ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Note Regarding Forward-Looking Statements
This report and all attachments hereto, as well as other written or oral communications made from time to time by us, may contain forward-looking information within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements relate to future events or future predictions, including events or predictions relating to future financial performance, and are generally identifiable by the use of forward-looking terminology such as “believe,” “expect,” “may,” “will,” “should,” “plan,” “intend,” or “anticipate” or the negative thereof or comparable terminology. Forward-looking statements reflect numerous assumptions, estimates and forecasts as to future events. No assurance can be given that the assumptions, estimates and forecasts underlying such forward-looking statements will accurately reflect future conditions, or that any guidance, goals, targets or projected results will be realized. The assumptions, estimates and forecasts underlying such forward-looking statements involve judgments with respect to, among other things, future economic, competitive, regulatory and financial market conditions and future business decisions, which may not be realized and which are inherently subject to significant business, economic, competitive and regulatory uncertainties and known and unknown risks, including the risks described under “Risk Factors” in Customers Bancorp, Inc.'s Annual Report on Form 10-K for the fiscal year ended
December 31, 2017
(the “
2017
Form 10-K”), as such factors may be updated from time to time in our filings with the SEC, including our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Our actual results may differ materially from those reflected in the forward-looking statements. You are cautioned not to place undue reliance on any forward-looking statements we make, which speak only as of the date they are made. We do not undertake any obligation to release publicly or otherwise provide any revisions to any forward-looking statements we may make, including any forward-looking financial information, to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events, except as may be required under applicable law.
Management’s discussion and analysis represents an overview of the financial condition and results of operations, and highlights the significant changes in the financial condition and results of operations, as presented in the accompanying consolidated financial statements for Customers Bancorp, Inc. (the "Bancorp" or "Customers Bancorp"), a financial holding company, and its wholly owned subsidiaries, including Customers Bank (the "Bank"), collectively referred to as "Customers" herein. This information is intended to facilitate your understanding and assessment of significant changes and trends related to Customers' financial condition and results of operations as of and for the three
and nine
months ended
September 30, 2018
. All quarterly information in this Management’s Discussion and Analysis is unaudited. You should read this section in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Customers' 2017 Form 10-K.
Restatement of Previously Issued Financial Statements
In November 2018, Customers determined that commercial mortgage warehouse loans should have been classified as loans receivable, rather than loans held for sale. Additional discussion regarding the correction in classification error of mortgage warehouse loans is included in NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION.
Critical Accounting Policies
Customers has adopted various accounting policies that govern the application of accounting principles generally accepted in the United States of America and that are consistent with general practices within the banking industry in the preparation of its financial statements. Customers' significant accounting policies are described in “NOTE 4 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION” in Customers' audited financial statements included in its
2017
Form 10-K and updated in this Form 10-Q for the quarterly period ended
September 30, 2018
in “NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION."
Certain accounting policies involve significant judgments and assumptions by Customers that have a material impact on the carrying value of certain assets and liabilities. Customers considers these accounting policies to be critical accounting policies. The judgment and assumptions used are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions management makes, actual results could differ from these judgments and estimates, which could have a material impact on the carrying values of Customers' assets and liabilities and its results of operations.
Overview
As previously disclosed, Customers intends to retain and operate BankMobile for the next 2 - 3 years while its spin-off plans are put on hold as a result of regulatory complications. Management recently announced its first White-Label partnership with T-Mobile, which is expected to be launched in fourth quarter 2018 and provide significant benefits to the overall profitability of BankMobile, beginning as early as the end of 2019.
Customers' strategic priorities include maintaining a balance sheet below $10 billion in total assets to improve capital ratios, enhance liquidity, expand net interest margin, and maximize the return of average assets. Longer-term goals include a net interest margin target of 2.75% within the next 12 - 18 months, which is expected to be achieved through a shift in the mix of assets and liabilities maintained on the balance sheet. Customers intends to deemphasize its lower-yielding multi-family loan portfolio, with multi-family balances expected to be around $3.3 billion by the end of 2018 and continue to trend lower over time if spreads remain at the current level, and fund future growth in higher-yielding commercial and industrial and consumer loan portfolios with the multi-family run-off. Similarly, Customers plans to replace higher-rate non-core deposits and borrowings with less expensive core deposits. Customers plans to remain predominately a small business bank, with higher-quality consumer loans making up about 15% - 20% of total assets, multi-family loans comprising about 10% of total assets, and core commercial lending activities, including specialty lending and loans to mortgage banking businesses totaling approximately 70% - 75% of total assets.
