at lower of cost or fair value
|
—
|
|
|
144,191
|
|
Total commercial loans held for sale
|
1,874,853
|
|
|
1,937,599
|
|
Consumer loans:
|
|
|
|
Residential mortgage loans, at fair value
|
662
|
|
|
1,886
|
|
Loans held for sale
|
$
|
1,875,515
|
|
|
$
|
1,939,485
|
|
Commercial loans held for sale consists predominately of commercial loans to mortgage companies (i.e., mortgage warehouse loans). These mortgage warehouse lending transactions are subject to master repurchase agreements and are designated as held for sale and reported at fair value based on an election made to account for the loans at fair value. Pursuant to the agreements, Customers funds the pipelines for these mortgage lenders by sending payments directly to the closing agents for funded loans (i.e., the purchase event) and receives proceeds directly from third party investors when the loans are sold into the secondary market (i.e., the sale event). The fair value of the mortgage warehouse loans is estimated as the amount of cash initially advanced to fund the mortgage, plus accrued interest and fees, as specified in the respective agreements. The interest rates on these loans are variable, and the lending transactions are short-term, with an average life of
21
days from purchase to sale. The primary goal of these lending transactions is to provide liquidity to mortgage companies.
Effective March 31, 2018, Customers Bank transferred
$129.7 million
of multi-family loans from loans held for sale to loan receivable (held for investment) because the Bank no longer has the intent to sell these loans. Customers Bank transferred these loans at their carrying value, which approximated their fair value at the time of transfer.
On June 30, 2017, Customers Bank transferred
$150.6 million
of multi-family loans from held for investment to loans held for sale. Customers Bank transferred these loans at their carrying value, which was lower than the estimated fair value at the time of transfer. At December 31, 2017, the carrying value of these loans approximated their fair value. Accordingly, a lower of cost or fair value adjustment was not recorded as of December 31, 2017.
NOTE 8
— LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
The following table presents loans receivable as of
March 31, 2018
and
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
(amounts in thousands)
|
|
Commercial:
|
|
|
|
Multi-family
|
$
|
3,645,374
|
|
|
$
|
3,502,381
|
|
Commercial and industrial (including owner occupied commercial real estate)
|
1,704,791
|
|
|
1,633,818
|
|
Commercial real estate non-owner occupied
|
1,195,904
|
|
|
1,218,719
|
|
Construction
|
81,101
|
|
|
85,393
|
|
Total commercial loans
|
6,627,170
|
|
|
6,440,311
|
|
Consumer:
|
|
|
|
Residential real estate
|
225,839
|
|
|
234,090
|
|
Manufactured housing
|
87,687
|
|
|
90,227
|
|
Other
|
3,570
|
|
|
3,547
|
|
Total consumer loans
|
317,096
|
|
|
327,864
|
|
Total loans receivable
|
6,944,266
|
|
|
6,768,175
|
|
Deferred (fees)/costs and unamortized (discounts)/premiums, net
|
(700
|
)
|
|
83
|
|
Allowance for loan losses
|
(39,499
|
)
|
|
(38,015
|
)
|
Loans receivable, net of allowance for loan losses
|
$
|
6,904,067
|
|
|
$
|
6,730,243
|
|
The following tables summarize loans receivable by loan type and performance status as of
March 31, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
30-89 Days
Past Due (1)
|
|
90 Days
Or More
Past Due(1)
|
|
Total Past
Due (1)
|
|
Non-
Accrual
|
|
Current (2)
|
|
Purchased-
Credit-
Impaired
Loans (3)
|
|
Total
Loans (4)
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,643,539
|
|
|
$
|
1,835
|
|
|
$
|
3,645,374
|
|
Commercial and industrial
|
129
|
|
|
—
|
|
|
129
|
|
|
14,220
|
|
|
1,187,571
|
|
|
721
|
|
|
1,202,641
|
|
Commercial real estate - owner occupied
|
—
|
|
|
—
|
|
|
—
|
|
|
1,437
|
|
|
490,277
|
|
|
10,436
|
|
|
502,150
|
|
Commercial real estate - non-owner occupied
|
—
|
|
|
—
|
|
|
—
|
|
|
242
|
|
|
1,190,591
|
|
|
5,071
|
|
|
1,195,904
|
|
Construction
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
81,101
|
|
|
—
|
|
|
81,101
|
|
Residential real estate
|
4,490
|
|
|
—
|
|
|
4,490
|
|
|
5,216
|
|
|
210,825
|
|
|
5,308
|
|
|
225,839
|
|
Manufactured housing (5)
|
3,444
|
|
|
2,746
|
|
|
6,190
|
|
|
1,979
|
|
|
77,042
|
|
|
2,476
|
|
|
87,687
|
|
Other consumer
|
75
|
|
|
—
|
|
|
75
|
|
|
97
|
|
|
3,148
|
|
|
250
|
|
|
3,570
|
|
Total
|
$
|
8,138
|
|
|
$
|
2,746
|
|
|
$
|
10,884
|
|
|
$
|
23,191
|
|
|
$
|
6,884,094
|
|
|
$
|
26,097
|
|
|
$
|
6,944,266
|
|
|
December 31, 2017
|
|
30-89 Days
Past Due (1)
|
|
90 Days
Or More
Past Due(1)
|
|
Total Past
Due (1)
|
|
Non-
Accrual
|
|
Current (2)
|
|
Purchased-
Credit-
Impaired
Loans (3)
|
|
Total
Loans (4)
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-family
|
$
|
4,900
|
|
|
$
|
—
|
|
|
$
|
4,900
|
|
|
$
|
—
|
|
|
$
|
3,495,600
|
|
|
$
|
1,881
|
|
|
$
|
3,502,381
|
|
Commercial and industrial
|
103
|
|
|
—
|
|
|
103
|
|
|
17,392
|
|
|
1,130,831
|
|
|
764
|
|
|
1,149,090
|
|
Commercial real estate - owner occupied
|
202
|
|
|
—
|
|
|
202
|
|
|
1,453
|
|
|
472,501
|
|
|
10,572
|
|
|
484,728
|
|
Commercial real estate - non-owner occupied
|
93
|
|
|
—
|
|
|
93
|
|
|
160
|
|
|
1,213,216
|
|
|
5,250
|
|
|
1,218,719
|
|
Construction
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
85,393
|
|
|
—
|
|
|
85,393
|
|
Residential real estate
|
7,628
|
|
|
—
|
|
|
7,628
|
|
|
5,420
|
|
|
215,361
|
|
|
5,681
|
|
|
234,090
|
|
Manufactured housing (5)
|
4,028
|
|
|
2,743
|
|
|
6,771
|
|
|
1,959
|
|
|
78,946
|
|
|
2,551
|
|
|
90,227
|
|
Other consumer
|
116
|
|
|
—
|
|
|
116
|
|
|
31
|
|
|
3,184
|
|
|
216
|
|
|
3,547
|
|
Total
|
$
|
17,070
|
|
|
$
|
2,743
|
|
|
$
|
19,813
|
|
|
$
|
26,415
|
|
|
$
|
6,695,032
|
|
|
$
|
26,915
|
|
|
$
|
6,768,175
|
|
|
|
(1)
|
Includes past due loans that are accruing interest because collection is considered probable.
|
|
|
(2)
|
Loans where next payment due is less than
30
days from the report date.
|
|
|
(3)
|
Purchased-credit-impaired loans aggregated into a pool are accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, and the past due status of the pools, or that of the individual loans within the pools, is not meaningful. Because of the credit impaired nature of the loans, the loans are recorded at a discount reflecting estimated future cash flows and the Bank recognizes interest income on each pool of loans reflecting the estimated yield and passage of time. Such loans are considered to be performing. Purchased-credit-impaired loans that are not in pools accrete interest when the timing and amount of their expected cash flows are reasonably estimable, and are reported as performing loans.
|
|
|
(4)
|
Amounts exclude deferred costs and fees, unamortized premiums and discounts, and the allowance for loan losses.
|
|
|
(5)
|
Manufactured housing loans purchased in 2010 are supported by cash reserves held at the Bank that are used to fund past-due payments when the loan becomes
90
days or more delinquent. Subsequent purchases are subject to varying provisions in the event of borrowers’ delinquencies.
|
As of
March 31, 2018
and December 31, 2017, the Bank had
$0.3 million
, respectively, of residential real estate held in other real estate owned. As of
March 31, 2018
and December 31, 2017, the Bank had initiated foreclosure proceedings on
$1.2 million
and
$1.6 million
, respectively, in loans secured by residential real estate.
Allowance for loan losses
The changes in the allowance for loan losses for the
three
months ended
March 31, 2018
and
2017
, and the loans and allowance for loan losses by loan class based on impairment-evaluation method as of March 31, 2018 and December 31, 2017 are presented in the tables below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2018
|
Multi-family
|
|
Commercial and Industrial
|
|
Commercial Real Estate Owner Occupied
|
|
Commercial
Real Estate Non-Owner Occupied
|
|
Construction
|
|
Residential
Real Estate
|
|
Manufactured
Housing
|
|
Other Consumer
|
|
Total
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance,
December 31, 2017
|
$
|
12,168
|
|
|
$
|
10,918
|
|
|
$
|
3,232
|
|
|
$
|
7,437
|
|
|
$
|
979
|
|
|
$
|
2,929
|
|
|
$
|
180
|
|
|
$
|
172
|
|
|
$
|
38,015
|
|
Charge-offs
|
—
|
|
|
(50
|
)
|
|
(18
|
)
|
|
—
|
|
|
—
|
|
|
(365
|
)
|
|
—
|
|
|
(256
|
)
|
|
(689
|
)
|
Recoveries
|
—
|
|
|
35
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
7
|
|
|
—
|
|
|
3
|
|
|
56
|
|
Provision for loan losses
|
377
|
|
|
834
|
|
|
311
|
|
|
(204
|
)
|
|
(69
|
)
|
|
608
|
|
|
(4
|
)
|
|
264
|
|
|
2,117
|
|
Ending Balance,
March 31, 2018
|
$
|
12,545
|
|
|
$
|
11,737
|
|
|
$
|
3,525
|
|
|
$
|
7,233
|
|
|
$
|
921
|
|
|
$
|
3,179
|
|
|
$
|
176
|
|
|
$
|
183
|
|
|
$
|
39,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
—
|
|
|
$
|
14,288
|
|
|
$
|
1,483
|
|
|
$
|
242
|
|
|
$
|
—
|
|
|
$
|
8,242
|
|
|
$
|
10,108
|
|
|
$
|
97
|
|
|
$
|
34,460
|
|
Collectively evaluated for impairment
|
3,643,539
|
|
|
1,187,632
|
|
|
490,231
|
|
|
1,190,591
|
|
|
81,101
|
|
|
212,289
|
|
|
75,103
|
|
|
3,223
|
|
|
6,883,709
|
|
Loans acquired with credit deterioration
|
1,835
|
|
|
721
|
|
|
10,436
|
|
|
5,071
|
|
|
—
|
|
|
5,308
|
|
|
2,476
|
|
|
250
|
|
|
26,097
|
|
|
$
|
3,645,374
|
|
|
$
|
1,202,641
|
|
|
$
|
502,150
|
|
|
$
|
1,195,904
|
|
|
$
|
81,101
|
|
|
$
|
225,839
|
|
|
$
|
87,687
|
|
|
$
|
3,570
|
|
|
$
|
6,944,266
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
—
|
|
|
$
|
986
|
|
|
$
|
764
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
365
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
2,119
|
|
Collectively evaluated for impairment
|
12,545
|
|
|
10,300
|
|
|
2,751
|
|
|
4,512
|
|
|
921
|
|
|
2,274
|
|
|
82
|
|
|
125
|
|
|
33,510
|
|
Loans acquired with credit deterioration
|
—
|
|
|
451
|
|
|
10
|
|
|
2,721
|
|
|
—
|
|
|
540
|
|
|
90
|
|
|
58
|
|
|
3,870
|
|
|
$
|
12,545
|
|
|
$
|
11,737
|
|
|
$
|
3,525
|
|
|
$
|
7,233
|
|
|
$
|
921
|
|
|
$
|
3,179
|
|
|
$
|
176
|
|
|
$
|
183
|
|
|
$
|
39,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2017
|
Multi-family
|
|
Commercial and Industrial
|
|
Commercial Real Estate Owner Occupied
|
|
Commercial
Real Estate Non-Owner Occupied
|
|
Construction
|
|
Residential
Real Estate
|
|
Manufactured
Housing
|
|
Other Consumer
|
|
Total
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance,
December 31, 2016
|
$
|
11,602
|
|
|
$
|
11,050
|
|
|
$
|
2,183
|
|
|
$
|
7,894
|
|
|
$
|
840
|
|
|
$
|
3,342
|
|
|
$
|
286
|
|
|
$
|
118
|
|
|
$
|
37,315
|
|
Charge-offs
|
—
|
|
|
(198
|
)
|
|
—
|
|
|
(404
|
)
|
|
—
|
|
|
(221
|
)
|
|
—
|
|
|
(20
|
)
|
|
(843
|
)
|
Recoveries
|
—
|
|
|
215
|
|
|
—
|
|
|
—
|
|
|
81
|
|
|
21
|
|
|
—
|
|
|
44
|
|
|
361
|
|
Provision for loan losses
|
681
|
|
|
1,942
|
|
|
211
|
|
|
357
|
|
|
(36
|
)
|
|
(62
|
)
|
|
(2
|
)
|
|
(41
|
)
|
|
3,050
|
|
Ending Balance,
March 31, 2017
|
$
|
12,283
|
|
|
$
|
13,009
|
|
|
$
|
2,394
|
|
|
$
|
7,847
|
|
|
$
|
885
|
|
|
$
|
3,080
|
|
|
$
|
284
|
|
|
$
|
101
|
|
|
$
|
39,883
|
|
As of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
—
|
|
|
$
|
17,461
|
|
|
$
|
1,448
|
|
|
$
|
160
|
|
|
$
|
—
|
|
|
$
|
9,247
|
|
|
$
|
10,089
|
|
|
$
|
30
|
|
|
$
|
38,435
|
|
Collectively evaluated for impairment
|
3,500,500
|
|
|
1,130,865
|
|
|
472,708
|
|
|
1,213,309
|
|
|
85,393
|
|
|
219,162
|
|
|
77,587
|
|
|
3,301
|
|
|
6,702,825
|
|
Loans acquired with credit deterioration
|
1,881
|
|
|
764
|
|
|
10,572
|
|
|
5,250
|
|
|
—
|
|
|
5,681
|
|
|
2,551
|
|
|
216
|
|
|
26,915
|
|
|
$
|
3,502,381
|
|
|
$
|
1,149,090
|
|
|
$
|
484,728
|
|
|
$
|
1,218,719
|
|
|
$
|
85,393
|
|
|
$
|
234,090
|
|
|
$
|
90,227
|
|
|
$
|
3,547
|
|
|
$
|
6,768,175
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment
|
$
|
—
|
|
|
$
|
650
|
|
|
$
|
642
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
155
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
1,451
|
|
Collectively evaluated for impairment
|
12,168
|
|
|
9,804
|
|
|
2,580
|
|
|
4,630
|
|
|
979
|
|
|
2,177
|
|
|
82
|
|
|
117
|
|
|
32,537
|
|
Loans acquired with credit deterioration
|
—
|
|
|
464
|
|
|
10
|
|
|
2,807
|
|
|
—
|
|
|
597
|
|
|
94
|
|
|
55
|
|
|
4,027
|
|
|
$
|
12,168
|
|
|
$
|
10,918
|
|
|
$
|
3,232
|
|
|
$
|
7,437
|
|
|
$
|
979
|
|
|
$
|
2,929
|
|
|
$
|
180
|
|
|
$
|
172
|
|
|
$
|
38,015
|
|
Certain manufactured housing loans were purchased in August 2010. A portion of the purchase price may be used to reimburse the Bank under the specified terms in the purchase agreement for defaults of the underlying borrower and other specified items. At
March 31, 2018
and December 31,
2017
, funds available for reimbursement, if necessary, were
$0.6 million
, respectively. Each quarter, these funds are evaluated to determine if they would be sufficient to absorb the probable incurred losses within the manufactured housing portfolio.