Third
Quarter Events of Note
Customers reported net income available to common shareholders of
$2.4 million
, or
$0.07
per diluted share, for
third
quarter
2018
and
$43.0 million
, or
$1.33
per diluted share, for the
nine
months ended
September 30, 2018
. The financial results for third quarter 2018 included $18.7 million of losses realized from the sale of $495 million of lower-yielding investment securities, $2.9 million of merger and acquisition related expenses resulting primarily from the termination of the spin-off and merger agreement between Customers and Flagship Community Bank ("Flagship") on October 18, 2018, and a negative mark-to-market adjustment of $1.2 million on an equity investment. These notable charges negatively affected GAAP earnings by $0.55 per diluted share in third quarter 2018 and $0.57 per diluted share for the nine months ended September 30, 2018.
Total assets were
$10.6 billion
at
September 30, 2018
, an increase of
$0.8 billion
from
December 31, 2017
. The increase in total assets was primarily driven by increased cash held at the Federal Reserve Bank of $0.5 billion and increased investment securities, even after the securities sale of $495 million executed in the third quarter of 2018 generated the $18.7 million loss, of $0.2 billion. Customers expects to have total assets of under $10 billion by the end of 2018, with an emphasis on higher-yielding assets replacing lower-yielding assets and lower-cost core deposit growth replacing higher-cost funding.
Asset quality remained exceptional with non-performing loans of
$23.6 million
, or 0.27% of total loans, and total non-performing assets (non-performing loans and other real estate owned) only
0.24%
of total assets at
September 30, 2018
, reflecting Customers' conservative lending practices and continued focus on credit risk management. Customers' level of non-performing loans to total loans at
September 30, 2018
remained well below industry average non-performing loans to total loans of
1.21%
and Customers' peer group non-performing loans to total loans of
0.78%
. Customers' capital ratios at the holding company and its bank subsidiary continue to exceed the “well-capitalized” threshold established by regulation at the Bank and exceed the applicable Basel III regulatory threshold ratios for the Bancorp and the Bank at
September 30, 2018
. Customers Bancorp's Tier 1 leverage ratio was
8.91%
, and its total risk-based capital ratio was
12.69%
, at
September 30, 2018
.
Results of Operations
Three Months Ended September 30, 2018
Compared to
Three Months Ended September 30, 2017
Net income available to common shareholders
decreased
$1.7 million
, or
41.7%
, to
$2.4 million
for the three months ended
September 30, 2018
when compared to net income available to common shareholders of
$4.1 million
for the three months ended
September 30, 2017
. The
decreased
net income available to common shareholders primarily resulted from a decrease in net interest income of
$4.0 million
, or
5.9%
, an increase in the provision for loan losses of $0.6 million, and a decrease in non-interest income of
$15.9 million
, or
88.4%
, offset in part by a decrease in non-interest expense of
$3.9 million
, or 6.4%, and a decrease in income tax expense of
$14.9 million
, or 99.8%.
Net interest income of
$64.0 million
decreased
$4.0 million
, or
5.9%
, for the three months ended
September 30, 2018
when compared to net interest income of
$68.0 million
for the three months ended
September 30, 2017
. This decrease resulted primarily from a decrease in the average balance of interest earning assets of $33.5 million and a 15 basis point decrease in net interest margin (tax equivalent) to 2.47% for third quarter 2018 from 2.62% for third quarter 2017. The total cost of deposits and borrowings increased 66 basis points, which was mitigated in part by a 47 basis point increase in yield on interest earning assets over the prior period, primarily due to an increase in yield on loans of 44 basis points and a 43 basis point increase in yield on investment securities.
The provision for loan losses of $2.9 million
increased
$0.6 million
for the three months ended
September 30, 2018
when compared to the provision for loan losses of
$2.4 million
for the three months ended
September 30, 2017
, reflecting Customers' initiative to increase consumer loans. The third quarter 2018 provision for loan losses included $2.3 million for growth in the consumer loan portfolio and a $0.9 million increase for impaired loans, offset in part by a release of reserves of $0.2 million resulting from improved asset quality and lower incurred losses than previously estimated.
Non-interest income of
$2.1 million
decreased
$15.9 million
, or
88.4%
, for the three months ended
September 30, 2018
when compared to non-interest income of
$18.0 million
for the three months ended
September 30, 2017
. Included within non-interest income for the three months ended September 30, 2018 was an $18.7 million loss realized from the sale of $495 million of lower-yielding investment securities and a $1.2 million negative mark-to-market adjustment on an equity investment. Also included within non-interest income for the three months ended September 30, 2018 was $1.2 million of debit and prepaid card interchange expense, which was recorded as a reduction to the gross amount of interchange and card revenue of $8.3 million as a result of the adoption of the new revenue recognition guidance as described in NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION on a modified retrospective basis. Prior to the adoption of the new revenue recognition guidance, these expenses were included within non-interest expense and reported as technology, communication and bank operations expense. For the three months ended September 30, 2017, debit and prepaid card interchange expense was $1.2 million. If the three months ended September 30, 2017 was presented on a consistent basis with the three months ended September 30, 2018, the reported amount of the gross interchange and card revenue of $9.6 million would have been presented net of the debit and prepaid card interchange expense of $1.2 million, or $8.4 million. When presented on a consistent basis, interchange and card revenue decreased $1.3 million over the year-ago period resulting from lower activity volumes in the BankMobile business segment. Other decreases in total non-interest income for the three months ended September 30, 2018 compared to the three months ended September 30, 2017 included
decrease
s in mortgage warehouse transactional fees and deposit fees of
$0.6 million
and
$0.7 million
, respectively, primarily resulting from reduced transaction volumes. These decreases in non-interest income were offset in part by a $2.8 million gain recognized from the discontinuance of cash flow hedge accounting for three interest rate swaps, which Customers now believes are not needed due to strong core deposit growth, and an increase in income on commercial operating leases of $1.3 million. For the three months ended
September 30, 2017
, Customers realized $5.3 million of gains from the sale of investment securities and an $8.3 million impairment loss on an equity investment.
Non-interest expense of
$57.1 million
decreased
$3.9 million
, or
6.4%
, for the three months ended
September 30, 2018
when compared to non-interest expense of
$61.0 million
for the three months ended
September 30, 2017
. Total non-interest expense for the three months ended September 30, 2018 excludes $1.2 million of debit and prepaid card interchange expense as a result of the adoption of the new revenue recognition guidance on January 1, 2018. If the three months ended September 30, 2017 was presented on a consistent basis with the three months ended September 30, 2018, the reported amount of non-interest expense of $61.0 million would have been $59.8 million and technology, communication, and bank operations expense of $14.4 million would have been $13.2 million. When presented on a consistent basis, technology, communication and bank operations expense decreased $1.5 million to
$11.7 million
for the three months ended
September 30, 2018
from $13.2 million for the three months ended
September 30, 2017
. Professional services decreased
$2.7 million
to $4.7 million for the three months ended September 30, 2018 compared to $7.4 million for the three months ended September 30, 2017 primarily attributable to reductions in consulting, legal, and other outside professional services as management continues its efforts to monitor and control expenses. Included in non-interest expenses for the three months ended September 30, 2017 was $2.8 million in catch-up depreciation and amortization for BankMobile assets that were previously classified as held for sale. These decreases in non-interest expense were partially offset by a $2.9 million increase in merger and acquisition related expenses due primarily to the termination of the spin-off and merger agreement with Flagship, a $0.7 million increase in salaries and employee benefits and a $1.0 million increase in depreciation on commercial operating leases for the three months ended September 30, 2018 compared the three months ended September 30, 2017.
Income tax expense of $28,000
decreased
$14.9 million
, or
99.8%
, for the three months ended
September 30, 2018
when compared to income tax expense of
$14.9 million
for the three months ended
September 30, 2017
. The
decrease
in income tax expense was driven primarily by a lower federal income tax rate from the adoption of the Tax Cut and Jobs Act of 2017, a decrease in pre-tax income of
$16.6 million
, and a $1.7 million return to provision adjustment, which included the benefit of a research and development tax credit, recorded in third quarter 2018 upon completion of the 2017 income tax returns. Customers' effective tax rate
decreased
to
0.46%
for the three months ended
September 30, 2018
, compared to
65.8%
for the same period in
2017
. Income tax expense for the three months ended September 30, 2017 included an elimination of deferred tax benefits from the other-than-temporary impairment losses on investment securities totaling $7.7 million.