Impaired Loans - Individually Evaluated for Impairment
The following tables present the recorded investment (net of charge-offs), unpaid principal balance, and related allowance by loan type for impaired loans that were individually evaluated for impairment as of
March 31, 2018
and
December 31, 2017
and the average recorded investment and interest income recognized for the
three
months ended
March 31, 2018
and
2017
. Purchased-credit-impaired loans are considered to be performing and are not included in the tables below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
Three Months Ended
March 31, 2018
|
|
Recorded
Investment
Net of
Charge offs
|
|
Unpaid
Principal
Balance
|
|
Related
Allowance
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
With no recorded allowance:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
5,830
|
|
|
$
|
6,029
|
|
|
$
|
—
|
|
|
$
|
7,484
|
|
|
$
|
—
|
|
Commercial real estate owner occupied
|
614
|
|
|
614
|
|
|
—
|
|
|
710
|
|
|
—
|
|
Commercial real estate non-owner occupied
|
242
|
|
|
353
|
|
|
—
|
|
|
201
|
|
|
—
|
|
Other consumer
|
97
|
|
|
97
|
|
|
—
|
|
|
63
|
|
|
—
|
|
Residential real estate
|
3,617
|
|
|
3,788
|
|
|
—
|
|
|
3,623
|
|
|
—
|
|
Manufactured housing
|
9,886
|
|
|
9,886
|
|
|
—
|
|
|
9,876
|
|
|
131
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
8,458
|
|
|
8,642
|
|
|
986
|
|
|
8,390
|
|
|
1
|
|
Commercial real estate owner occupied
|
869
|
|
|
869
|
|
|
764
|
|
|
756
|
|
|
1
|
|
Residential real estate
|
4,625
|
|
|
4,662
|
|
|
365
|
|
|
5,122
|
|
|
25
|
|
Manufactured housing
|
222
|
|
|
222
|
|
|
4
|
|
|
223
|
|
|
—
|
|
Total
|
$
|
34,460
|
|
|
$
|
35,162
|
|
|
$
|
2,119
|
|
|
$
|
36,448
|
|
|
$
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Three Months Ended
March 31, 2017
|
|
Recorded
Investment
Net of
Charge offs
|
|
Unpaid
Principal
Balance
|
|
Related
Allowance
|
|
Average
Recorded
Investment
|
|
Interest
Income
Recognized
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
With no recorded allowance:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
9,138
|
|
|
$
|
9,287
|
|
|
$
|
—
|
|
|
$
|
4,248
|
|
|
$
|
50
|
|
Commercial real estate owner occupied
|
806
|
|
|
806
|
|
|
—
|
|
|
1,435
|
|
|
15
|
|
Commercial real estate non-owner occupied
|
160
|
|
|
272
|
|
|
—
|
|
|
1,794
|
|
|
2
|
|
Other consumer
|
30
|
|
|
30
|
|
|
—
|
|
|
57
|
|
|
—
|
|
Residential real estate
|
3,628
|
|
|
3,801
|
|
|
—
|
|
|
4,502
|
|
|
1
|
|
Manufactured housing
|
9,865
|
|
|
9,865
|
|
|
—
|
|
|
9,833
|
|
|
141
|
|
With an allowance recorded:
|
|
|
|
|
|
|
|
|
|
Commercial and industrial
|
8,323
|
|
|
8,506
|
|
|
650
|
|
|
8,837
|
|
|
81
|
|
Commercial real estate - owner occupied
|
642
|
|
|
642
|
|
|
642
|
|
|
844
|
|
|
1
|
|
Commercial real estate non-owner occupied
|
—
|
|
|
—
|
|
|
—
|
|
|
138
|
|
|
—
|
|
Residential real estate
|
5,619
|
|
|
5,656
|
|
|
155
|
|
|
2,597
|
|
|
39
|
|
Manufactured housing
|
224
|
|
|
224
|
|
|
4
|
|
|
102
|
|
|
3
|
|
Total
|
$
|
38,435
|
|
|
$
|
39,089
|
|
|
$
|
1,451
|
|
|
$
|
34,387
|
|
|
$
|
333
|
|
Troubled Debt Restructurings
At
March 31, 2018
and December 31,
2017
, there were
$19.0 million
and
$20.4 million
, respectively, in loans reported as troubled debt restructurings (“TDRs”). TDRs are reported as impaired loans in the calendar year of their restructuring and are evaluated to determine whether they should be placed on non-accrual status. In subsequent years, a TDR may be returned to accrual status if it satisfies a minimum performance requirement of
six months
, however, it will remain classified as impaired. Generally, the Bank requires sustained performance for
nine months
before returning a TDR to accrual status. Modification of purchased-credit-impaired loans that are accounted for within loan pools in accordance with the accounting standards for purchased-credit-impaired loans do not result in the removal of these loans from the pool even if the modifications would otherwise be considered a TDR. Accordingly, as each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, modifications of loans within such pools are not considered TDRs.
The following table presents total TDRs based on loan type and accrual status at March 31, 2018 and December 31, 2017. Nonaccrual TDRs are included in the reported amount of total non-accrual loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
|
Accruing
TDRs
|
Nonaccrual TDRs
|
Total
|
|
Accruing TDRs
|
Nonaccrual TDRs
|
Total
|
(amounts in thousands)
|
|
|
|
|
|
|
|
Commercial and industrial
|
$
|
68
|
|
$
|
5,519
|
|
$
|
5,587
|
|
|
$
|
63
|
|
$
|
5,939
|
|
$
|
6,002
|
|
Commercial real estate owner occupied
|
45
|
|
—
|
|
45
|
|
|
—
|
|
—
|
|
—
|
|
Manufactured housing
|
8,130
|
|
1,787
|
|
9,917
|
|
|
8,130
|
|
1,766
|
|
9,896
|
|
Residential real estate
|
3,026
|
|
463
|
|
3,489
|
|
|
3,828
|
|
703
|
|
4,531
|
|
Total TDRs
|
$
|
11,269
|
|
$
|
7,769
|
|
$
|
19,038
|
|
|
$
|
12,021
|
|
$
|
8,408
|
|
$
|
20,429
|
|
The following table presents loans modified in a troubled debt restructuring by type of concession for the
three
months ended
March 31, 2018
and
2017
. There were no modifications that involved forgiveness of debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2018
|
|
Three Months Ended
March 31, 2017
|
|
Number
of Loans
|
|
Recorded
Investment
|
|
Number
of Loans
|
|
Recorded
Investment
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Extensions of maturity
|
—
|
|
|
$
|
—
|
|
|
1
|
|
|
$
|
348
|
|
Interest-rate reductions
|
9
|
|
|
322
|
|
|
20
|
|
|
855
|
|
Total
|
9
|
|
|
$
|
322
|
|
|
21
|
|
|
$
|
1,203
|
|
The following table provides, by loan type, the number of loans modified in troubled debt restructurings, and the related recorded investment, during the
three
months ended
March 31, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2018
|
|
Three Months Ended
March 31, 2017
|
|
Number
of Loans
|
|
Recorded
Investment
|
|
Number
of Loans
|
|
Recorded
Investment
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Commercial and industrial
|
—
|
|
|
$
|
—
|
|
|
1
|
|
|
$
|
348
|
|
Manufactured housing
|
9
|
|
|
322
|
|
|
20
|
|
|
855
|
|
Total loans
|
9
|
|
|
$
|
322
|
|
|
21
|
|
|
$
|
1,203
|
|
As of
March 31, 2018
, there were
no
additional commitments to lend additional funds to debtors whose loans have been modified in TDRs. As of December 31, 2017, except for
one
commercial and industrial loan with an outstanding commitment of
$2.1 million
, there were
no
other commitments to lend additional funds to debtors whose loans have been modified in TDRs.
As of
March 31, 2018
,
one
manufactured housing loan totaling
$29 thousand
that was modified in a TDR within the past twelve months, defaulted on payments. As of
March 31, 2017
,
five
manufactured housing loans totaling
$0.2 million
, that were modified in TDRs within the past twelve months, defaulted on payments.
Loans modified in troubled debt restructurings are evaluated for impairment. The nature and extent of impairment of TDRs, including those which have experienced a subsequent default, is considered in the determination of an appropriate level of allowance for loan losses. There was
no
allowance recorded as a result of TDR modifications during the three months ended
March 31, 2018
. For the three months ended March 31, 2017, there was
one
allowance recorded resulting from TDR modifications, totaling
$1 thousand
for
one
manufactured housing loan.
Purchased Credit Impaired Loans
The changes in accretable yield related to purchased-credit-impaired loans for the
three
months ended
March 31, 2018
and
2017
were as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
(amounts in thousands)
|
|
|
|
Accretable yield balance as of December 31,
|
$
|
7,825
|
|
|
$
|
10,202
|
|
Accretion to interest income
|
(338
|
)
|
|
(493
|
)
|
Reclassification from nonaccretable difference and disposals, net
|
176
|
|
|
(333
|
)
|
Accretable yield balance as of March 31,
|
$
|
7,663
|
|
|
$
|
9,376
|
|
Credit Quality Indicators
Multi-family, commercial and industrial, owner occupied commercial real estate, non-owner occupied commercial real estate, and construction loans are rated based on an internally assigned risk rating system which is assigned at the time of loan origination and reviewed on a periodic, or on an “as needed” basis. Residential real estate loans, manufactured housing and other consumer loans are evaluated based on the payment activity of the loan.
To facilitate the monitoring of credit quality within the multi-family, commercial and industrial, owner occupied commercial real estate, non-owner occupied commercial real estate, construction and residential real estate classes, and for purposes of analyzing historical loss rates used in the determination of the allowance for loan losses for the respective loan portfolio class, the Bank utilizes the following categories of risk ratings: pass/satisfactory (includes risk rating 1 through 6), special mention, substandard, doubtful, and loss. The risk rating categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter. Pass/satisfactory ratings, which are assigned to those borrowers who do not have identified potential or well-defined weaknesses and for whom there is a high likelihood of orderly repayment, are updated periodically based on the size and credit characteristics of the borrower. All other categories are updated on a quarterly basis during the month preceding the end of the calendar quarter. While assigning risk ratings involves judgment, the risk-rating process allows management to identify riskier credits in a timely manner and allocate the appropriate resources to manage those loans.
The risk rating grades are defined as follows:
“1” –
Pass
/
Excellent
Loans rated 1 represent a credit extension of the highest quality. The borrower’s historic (at least five years) cash flows manifest extremely large and stable margins of coverage. Balance sheets are conservative, well capitalized, and liquid. After considering debt service for proposed and existing debt, projected cash flows continue to be strong and provide ample coverage. The borrower typically reflects broad geographic and product diversification and has access to alternative financial markets.
“2” –
Pass
/
Superior
Loans rated 2 are those for which the borrower has a strong financial condition, balance sheet, operations, cash flow, debt capacity and coverage with ratios better than industry norms. The borrowers of these loans exhibit a limited leverage position, are virtually immune to local economies, and are in stable growing industries. The management team is well respected and the company has ready access to public markets.
“3” –
Pass
/
Strong
Loans rated 3 are those loans for which the borrowers have above average financial condition and flexibility; more than satisfactory debt service coverage; balance sheet and operating ratios are consistent with or better than industry peers; operate in industries with little risk; move in diversified markets; and are experienced and competent in their industry. These borrowers’ access to capital markets is limited mostly to private sources, often secured, but the borrower typically has access to a wide range of refinancing alternatives.