Preferred stock dividends were
$3.6 million
for the three months ended
September 30, 2018
and 2017, respectively.
NET INTEREST INCOME
Net interest income (the difference between the interest earned on loans, investments and interest-earning deposits with banks, and interest paid on deposits, borrowed funds and subordinated debt) is the primary source of Customers' earnings.
The following table summarizes Customers' net interest income and related interest spread and net interest margin for the periods indicated.
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|
|
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|
|
|
|
|
|
Three Months Ended September 30,
|
|
2018
|
|
2017
|
|
Average
Balance
|
|
Interest
Income or
Expense
|
|
Average
Yield or
Cost (%)
|
|
Average
Balance
|
|
Interest
Income or
Expense
|
|
Average
Yield or
Cost (%)
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits
|
$
|
309,588
|
|
|
$
|
1,538
|
|
|
1.97
|
%
|
|
$
|
280,845
|
|
|
$
|
923
|
|
|
1.30
|
%
|
Investment securities (1)
|
1,029,857
|
|
|
8,495
|
|
|
3.30
|
%
|
|
1,017,065
|
|
|
7,307
|
|
|
2.87
|
%
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans to mortgage companies
|
1,680,441
|
|
|
21,274
|
|
|
5.02
|
%
|
|
1,956,587
|
|
|
21,099
|
|
|
4.28
|
%
|
Multi-family loans
|
3,555,223
|
|
|
34,901
|
|
|
3.89
|
%
|
|
3,639,566
|
|
|
33,301
|
|
|
3.63
|
%
|
Commercial and industrial loans (2)
|
1,782,500
|
|
|
21,692
|
|
|
4.83
|
%
|
|
1,491,833
|
|
|
15,792
|
|
|
4.20
|
%
|
Non-owner occupied commercial real estate
|
1,255,206
|
|
|
12,753
|
|
|
4.03
|
%
|
|
1,294,996
|
|
|
12,706
|
|
|
3.89
|
%
|
All other loans
|
594,528
|
|
|
7,195
|
|
|
4.80
|
%
|
|
546,161
|
|
|
5,842
|
|
|
4.24
|
%
|
Total loans (3)
|
8,867,898
|
|
|
97,815
|
|
|
4.38
|
%
|
|
8,929,143
|
|
|
88,740
|
|
|
3.94
|
%
|
Other interest-earning assets
|
111,600
|
|
|
2,197
|
|
|
7.81
|
%
|
|
125,341
|
|
|
1,315
|
|
|
4.16
|
%
|
Total interest-earning assets
|
10,318,943
|
|
|
110,045
|
|
|
4.24
|
%
|
|
10,352,394
|
|
|
98,285
|
|
|
3.77
|
%
|
Non-interest-earning assets
|
409,396
|
|
|
|
|
|
|
389,797
|
|
|
|
|
|
Total assets
|
$
|
10,728,339
|
|
|
|
|
|
|
$
|
10,742,191
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking accounts
|
$
|
696,827
|
|
|
2,690
|
|
|
1.53
|
%
|
|
$
|
351,422
|
|
|
708
|
|
|
0.80
|
%
|
Money market deposit accounts
|
3,564,148
|
|
|
17,855
|
|
|
1.99
|
%
|
|
3,427,682
|
|
|
9,866
|
|
|
1.14
|
%
|
Other savings accounts
|
116,172
|
|
|
464
|
|
|
1.59
|
%
|
|
40,310
|
|
|
29
|
|
|
0.28
|
%
|
Certificates of deposit
|
2,288,237
|
|
|
11,795
|
|
|
2.05
|
%
|
|
2,361,069
|
|
|
7,778
|
|
|
1.31
|
%
|
Total interest-bearing deposits
|
6,665,384
|
|
|
32,804
|
|
|
1.95
|
%
|
|
6,180,483
|
|
|
18,381
|
|
|
1.18
|
%
|
Borrowings
|
1,918,577
|
|
|
13,240
|
|
|
2.74
|
%
|
|
2,414,086
|
|
|
11,885
|
|
|
1.96
|
%
|
Total interest-bearing liabilities
|
8,583,961
|
|
|
46,044
|
|
|
2.13
|
%
|
|
8,594,569
|
|
|
30,266
|
|
|
1.40
|
%
|
Non-interest-bearing deposits
|
1,109,819
|
|
|
|
|
|
|
1,158,911
|
|
|
|
|
|
Total deposits and borrowings
|
9,693,780
|
|
|
|
|
1.89
|
%
|
|
9,753,480
|
|
|
|
|
1.23
|
%
|
Other non-interest-bearing liabilities
|
84,786
|
|
|
|
|
|
|
66,220
|
|
|
|
|
|
Total liabilities
|
9,778,566
|
|
|
|
|
|
|
9,819,700
|
|
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|
Shareholders’ Equity
|
949,773
|
|
|
|
|
|
|
922,491
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
$
|
10,728,339
|
|
|
|
|
|
|
$
|
10,742,191
|
|
|
|
|
|
Net interest income
|
|
|
64,001
|
|
|
|
|
|
|
68,019
|
|
|
|
Tax-equivalent adjustment (4)
|
|
|
172
|
|
|
|
|
|
|
203
|
|
|
|
Net interest earnings
|
|
|
$
|
64,173
|
|
|
|
|
|
|
$
|
68,222
|
|
|
|
Interest spread
|
|
|
|
|
2.35
|
%
|
|
|
|
|
|
2.54
|
%
|
Net interest margin
|
|
|
|
|
2.46
|
%
|
|
|
|
|
|
2.61
|
%
|