“4” –
Pass
/
Good
Loans rated 4 have a sound primary and secondary source of repayment. The borrower may have access to alternative sources of financing, but sources are not as widely available as they are to a higher grade borrower. These loans carry a normal level of risk, with very low loss exposure. The borrower has the ability to perform according to the terms of the credit facility. The margins of cash flow coverage are satisfactory but vulnerable to more rapid deterioration than the higher quality loans.
“5” –
Satisfactory
Loans rated 5 are extended to borrowers who are determined to be a reasonable credit risk and demonstrate the ability to repay the debt from normal business operations. Risk factors may include reliability of margins and cash flows, liquidity, dependence on a single product or industry, cyclical trends, depth of management, or limited access to alternative financing sources. The borrower’s historical financial information may indicate erratic performance, but current trends are positive and the quality of financial information is adequate, but is not as detailed and sophisticated as information found on higher grade loans. If adverse circumstances arise, the impact on the borrower may be significant.
“6” –
Satisfactory
/
Bankable with Care
Loans rated 6 are those for which the borrower has higher than normal credit risk; however, cash flow and asset values are generally intact. These borrowers may exhibit declining financial characteristics, with increasing leverage and decreasing liquidity and may have limited resources and access to financial alternatives. Signs of weakness in these borrowers may include delinquent taxes, trade slowness and eroding profit margins.
“7” –
Special Mention
Loans rated 7 are credit facilities that may have potential developing weaknesses and deserve extra attention from the account manager and other management personnel. In the event potential weaknesses are not corrected or mitigated, deterioration in the ability of the borrower to repay the debt in the future may occur. This grade is not assigned to loans that bear certain peculiar risks normally associated with the type of financing involved, unless circumstances have caused the risk to increase to a level higher than would have been acceptable when the credit was originally approved. Loans where significant actual, not potential, weaknesses or problems are clearly evident are graded in the category below.
“8” –
Substandard
Loans are rated 8 when the loans are inadequately protected by the current sound worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the company will sustain some loss if the weaknesses are not corrected.
“9” –
Doubtful
The Bank assigns a doubtful rating to loans that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans.
“10” –
Loss
The Bank assigns a loss rating to loans considered uncollectible and of such little value that their continuance as an active asset is not warranted. Amounts classified as loss are immediately charged off.
Risk ratings are not established for certain consumer loans, including residential real estate, home equity, manufactured housing, and installment loans, mainly because these portfolios consist of a larger number of homogeneous loans with smaller balances. Instead, these portfolios are evaluated for risk mainly based upon aggregate payment history through the monitoring of delinquency levels and trends and are classified as performing and non-performing.
The following tables present the credit ratings of loans receivable as of
March 31, 2018
and
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
Multi-family
|
|
Commercial
and
Industrial
|
|
Commercial
Real Estate Owner Occupied
|
|
Commercial Real Estate Non-Owner Occupied
|
|
Construction
|
|
Residential
Real Estate
|
|
Manufactured Housing
|
|
Other Consumer
|
|
Total
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass/Satisfactory
|
$
|
3,608,179
|
|
|
$
|
1,161,401
|
|
|
$
|
485,423
|
|
|
$
|
1,178,454
|
|
|
$
|
81,101
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,514,558
|
|
Special Mention
|
29,634
|
|
|
12,751
|
|
|
8,208
|
|
|
16,356
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
66,949
|
|
Substandard
|
7,561
|
|
|
28,489
|
|
|
8,519
|
|
|
1,094
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
45,663
|
|
Performing (1)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
216,133
|
|
|
79,518
|
|
|
3,398
|
|
|
299,049
|
|
Non-performing (2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9,706
|
|
|
8,169
|
|
|
172
|
|
|
18,047
|
|
Total
|
$
|
3,645,374
|
|
|
$
|
1,202,641
|
|
|
$
|
502,150
|
|
|
$
|
1,195,904
|
|
|
$
|
81,101
|
|
|
$
|
225,839
|
|
|
$
|
87,687
|
|
|
$
|
3,570
|
|
|
$
|
6,944,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Multi-family
|
|
Commercial
and
Industrial
|
|
Commercial
Real Estate Owner Occupied
|
|
Commercial Real Estate Non-Owner Occupied
|
|
Construction
|
|
Residential
Real Estate
|
|
Manufactured
Housing
|
|
Other Consumer
|
|
Total
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pass/Satisfactory
|
$
|
3,438,554
|
|
|
$
|
1,118,889
|
|
|
$
|
471,826
|
|
|
$
|
1,185,933
|
|
|
$
|
85,393
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,300,595
|
|
Special Mention
|
53,873
|
|
|
7,652
|
|
|
5,987
|
|
|
31,767
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
99,279
|
|
Substandard
|
9,954
|
|
|
22,549
|
|
|
6,915
|
|
|
1,019
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
40,437
|
|
Performing (1)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
221,042
|
|
|
81,497
|
|
|
3,400
|
|
|
305,939
|
|
Non-performing (2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13,048
|
|
|
8,730
|
|
|
147
|
|
|
21,925
|
|
Total
|
$
|
3,502,381
|
|
|
$
|
1,149,090
|
|
|
$
|
484,728
|
|
|
$
|
1,218,719
|
|
|
$
|
85,393
|
|
|
$
|
234,090
|
|
|
$
|
90,227
|
|
|
$
|
3,547
|
|
|
$
|
6,768,175
|
|
(1) Includes consumer and other installment loans not subject to risk ratings.
(2) Includes loans that are past due and still accruing interest and loans on nonaccrual status.
Loan Purchases and Sales
Customers did not purchase any loans during first quarter 2018. During first quarter 2018, Customers sold
$15.0 million
of Small Business Administration (SBA) loans resulting in a gain on sale of
$1.4 million
. In first quarter 2017, Customers purchased
$174.2 million
of thirty-year fixed-rate residential mortgage loans from Florida-based Everbank. The purchase price was
98.5%
of loans outstanding. In first quarter 2017, Customers sold
$94.9 million
of multi-family loans for
$95.4 million
resulting in a gain on sale of
$0.5 million
and
$8.7 million
of SBA loans resulting in a gain on sale of
$0.8 million
.
None of these purchases and sales during the three months ended
March 31, 2018
and
2017
materially affected the credit profile of Customers’ related loan portfolio.
Loans Pledged as Collateral
Customers has pledged eligible real estate loans as collateral for potential borrowings from the Federal Home Loan Bank of Pittsburgh ("FHLB") in the amount of
$5.5 billion
at
March 31, 2018
and
December 31, 2017
, respectively.
NOTE 9 — REGULATORY CAPITAL
The Bank and the Bancorp are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can result in certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on Customers' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank and the Bancorp must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items, as calculated under the regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Bancorp to maintain minimum amounts and ratios (set forth in the following table) of common equity Tier 1, Tier 1, and total capital to risk-weighted assets, and Tier 1 capital to average assets (as defined in the regulations). At
March 31, 2018
and
December 31, 2017
, the Bank and the Bancorp satisfied all capital requirements to which they were subject.