Net interest margin tax equivalent (4)
|
|
|
|
|
2.47
|
%
|
|
|
|
|
|
2.62
|
%
|
|
|
(1)
|
For presentation in this table, average balances and the corresponding average yields for investment securities are based upon historical cost, adjusted for other-than-temporary impairment and amortization of premiums and accretion of discounts.
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(2)
|
Includes owner occupied commercial real estate loans.
|
|
|
(3)
|
Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees.
|
|
|
(4)
|
Non-GAAP tax-equivalent basis, using an estimated marginal tax rate of 26% for the three months ended September 30, 2018 and 35% for the three months ended September 30, 2017, presented to approximate interest income as a taxable asset. Management uses non-GAAP measures to present historical periods comparable to the current period presentation. In addition, management believes the use of these non-GAAP measures provides additional clarity when assessing Customers’ financial results. These disclosures should not be viewed as substitutes for results determined to be in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other entities.
|
The following table presents the dollar amount of changes in interest income and interest expense for the major categories of interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2018 vs. 2017
|
|
Increase (Decrease) due
to Change in
|
|
|
|
Rate
|
|
Volume
|
|
Total
|
(amounts in thousands)
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
Interest-earning deposits
|
$
|
513
|
|
|
$
|
102
|
|
|
$
|
615
|
|
Investment securities
|
1,095
|
|
|
93
|
|
|
1,188
|
|
Loans:
|
|
|
|
|
|
Commercial loans to mortgage companies
|
3,385
|
|
|
(3,210
|
)
|
|
175
|
|
Multi-family loans
|
2,385
|
|
|
(785
|
)
|
|
1,600
|
|
Commercial and industrial loans, including owner occupied commercial real estate
|
2,563
|
|
|
3,337
|
|
|
5,900
|
|
Non-owner occupied commercial real estate
|
444
|
|
|
(397
|
)
|
|
47
|
|
All other loans
|
808
|
|
|
545
|
|
|
1,353
|
|
Total loans
|
9,585
|
|
|
(510
|
)
|
|
9,075
|
|
Other interest-earning assets
|
1,040
|
|
|
(158
|
)
|
|
882
|
|
Total interest income
|
12,233
|
|
|
(473
|
)
|
|
11,760
|
|
Interest expense
|
|
|
|
|
|
Interest checking accounts
|
956
|
|
|
1,026
|
|
|
1,982
|
|
Money market deposit accounts
|
7,581
|
|
|
408
|
|
|
7,989
|
|
Other savings accounts
|
308
|
|
|
127
|
|
|
435
|
|
Certificates of deposit
|
4,264
|
|
|
(247
|
)
|
|
4,017
|
|
Total interest-bearing deposits
|
13,109
|
|
|
1,314
|
|
|
14,423
|
|
Borrowings
|
4,128
|
|
|
(2,773
|
)
|
|
1,355
|
|
Total interest expense
|
17,237
|
|
|
(1,459
|
)
|
|
15,778
|
|
Net interest income
|
$
|
(5,004
|
)
|
|
$
|
986
|
|
|
$
|
(4,018
|
)
|
Net interest income for the
three months ended September 30, 2018
was
$64.0 million
, a decrease of
$4.0 million
, or
5.9%
, from net interest income of
$68.0 million
for the
three months ended September 30, 2017
, as net interest margin (tax equivalent)
narrowed
by
15
basis points to
2.47%
for
third
quarter
2018
compared to
2.62%
for
third
quarter
2017
. The net interest margin (tax equivalent) compression largely resulted from a
77
basis point increase in the cost of interest-bearing deposits, reflecting higher interest rates offered by Customers on its deposit products in order to remain competitive and attract new and retain existing deposit customers, and a
78
basis point increase in borrowing costs, reflecting higher short-term funding rates. The higher cost of funds was offset in part by a
47
basis point increase in the yield on interest-earning assets, primarily resulting from increased yields on all loan categories, reflecting higher short-term interest rates and increased prepayment fees of
$1.5 million
in
third
quarter
2018
compared to
third
quarter
2017
.
Interest expense on borrowings increased
$1.4 million
for the
three months ended September 30, 2018
compared to the
three months ended September 30, 2017
. This increase was primarily driven by higher federal fund rates, partially offset by lower average balances of borrowings, which decreased
$0.5 billion
for the
three months ended September 30, 2018
compared to the
three months ended September 30, 2017
, as a result of decreases in the average balances of FHLB advances and federal funds purchased, as well as senior note borrowings due to the maturity and payment in full of $63.3 million of senior notes in
third
quarter
2018
.
PROVISION FOR LOAN LOSSES
The provision for loan losses
increased
by
$0.6 million
to
$2.9 million
for the
three months ended September 30, 2018
, compared to
$2.4 million
for the same period in
2017
, reflecting Customers' initiatives to increase consumer loans. The provision for loan losses in
third
quarter
2018
included
$2.3 million
for growth in the consumer loan portfolio and a
$0.9 million
increase for impaired loans, offset in part by a release of reserve of
$0.2 million
resulting from improved asset quality and lower incurred losses than previously estimated. The provision for loan losses in
third
quarter
2017
included provisions of
$1.4 million
for loan portfolio growth and reserves of
$0.8 million
for impaired loans.
For more information about the provision and allowance for loan losses and our loss experience, see “Credit Risk” and “Asset Quality” herein.
NON-INTEREST INCOME
The table below presents the components of non-interest income for the three months ended
September 30, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
Percentage Change
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Interchange and card revenue
|
$
|
7,084
|
|
|
$
|
9,570
|
|
|
$
|
(2,486
|
)
|
|
(26.0
|
)%
|
Deposit fees
|
2,002
|
|
|
2,659
|
|
|
(657
|
)
|
|
(24.7
|
)%
|
Bank-owned life insurance
|
1,869
|
|
|
1,672
|
|
|
197
|
|
|
11.8
|
%
|
Mortgage warehouse transactional fees
|
1,809
|
|
|
2,396
|
|
|
(587
|
)
|
|
(24.5
|
)%
|
Gain on sale of SBA and other loans
|
1,096
|
|
|
1,144
|
|
|
(48
|
)
|
|
(4.2
|
)%
|
Mortgage banking income
|
207
|
|
|
257
|
|
|
(50
|
)
|
|
(19.5
|
)%
|
(Loss) gain on sale of investment securities
|
(18,659
|
)
|
|
5,349
|
|
|
(24,008
|
)
|
|
(448.8
|
)%
|
Impairment loss on investment securities
|
—
|
|
|
(8,349
|
)
|
|
8,349
|
|
|
(100.0
|
)%
|
Other
|
6,676
|
|
|
3,328
|
|
|
3,348
|
|
|
100.6
|
%
|
Total non-interest income
|
$
|
2,084
|
|
|
$
|
18,026
|
|
|
$
|
(15,942
|
)
|
|
(88.4
|
)%
|
Interchange and card revenue
Included within interchange and card revenue for the three months ended
September 30, 2018
was
$1.2 million
of debit and prepaid card interchange expense, which was recorded as a reduction to the gross amount of interchange and card revenue of $8.3 million as a result of the adoption of the new revenue recognition guidance as described in NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION on a modified retrospective basis. Prior to the adoption of the new revenue recognition guidance, these expenses were included within non-interest expense and reported as technology, communication, and bank operations expense. For the three months ended
September 30, 2017
, debit and prepaid card interchange expense was
$1.2 million
. If the three months ended
September 30, 2017
was presented on a consistent basis with the three months ended
September 30, 2018
, the reported amount of the gross interchange and card revenue of
$9.6 million
would have been presented net of the debit and prepaid card interchange expense of $1.2 million, or $8.4 million. When presented on a consistent basis, the $1.3 million decline in interchange and card revenue was largely the result of lower activity volumes in the BankMobile business segment.