Generally, to comply with the regulatory definition of adequately capitalized, or well capitalized, respectively, an institution must at least maintain the common equity Tier 1, Tier 1 and total risk-based capital ratios and the Tier 1 leverage ratio in excess of the related minimum ratios as set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Capital Levels to be Classified as:
|
|
Actual
|
|
Adequacy Capitalized
|
|
Well Capitalized
|
|
Basel III Compliant
|
(amounts in thousands)
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
As of March 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
710,156
|
|
|
8.508
|
%
|
|
$
|
375,609
|
|
|
4.500
|
%
|
|
N/A
|
|
|
N/A
|
|
|
$
|
532,113
|
|
|
6.375
|
%
|
Customers Bank
|
$
|
1,037,480
|
|
|
12.448
|
%
|
|
$
|
375,048
|
|
|
4.500
|
%
|
|
$
|
541,736
|
|
|
6.500
|
%
|
|
$
|
531,318
|
|
|
6.375
|
%
|
Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
927,627
|
|
|
11.113
|
%
|
|
$
|
500,812
|
|
|
6.000
|
%
|
|
N/A
|
|
|
N/A
|
|
|
$
|
657,316
|
|
|
7.875
|
%
|
Customers Bank
|
$
|
1,037,480
|
|
|
12.448
|
%
|
|
$
|
500,064
|
|
|
6.000
|
%
|
|
$
|
666,751
|
|
|
8.000
|
%
|
|
$
|
656,333
|
|
|
7.875
|
%
|
Total capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
1,047,698
|
|
|
12.552
|
%
|
|
$
|
667,749
|
|
|
8.000
|
%
|
|
N/A
|
|
|
N/A
|
|
|
$
|
824,253
|
|
|
9.875
|
%
|
Customers Bank
|
$
|
1,186,105
|
|
|
14.231
|
%
|
|
$
|
666,751
|
|
|
8.000
|
%
|
|
$
|
833,439
|
|
|
10.000
|
%
|
|
$
|
823,021
|
|
|
9.875
|
%
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
927,627
|
|
|
9.031
|
%
|
|
$
|
410,858
|
|
|
4.000
|
%
|
|
N/A
|
|
|
N/A
|
|
|
$
|
410,858
|
|
|
4.000
|
%
|
Customers Bank
|
$
|
1,037,480
|
|
|
10.107
|
%
|
|
$
|
410,612
|
|
|
4.000
|
%
|
|
$
|
513,265
|
|
|
5.000
|
%
|
|
$
|
410,612
|
|
|
4.000
|
%
|
As of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
689,494
|
|
|
8.805
|
%
|
|
$
|
352,368
|
|
|
4.500
|
%
|
|
N/A
|
|
|
N/A
|
|
|
$
|
450,248
|
|
|
5.750
|
%
|
Customers Bank
|
$
|
1,023,564
|
|
|
13.081
|
%
|
|
$
|
352,122
|
|
|
4.500
|
%
|
|
$
|
508,621
|
|
|
6.500
|
%
|
|
$
|
449,934
|
|
|
5.750
|
%
|
Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
906,963
|
|
|
11.583
|
%
|
|
$
|
469,824
|
|
|
6.000
|
%
|
|
N/A
|
|
|
N/A
|
|
|
$
|
567,704
|
|
|
7.250
|
%
|
Customers Bank
|
$
|
1,023,564
|
|
|
13.081
|
%
|
|
$
|
469,496
|
|
|
6.000
|
%
|
|
$
|
625,994
|
|
|
8.000
|
%
|
|
$
|
567,307
|
|
|
7.250
|
%
|
Total capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
1,021,601
|
|
|
13.047
|
%
|
|
$
|
626,432
|
|
|
8.000
|
%
|
|
N/A
|
|
|
N/A
|
|
|
$
|
724,313
|
|
|
9.250
|
%
|
Customers Bank
|
$
|
1,170,666
|
|
|
14.961
|
%
|
|
$
|
625,994
|
|
|
8.000
|
%
|
|
$
|
782,493
|
|
|
10.000
|
%
|
|
$
|
723,806
|
|
|
9.250
|
%
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
906,963
|
|
|
8.937
|
%
|
|
$
|
405,949
|
|
|
4.000
|
%
|
|
N/A
|
|
|
N/A
|
|
|
$
|
405,949
|
|
|
4.000
|
%
|
Customers Bank
|
$
|
1,023,564
|
|
|
10.092
|
%
|
|
$
|
405,701
|
|
|
4.000
|
%
|
|
$
|
507,126
|
|
|
5.000
|
%
|
|
$
|
405,701
|
|
|
4.000
|
%
|
The risk-based capital rules adopted effective January 1, 2015 require that banks and holding companies maintain a "capital conservation buffer" of 250 basis points in excess of the "minimum capital ratio" or certain elective distributions would be limited. The minimum capital ratio is equal to the prompt corrective action adequately capitalized threshold ratio. The capital conservation buffer is being phased in over four years beginning on January 1, 2016, with a maximum buffer of
0.625%
of risk weighted assets for 2016,
1.25%
for 2017,
1.875%
for 2018, and
2.5%
for 2019 and thereafter.
Effective January 1, 2018, the capital level required to avoid limitation on elective distributions applicable to the Bancorp and the Bank were as follows:
(i) a common equity Tier 1 risk-based capital ratio of
6.375%
;
(ii) a Tier 1 risk-based capital ratio of
7.875%
; and
(iii) a Total risk-based capital ratio of
9.875%
.
Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers.
NOTE 10 — DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Customers uses fair value measurements to record fair value adjustments to certain assets and liabilities and to disclose the fair value of its financial instruments. ASC Topic 825,
Financial Instruments
, requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments. For Customers, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments. Many of these financial instruments lack an available trading market as characterized by a willing buyer and a willing seller engaging in an exchange transaction. For fair value disclosure purposes, Customers utilized certain fair value measurement criteria under ASC Topic 820,
Fair Value Measurements and Disclosures
, as explained below.
In accordance with ASC 820, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for Customers' various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The fair value guidance provides a consistent definition of fair value, focusing on an exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
The fair value guidance also establishes a fair value hierarchy and describes the following three levels used to classify fair value measurements.
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require adjustments to inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The following methods and assumptions were used to estimate the fair values of Customers' financial instruments as of
March 31, 2018
and
December 31, 2017
:
Financial Instruments Recorded at Fair Value on a Recurring Basis
Investment securities:
The fair values of equity securities and available for sale debt securities are determined by obtaining quoted market prices on nationally recognized and foreign securities exchanges (Level 1), matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices, or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3). These assets are classified as Level 1, 2 or 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
The carrying amount of investments in FHLB, Federal Reserve Bank, and other restricted stock approximates fair value, and considers the limited marketability of such securities. These assets are classified as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Loans held for sale - Consumer residential mortgage loans:
The Bank generally estimates the fair values of residential mortgage loans held for sale based on commitments on hand from investors within the secondary market for loans with similar characteristics. These assets are classified as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Loans held for sale - Commercial mortgage warehouse loans:
The fair value of mortgage warehouse loans is the amount of cash initially advanced to fund the mortgage, plus accrued interest and fees, as specified in the respective agreements. The loan is used by mortgage companies as short-term bridge financing between the funding of mortgage loans and the finalization of the sale of the loans to an investor. Changes in fair value are not expected to be recognized because at inception of the transaction the underlying loans have already been sold to an approved investor. Additionally, the interest rate is variable, and the transaction is short-term, with an average life of
21
days from purchase to sale. These assets are classified as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Derivatives (Assets and Liabilities):
The fair values of interest rate swaps and credit derivatives are determined using models that incorporate readily observable market data into a market standard methodology. This methodology nets the discounted future cash receipts and the discounted expected cash payments. The discounted variable cash receipts and payments are based on expectations of future interest rates derived from observable market interest rate curves. In addition, fair value is adjusted for the effect of nonperformance risk by incorporating credit valuation adjustments for the Bank and its counterparties. These assets and liabilities are classified as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
The fair values of the residential mortgage loan commitments are derived from the estimated fair values that can be generated when the underlying mortgage loan is sold in the secondary market. The Bank generally uses commitments on hand from third- party investors to estimate an exit price and adjusts for the probability of the commitment being exercised based on the Bank’s internal experience (i.e., pull-through rate). These assets and liabilities are classified as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Derivative assets and liabilities are presented in "Other assets" and "Accrued interest payable and other liabilities" on the consolidated balance sheet.
Financial Instruments Recorded at Fair Value on a Nonrecurring Basis
Impaired loans:
Impaired loans are those loans that are accounted for under ASC 310,
Receivables
, in which the Bank has measured impairment generally based on the fair value of the loan’s collateral or discounted cash flow analysis. Fair value is generally determined based upon independent third-party appraisals of the properties that collateralize the loans or discounted cash flows based upon the expected proceeds. These assets are generally classified as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Other real estate owned:
The fair value of other real estate owned ("OREO") is determined by using appraisals, which may be discounted based on management’s review and changes in market conditions or sales agreements with third parties. All appraisals must be performed in accordance with the Uniform Standards of Professional Appraisal Practice. Appraisals are certified to the Bank and performed by appraisers on the Bank’s approved list of appraisers. Evaluations are completed by a person independent of management. The content of the appraisal depends on the complexity of the property. Appraisals are completed on a “retail value” and an “as is value”. These assets are classified as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
The following information should not be interpreted as an estimate of Customers' fair value in its entirety because fair value calculations are only provided for a limited portion of Customers' assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making these estimates, comparisons between Customer’s disclosures and those of other companies may not be meaningful.
The estimated fair values of Customers' financial instruments at
March 31, 2018
and
December 31, 2017
were as follows.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2018
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
215,411
|
|
|
$
|
215,411
|
|
|
$
|
215,411
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Debt securities, available for sale
|
1,178,299
|
|
|
1,178,299
|
|
|
—
|
|
|
1,178,299
|
|
|
—
|
|
Equity securities
|
3,362
|
|
|
3,362
|
|
|
3,362
|
|
|
—
|
|
|
—
|
|
Loans held for sale
|
1,875,515
|
|
|
1,875,515
|
|
|
—
|
|
|
1,875,515
|
|
|
—
|
|
Loans receivable, net of allowance for loan losses
|
6,904,067
|
|
|
6,829,770
|
|
|
—
|
|
|
—
|
|
|
6,829,770
|
|
FHLB, Federal Reserve Bank and other restricted stock
|
130,302
|
|
|
130,302
|
|
|
—
|
|
|
130,302
|
|
|
—
|
|
Derivatives
|
13,606
|
|
|
13,606
|
|
|
—
|
|
|
13,523
|
|
|
83
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
7,042,459
|
|
|
$
|
7,034,680
|
|
|
$
|
5,153,428
|
|
|
$
|
1,881,252
|
|
|
$
|
—
|
|
Federal funds purchased
|
195,000
|
|
|
195,000
|
|
|
195,000
|
|
|
—
|
|
|
—
|
|
FHLB advances
|
2,252,615
|
|
|
2,252,445
|
|
|
1,687,615
|
|
|
564,830
|
|
|
—
|
|
Other borrowings
|
186,735
|
|
|
187,092
|
|
|
64,262
|
|
|
122,830
|
|
|
—
|
|
Subordinated debt
|
108,904
|
|
|
114,950
|
|
|
—
|
|
|
114,950
|
|
|
—
|
|
Derivatives
|
12,673
|
|
|
12,673
|
|
|
—
|
|
|
12,673
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2017
|
|
Carrying
Amount
|
|
Estimated
Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
146,323
|
|
|
$
|
146,323
|
|
|
$
|
146,323
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investment securities, available for sale
|
471,371
|
|
|
471,371
|
|
|
3,352
|
|
|
468,019
|
|
|
—
|
|
Loans held for sale
|
1,939,485
|
|
|
1,939,659
|
|
|
—
|
|
|
1,795,294
|
|
|
144,365
|
|
Loans receivable, net of allowance for loan losses
|
6,730,243
|
|
|
6,676,763
|
|
|
—
|
|
|
—
|
|
|
6,676,763
|
|
FHLB, Federal Reserve Bank and other restricted stock
|
105,918
|
|
|
105,918
|
|
|
—
|
|
|
105,918
|
|
|
—
|
|
Derivatives
|
9,752
|
|
|
9,752
|
|
|
—
|
|
|
9,692
|
|
|
60
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Deposits
|
$
|
6,800,142
|
|
|
$
|
6,796,095
|
|
|
$
|
4,894,449
|
|
|
$
|
1,901,646
|
|
|
$
|
—
|
|
Federal funds purchased
|
155,000
|
|
|
155,000
|
|
|
155,000
|
|
|
—
|
|
|
—
|
|
FHLB advances
|
1,611,860
|
|
|
1,611,603
|
|
|
881,860
|
|
|
729,743
|
|
|
—
|
|
Other borrowings
|
186,497
|
|
|
193,557
|
|
|
65,072
|
|
|
128,485
|
|
|
—
|
|
Subordinated debt
|
108,880
|
|
|
115,775
|
|
|
—
|
|
|
115,775
|
|
|
—
|
|
Derivatives
|
10,074
|
|
|
10,074
|
|
|
—
|
|
|
10,074
|
|
|
—
|
|
For financial assets and liabilities measured at fair value on a recurring and nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at
March 31, 2018
and
December 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
Fair Value Measurements at the End of the Reporting Period Using
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
Total
|
(amounts in thousands)
|
|
|
|
|
|
|
|
Measured at Fair Value on a Recurring Basis:
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Available-for-sale debt securities:
|
|
|
|
|
|
|
|
Agency-guaranteed residential mortgage-backed securities
|
$
|
—
|
|
|
$
|
493,257
|
|
|
$
|
—
|
|
|
$
|
493,257
|
|
Agency guaranteed commercial mortgage-backed securities
|
—
|
|
|
324,534
|
|
|
—
|
|
|
324,534
|
|
Corporate notes
|
—
|
|
|
360,508
|
|
|
—
|
|
|
360,508
|
|
Equity securities
|
3,362
|
|
|
—
|
|
|
—
|
|
|
3,362
|
|
Derivatives
|
—
|
|
|
13,523
|
|
|
83
|
|
|
13,606
|
|
Loans held for sale – fair value option
|
—
|
|
|
1,875,515
|
|
|
—
|
|
|
1,875,515
|
|
Total assets - recurring fair value measurements
|
$
|
3,362
|
|
|
$
|
3,067,337
|
|
|
$
|
83
|
|
|
$
|
3,070,782
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivatives
|
$
|
—
|
|
|
$
|
12,673
|
|
|
$
|
—
|
|
|
$
|
12,673
|
|
Measured at Fair Value on a Nonrecurring Basis:
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Impaired loans, net of reserves of $2,119
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,588
|
|
|
$
|
12,588
|
|
Other real estate owned
|
—
|
|
|
—
|
|
|
1,408
|
|
|
1,408
|
|
Total assets - nonrecurring fair value measurements
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,996
|
|
|
$
|
13,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Fair Value Measurements at the End of the Reporting Period Using
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
Total
|
(amounts in thousands)
|
|
|
|
|
|
|
|
Measured at Fair Value on a Recurring Basis:
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
Agency-guaranteed residential mortgage-backed securities
|
$
|
—
|
|
|
$
|
183,458
|
|
|
$
|
—
|
|
|
$
|
183,458
|
|
Agency-guaranteed commercial mortgage-backed securities
|
—
|
|
|
238,472
|
|
|
—
|
|
|
238,472
|
|
Corporate notes
|
—
|
|
|
46,089
|
|
|
—
|
|
|
46,089
|
|
Equity securities
|
3,352
|
|
|
—
|
|
|
—
|
|
|
3,352
|
|
Derivatives
|
—
|
|
|
9,692
|
|
|
60
|
|
|
9,752
|
|
Loans held for sale – fair value option
|
—
|
|
|
1,795,294
|
|
|
—
|
|
|
1,795,294
|
|
Total assets - recurring fair value measurements
|
$
|
3,352
|
|
|
$
|
2,273,005
|
|
|
$
|
60
|
|
|
$
|
2,276,417
|
|
Liabilities
|
|
|
|
|
|
|
|
Derivatives
|
$
|
—
|
|
|
$
|
10,074
|
|
|
$
|
—
|
|
|
$
|
10,074
|
|
Measured at Fair Value on a Nonrecurring Basis:
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Impaired loans, net of reserves of $1,451
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,902
|
|
|
$
|
13,902
|
|
Other real estate owned
|
—
|
|
|
—
|
|
|
1,449
|
|
|
1,449
|
|
Total assets - nonrecurring fair value measurements
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,351
|
|
|
$
|
15,351
|
|
The changes in Level 3 assets measured at fair value on a recurring basis for the
three
months ended
March 31, 2018
and
2017
are summarized as follows. Additional information about residential mortgage loan commitments can be found in NOTE 11 - DERIVATIVES INSTRUMENTS AND HEDGING ACTIVITIES.
|
|
|
|
|
|
|
|
|
|
Residential Mortgage Loan Commitments
|
|
Three Months Ended March 31,
|
|
2018
|
|
2017
|
(amounts in thousands)
|
|
|
|
Balance at December 31
|
$
|
60
|
|
|
$
|
45
|
|
Issuances
|
83
|
|
|
95
|
|
Settlements
|
(60
|
)
|
|
(45
|
)
|
Balance at March 31
|
$
|
83
|
|
|
$
|
95
|
|
Customers' policy is to recognize transfers between fair value levels when events or circumstances warrant transfers. There were
no
transfers between levels during the
three
months ended
March 31, 2018
and
2017
.
The following table summarizes financial assets and financial liabilities measured at fair value as of
March 31, 2018
and
December 31, 2017
on a recurring and nonrecurring basis for which Customers utilized Level 3 inputs to measure fair value.
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
March 31, 2018
|
Fair Value
Estimate
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range (Weighted
Average) (3)
|
(amounts in thousands)
|
|
|
|
|
|
|
|
Impaired loans
|
$
|
12,588
|
|
|
Collateral appraisal (1)
|
|
Liquidation expenses (2)
|
|
(8)%
|
Other real estate owned
|
1,408
|
|
|
Collateral appraisal (1)
|
|
Liquidation expenses (2)
|
|
(11)%
|
Residential mortgage loan commitments
|
83
|
|
|
Adjusted market bid
|
|
Pull-through rate
|
|
90%
|
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
December 31, 2017
|
Fair Value
Estimate
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Range (Weighted
Average) (3)
|
(amounts in thousands)
|
|
|
|
|
|
|
|
Impaired loans
|
$
|
13,902
|
|
|
Collateral appraisal (1)
|
|
Liquidation expenses (2)
|
|
(8)%
|
Other real estate owned
|
1,449
|
|
|
Collateral appraisal (1)
|
|
Liquidation expenses (2)
|
|
(8)%
|
Residential mortgage loan commitments
|
60
|
|
|
Adjusted market bid
|
|
Pull-through rate
|
|
90%
|
|
|
(1)
|
Obtained from approved independent appraisers. Appraisals are current and in compliance with credit policy. The Bank does not generally discount appraisals.
|
|
|
(2)
|
Fair value is adjusted for estimated costs to sell based on a percentage of the value as determined by the appraisal.
|
|
|
(3)
|
Presented as a percentage of the value determined by appraisal for impaired loans and other real estate owned.
|
NOTE 11 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Risk Management Objectives of Using Derivatives
Customers is exposed to certain risks arising from both its business operations and economic conditions. Customers manages economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and durations of its assets and liabilities. Specifically, Customers enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Customers' derivative financial instruments are used to manage differences in the amount, timing, and duration of Customers' known or expected cash receipts and its known or expected cash payments principally related to certain borrowings. Customers also has interest-rate derivatives resulting from a service provided to certain qualifying customers, and therefore, they are not used to manage Customers' interest-rate risk in assets or liabilities. Customers manages a matched book with respect to its derivative instruments used in this customer service in order to minimize its net risk exposure resulting from such transactions.
Cash Flow Hedges of Interest Rate Risk
Customers' objectives in using interest-rate derivatives are to add stability to interest expense and to manage exposure to interest-rate movements. To accomplish this objective, Customers primarily uses interest rate swaps as part of its interest-rate-risk management strategy. Interest-rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for Customers making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. To date, such derivatives were used to hedge the variable cash flows associated with the forecasted issuances of debt.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on Customers' variable-rate debt. Customers expects to reclassify
$0.8 million
from accumulated other comprehensive income as a reduction to interest expense during the next 12 months.
Customers is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of 27 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).
At
March 31, 2018
, Customers had
eleven
outstanding interest rate derivatives with notional amounts totaling
$960.0 million
that were designated as cash flow hedges of interest rate risk. At
December 31, 2017
, Customers had
nine
outstanding interest rate derivatives with notional amounts totaling
$550.0 million
that were designated as cash flow hedges of interest rate risk. The outstanding cash flow hedges at March 31, 2018 expire between April 2018 and July 2021.
Derivatives Not Designated as Hedging Instruments
Customers executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies (typically the loan customers will swap a floating-rate loan for a fixed-rate loan). The customer interest rate swaps are simultaneously offset by interest rate swaps that Customers executes with a third party in order to minimize interest rate risk exposure resulting from such transactions. Because the interest rate swaps associated with this program do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting third-party market swaps are recognized directly in earnings. At
March 31, 2018
, Customers had
84
interest rate swaps with an aggregate notional amount of
$813.7 million
related to this program. At
December 31, 2017
, Customers had
76
interest rate swaps with an aggregate notional amount of
$800.5 million
related to this program.
Customers enters into residential mortgage loan commitments in connection with its consumer mortgage banking activities to fund mortgage loans at specified rates and times in the future. These commitments are short-term in nature and generally expire in
30
to
60
days. The residential mortgage loan commitments that relate to the origination of mortgage loans that will be held for sale are considered derivative instruments under the applicable accounting guidance and are reported at fair value, with changes in fair value recorded directly in earnings. At
March 31, 2018
and
December 31, 2017
, Customers had an outstanding notional balance of residential mortgage loan commitments of
$3.6 million
and
$2.7 million
, respectively.
Customers has also purchased and sold credit derivatives to either hedge or participate in the performance risk associated with some of its counterparties. These derivatives are not designated as hedging instruments and are reported at fair value, with changes in fair value recorded directly in earnings. At
March 31, 2018
and
December 31, 2017
, Customers had outstanding notional balances of credit derivatives of
$80.0 million
and
$80.5 million
, respectively.
Fair Value of Derivative Instruments on the Balance Sheet
The following tables present the fair value of Customers' derivative financial instruments as well as their presentation on the balance sheet as of
March 31, 2018
and
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
|
Balance Sheet
Location
|
|
Fair Value
|
|
Balance Sheet
Location
|
|
Fair Value
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Other assets
|
|
$
|
1,224
|
|
|
Other liabilities
|
|
$
|
545
|
|
Total
|
|
|
|
$
|
1,224
|
|
|
|
|
$
|
545
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Other assets
|
|
$
|
12,235
|
|
|
Other liabilities
|
|
$
|
12,104
|
|
Credit contracts
|
|
Other assets
|
|
64
|
|
|
Other liabilities
|
|
24
|
|
Residential mortgage loan commitments
|
|
Other assets
|
|
83
|
|
|
Other liabilities
|
|
—
|
|
Total
|
|
|
|
$
|
12,382
|
|
|
|
|
$
|
12,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
|
Balance Sheet
|
|
|
|
Balance Sheet
|
|
|
|
|
Location
|
|
Fair Value
|
|
Location
|
|
Fair Value
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Other assets
|
|
$
|
816
|
|
|
Other liabilities
|
|
$
|
1,140
|
|
Total
|
|
|
|
$
|
816
|
|
|
|
|
$
|
1,140
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
Other assets
|
|
$
|
8,776
|
|
|
Other liabilities
|
|
$
|
8,897
|
|
Credit contracts
|
|
Other assets
|
|
100
|
|
|
Other liabilities
|
|
37
|
|
Residential mortgage loan commitments
|
|
Other assets
|
|
60
|
|
|
Other liabilities
|
|
—
|
|
Total
|
|
|
|
$
|
8,936
|
|
|
|
|
$
|
8,934
|
|
Effect of Derivative Instruments on Comprehensive Income
The following tables present the effect of Customers' derivative financial instruments on comprehensive income for the
three
months ended
March 31, 2018
and
2017
.
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
Income Statement Location
|
|
Amount of Income (Loss)
Recognized in Earnings
|
(amounts in thousands)
|
|
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
Interest rate swaps
|
Other non-interest income
|
|
$
|
385
|
|
Credit contracts
|
Other non-interest income
|
|
(23
|
)
|
Residential mortgage loan commitments
|
Mortgage banking income
|
|
23
|
|
Total
|
|
|
$
|
385
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 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
|
|
$
|
483
|
|
Credit contracts
|
Other non-interest income
|
|
—
|
|
Residential mortgage loan commitments
|
Mortgage banking income
|
|
50
|
|
Total
|
|
|
$
|
533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
Amount of Gain
Recognized in OCI on
Derivatives (1)
|
|
Location of Gain (Loss)
Reclassified from
Accumulated OCI into
Income
|
|
Amount of Loss
Reclassified from
Accumulated OCI into
Income
|
(amounts in thousands)
|
|
|
|
|
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
Interest rate swaps
|
$
|
646
|
|
|
Interest expense
|
|
$
|
(131
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Amount of Gain
Recognized in OCI on
Derivatives (1)
|
|
Location of Gain (Loss)
Reclassified from
Accumulated OCI into
Income
|
|
Amount of Loss
Reclassified from
Accumulated OCI into
Income
|
(amounts in thousands)
|
|
|
|
|
|
Derivatives in cash flow hedging relationships:
|
|
|
|
|
|
Interest rate swaps
|
$
|
201
|
|
|
Interest expense
|
|
$
|
(827
|
)
|
(1) Amounts presented are net of taxes. See
NOTE 5
- CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME for total effect on other comprehensive income from derivatives designated as cash flow hedges for the periods presented.
Credit-risk-related Contingent Features
By entering into derivative contracts, Customers is exposed to credit risk. The credit risk associated with derivatives executed with customers is the same as that involved in extending the related loans and is subject to the same standard credit policies. To mitigate the credit-risk exposure to major derivative dealer counterparties, Customers only enters into agreements with those counterparties that maintain credit ratings of high quality.
Agreements with major derivative dealer counterparties contain provisions whereby default on any of Customers' indebtedness would be considered a default on its derivative obligations. Customers also has entered into agreements that contain provisions under which the counterparty could require Customers to settle its obligations if Customers fails to maintain its status as a well/adequately capitalized institution. As of
March 31, 2018
, 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
$0.2 million
. In addition, Customers has minimum collateral posting thresholds with certain of these counterparties and at
March 31, 2018
had posted
$0.4 million
of cash as collateral. Customers records cash posted as collateral as a reduction in the outstanding balance of cash and cash equivalents and an increase in the balance of other assets.
Disclosures about Offsetting Assets and Liabilities
The following tables present derivative instruments that are subject to enforceable master netting arrangements. Customers' interest rate swaps with institutional counterparties are subject to master netting arrangements and are included in the table below. Interest rate swaps with commercial banking customers and residential mortgage loan commitments are not subject to master netting arrangements and are excluded from the table below. Customers has not made a policy election to offset its derivative positions.
Offsetting of Financial Assets and Derivative Assets
At
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Amount of
Recognized
Assets
|
|
Gross
Amounts
Offset in the
Consolidated
Balance
Sheet
|
|
Net
Amounts of
Assets
Presented
in the
Consolidated
Balance
Sheet
|
|
Gross Amounts
Not Offset in the
Consolidated
Balance Sheet
|
|
Net
Amount
|
|
Financial
Instruments
|
|
Cash
Collateral
Received
|
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap derivatives with institutional counterparties
|
$
|
11,716
|
|
|
$
|
—
|
|
|
$
|
11,716
|
|
|
$
|
—
|
|
|
$
|
9,240
|
|
|
$
|
2,476
|
|
Offsetting of Financial Liabilities and Derivative Liabilities
At
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
$
|
2,405
|
|
|
$
|
—
|
|
|
$
|
2,405
|
|
|
$
|
—
|
|
|
$
|
352
|
|
|
$
|
2,053
|
|
Offsetting of Financial Assets and Derivative Assets
At
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Amount of
Recognized
Assets
|
|
Gross
Amounts
Offset in the
Consolidated
Balance
Sheet
|
|
Net
Amounts of
Assets
Presented
in the
Consolidated
Balance
Sheet
|
|
Gross Amounts
Not Offset in the
Consolidated
Balance Sheet
|
|
Net
Amount
|
|
Financial
Instruments
|
|
Cash
Collateral
Received
|
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap derivatives with institutional counterparties
|
$
|
5,930
|
|
|
$
|
—
|
|
|
$
|
5,930
|
|
|
$
|
—
|
|
|
$
|
5,070
|
|
|
$
|
860
|
|
Offsetting of Financial Liabilities and Derivative Liabilities
At
December 31, 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
|
|
Net
Amount
|
|
Financial
Instruments
|
|
Cash
Collateral
Pledged
|
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap derivatives with institutional counterparties
|
$
|
5,058
|
|
|
$
|
—
|
|
|
$
|
5,058
|
|
|
$
|
—
|
|
|
$
|
4,872
|
|
|
$
|
186
|
|
NOTE 12 — BUSINESS SEGMENTS
Customers' segment financial reporting reflects the manner in which its chief operating decision makers allocate resources and assess performance. Management has determined that Customers' operations consist of
two
reportable segments - 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, New Hampshire, Washington D.C. and Illinois through a single-point-of-contact business model and provides liquidity to residential mortgage originators nationwide through commercial loans to mortgage companies. Lending and deposit gathering activities are focused primarily on privately held businesses, high-net-worth families, selected commercial real estate lending, and commercial mortgage companies. 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 related to the segment's operation of the ongoing business acquired through the Disbursement business acquisition.
The following tables present the operating results for Customers' reportable business segments for the three
month periods ended
March 31, 2018
and
2017
. 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
24.57%
for
2018
and
37.25%
for
2017
, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
Community Business Banking
|
|
BankMobile
|
|
Consolidated
|
Interest income
|
$
|
92,554
|
|
|
$
|
4,410
|
|
(1
|
)
|
$
|
96,964
|
|
Interest expense
|
31,917
|
|
|
16
|
|
|
31,933
|
|
Net interest income
|
60,637
|
|
|
4,394
|
|
|
65,031
|
|
Provision for loan losses
|
1,874
|
|
|
243
|
|
|
2,117
|
|
Non-interest income
|
8,439
|
|
|
12,471
|
|
|
20,910
|
|
Non-interest expense
|
34,331
|
|
|
17,949
|
|
|
52,280
|
|
Income before income tax expense (benefit)
|
32,871
|
|
|
(1,327
|
)
|
|
31,544
|
|
Income tax expense (benefit)
|
7,728
|
|
|
(326
|
)
|
|
7,402
|
|
Net income (loss)
|
25,143
|
|
|
(1,001
|
)
|
|
24,142
|
|
Preferred stock dividends
|
3,615
|
|
|
—
|
|
|
3,615
|
|
Net income (loss) available to common shareholders
|
$
|
21,528
|
|
|
$
|
(1,001
|
)
|
|
$
|
20,527
|
|
|
|
|
|
|
|
As of March 31, 2018
|
|
|
|
|
|
Goodwill and other intangibles
|
$
|
3,630
|
|
|
$
|
13,847
|
|
|
$
|
17,477
|
|
Total assets
|
$
|
10,690,479
|
|
|
$
|
78,787
|
|
|
$
|
10,769,266
|
|
Total deposits
|
$
|
6,418,810
|
|
|
$
|
623,649
|
|
|
$
|
7,042,459
|
|
Total non-deposit liabilities
|
$
|
2,759,156
|
|
|
$
|
48,563
|
|
|
$
|
2,807,719
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Community Business Banking
|
|
BankMobile
|
|
Consolidated
|
Interest income
|
$
|
78,832
|
|
|
$
|
4,262
|
|
(1
|
)
|
$
|
83,094
|
|
Interest expense
|
20,656
|
|
|
20
|
|
|
20,676
|
|
Net interest income
|
58,176
|
|
|
4,242
|
|
|
62,418
|
|
Provision for loan losses
|
3,050
|
|
|
—
|
|
|
3,050
|
|
Non-interest income
|
5,427
|
|
|
17,327
|
|
|
22,754
|
|
Non-interest expense
|
30,147
|
|
|
19,219
|
|
|
49,366
|
|
Income (loss) before income tax expense (benefit)
|
30,406
|
|
|
2,350
|
|
|
32,756
|
|
Income tax expense (benefit)
|
6,116
|
|
|
893
|
|
|
7,009
|
|
Net income (loss)
|
24,290
|
|
|
1,457
|
|
|
25,747
|
|
Preferred stock dividends
|
3,615
|
|
|
—
|
|
|
3,615
|
|
Net income (loss) available to common shareholders
|
$
|
20,675
|
|
|
$
|
1,457
|
|
|
$
|
22,132
|
|
|
|
|
|
|
|
As of March 31, 2017
|
|
|
|
|
|
Goodwill and other intangibles
|
$
|
3,636
|
|
|
$
|
13,982
|
|
|
$
|
17,618
|
|
Total assets
|
$
|
9,833,721
|
|
|
$
|
72,915
|
|
|
$
|
9,906,636
|
|
Total deposits
|
$
|
6,627,061
|
|
|
$
|
708,419
|
|
|
$
|
7,335,480
|
|
Total non-deposit liabilities
|
$
|
1,660,967
|
|
|
$
|
30,372
|
|
|
$
|
1,691,339
|
|
|
|
|
|
|
|
(1) - Amounts reported include funds transfer pricing of
$4.4 million
and
$4.3 million
for the
three
months ended
March 31, 2018
and
2017
, respectively, credited to BankMobile for the value provided to the Community Business Banking segment for the use of low/no cost deposits.
NOTE 13 - NON-INTEREST REVENUES
As provided in NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION, Customers' adoption of ASU 2014-09,
Revenue from Contracts with Customers (ASC 606),
on January 1, 2018 did not have a significant impact to Customers' consolidated financial statements, as such, a cumulative effect adjustment to beginning retained earnings was not necessary. Customers determined that its debit and prepaid card interchange income, previously reported on a gross basis for periods prior to adoption will need to be presented on a net basis under this ASU. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted and continue to be reported in accordance with the previous accounting guidance under ASC 605. Debit and prepaid card interchange expense for the three months ended March 31, 2018 and 2017 amounted to
$1.5 million
and
$0.8 million
, respectively.
In addition, as part of the enhanced disclosure requirements under the new guidance, Customers is presenting disaggregated revenue by business segment, nature of the revenue stream, and the pattern or timing of revenue recognition. The accounting treatment for interest-related revenues is covered under ASC-310 and is out of the scope of ASU 2014-09.
The following tables present Customers' non-interest revenues affected by ASU 2014-09 by business segment for the three months ended March 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
Community Business Banking
|
|
BankMobile
|
|
Consolidated
|
Revenue from contracts with customers:
|
|
|
|
|
|
Revenue recognized at point in time:
|
|
|
|
|
|
Interchange and Card Revenue
|
$
|
223
|
|
|
$
|
9,438
|
|
|
$
|
9,661
|
|
Deposit Fees
|
287
|
|
|
1,805
|
|
|
2,092
|
|
University Fees - Card and Disbursement Fees
|
—
|
|
|
326
|
|
|
326
|
|
Total revenue recognized at point in time
|
510
|
|
|
11,569
|
|
|
12,079
|
|
Revenue recognized over time:
|
|
|
|
|
|
University Fees - Subscription Revenue
|
—
|
|
|
870
|
|
|
870
|
|
Total revenue recognized over time
|
—
|
|
|
870
|
|
|
870
|
|
|
|
|
|
|
|
Total revenue from contracts with customers
|
$
|
510
|
|
|
$
|
12,439
|
|
|
$
|
12,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Community Business Banking
|
|
BankMobile
|
|
Consolidated
|
Revenue from contracts with customers:
|
|
|
|
|
|
Revenue recognized at point in time:
|
|
|
|
|
|
Interchange and Card Revenue
|
$
|
203
|
|
|
$
|
13,308
|
|
|
$
|
13,511
|
|
Deposit Fees
|
324
|
|
|
2,803
|
|
|
3,127
|
|
University Fees - Card and Disbursement Fees
|
—
|
|
|
392
|
|
|
392
|
|
Total revenue recognized at point in time
|
527
|
|
|
16,503
|
|
|
17,030
|
|
Revenue recognized over time:
|
|
|
|
|
|
University Fees - Subscription Revenue
|
—
|
|
|
795
|
|
|
795
|
|
Total revenue recognized over time
|
—
|
|
|
795
|
|
|
795
|
|
Total revenue from contracts with customers
|
$
|
527
|
|
|
$
|
17,298
|
|
|
$
|
17,825
|
|
The following is a discussion of revenues within the scope of ASC 606:
Card revenue
Card revenue primarily relates to debit and prepaid card fees earned from interchange and ATM fees. Interchange fees are earned whenever Customers' issued debit and prepaid cards are processed through card payment networks. Interchange fees are recognized concurrent with the processing of the debit or prepaid card transaction.
Deposit Fees
Deposit fees relate to service charges on deposit accounts for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such as stop-payment charges, wire transfer fees, cashier or money order fees are recognized at the time the transaction is executed. Account maintenance fees, which relate primarily to monthly maintenance and account analysis fees, are earned on a monthly basis representing the period over which Customers satisfies its performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposit accounts are withdrawn from the depositor's account balance.
The above revenues recognized at a point in time primarily consist of contracts with no specified terms, but which may be terminated at any time by the customer without penalty. Due to the transactional nature and indefinite term of these agreements, there were no related contract balances that were recorded for these revenue streams on Customers' consolidated balance sheets as of March 31, 2018 and December 31, 2017.
University Fees
University fees represent revenues from higher education institutions and is generated from fees charged for the services provided. For higher education institution clients, Customers through BankMobile facilitates the distribution of financial aid and other refunds to students, while simultaneously enhancing the ability of the higher education institutions to comply with the federal regulations applicable to financial aid transactions. For these services, higher education institution clients are charged an annual subscription fee and/or per-transaction fees (e.g. new card or card replacement fees) for certain transactions. The annual subscription fee is recognized ratably over the period of service and the transaction fees are recognized when the transaction is completed. BankMobile also enters into long-term (generally three- or five-year initial term) contracts with higher education institutions to provide these refund management disbursement services. Deferred revenue consists of amounts billed to or received from clients prior to the performance of services. The deferred revenues are earned over the service period on a straight line basis. As of March 31, 2018 and December 31, 2017, Customers recorded deferred revenue of
$1.8 million
and
$2.0 million
, respectively, related to these university subscription contracts. At March 31, 2018 and December 31, 2017, Customers had accounts receivable of
$1.2 million
and
$1.1 million
, respectively, related to the university fee arrangements.