Deposit fees
The
$0.7 million
decrease in deposit fees for the three months ended September 30, 2018 compared to the three months ended September 30, 2017 primarily resulted from reduced transaction volumes in the BankMobile business segment.
Mortgage warehouse transactional fees
The
$0.6 million
decrease in mortgage warehouse transactional fees for the three months ended September 30, 2018 compared to the three months ended September 30, 2017 primarily resulted from reduced transaction volumes and reduced per transaction fees in Customers' mortgage warehouse business.
(Loss) gain on sale of investment securities
For the three months ended September 30, 2018, there was an
$18.7 million
loss realized from the sale of $495 million of lower-yielding debt securities, compared to a gain of
$5.3 million
realized from the sale of $549 million of debt securities for the three months ended
September 30, 2017
.
Impairment loss on investment securities
There were no other-than-temporary impairment losses on investment securities for the three months ended September 30, 2018. Customers recorded an other-than-temporary impairment loss of $8.3 million for the three months ended September 30, 2017 for the full amount of decline in fair value of an equity investment below the cost basis established at June 30, 2017.
Other non-interest income
The
$3.3 million
increase in other non-interest income for the three months ended
September 30, 2018
compared to the three months ended September 30, 2017 was primarily due to a $2.8 million gain recognized from discontinuing cash flow hedge accounting for three interest rate swaps as of September 30, 2018 and a $1.3 million increase in income from commercial operating leases. These increases were offset in part by a $1.2 million negative mark-to-market adjustment on an equity investment.
NON-INTEREST EXPENSE
The table below presents the components of non-interest expense for the three months ended
September 30, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
Percentage Change
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
$
|
25,462
|
|
|
$
|
24,807
|
|
|
$
|
655
|
|
|
2.6
|
%
|
Technology, communication, and bank operations
|
11,657
|
|
|
14,401
|
|
|
(2,744
|
)
|
|
(19.1
|
)%
|
Professional services
|
4,743
|
|
|
7,403
|
|
|
(2,660
|
)
|
|
(35.9
|
)%
|
Merger and acquisition related expenses
|
2,945
|
|
|
—
|
|
|
2,945
|
|
|
N/A
|
|
Occupancy
|
2,901
|
|
|
2,857
|
|
|
44
|
|
|
1.5
|
%
|
FDIC assessments, non-income taxes, and regulatory fees
|
2,415
|
|
|
2,475
|
|
|
(60
|
)
|
|
(2.4
|
)%
|
Provision for operating losses
|
1,171
|
|
|
1,509
|
|
|
(338
|
)
|
|
(22.4
|
)%
|
Advertising and promotion
|
820
|
|
|
404
|
|
|
416
|
|
|
103.0
|
%
|
Loan workout
|
516
|
|
|
915
|
|
|
(399
|
)
|
|
(43.6
|
)%
|
Other real estate owned expenses
|
66
|
|
|
445
|
|
|
(379
|
)
|
|
(85.2
|
)%
|
Other
|
4,408
|
|
|
5,824
|
|
|
(1,416
|
)
|
|
(24.3
|
)%
|
Total non-interest expense
|
$
|
57,104
|
|
|
$
|
61,040
|
|
|
$
|
(3,936
|
)
|
|
(6.4
|
)%
|
Salaries and employee benefits
The
$0.7 million
increase in salaries and employee benefits for the three months ended September 30, 2018 compared to the three months ended September 30, 2017 was primarily attributable to increases in compensation levels for existing team members, reflecting higher costs to maintain our workforce, and an increase in headcount as Customers continues to hire new team members in the markets it serves.
Technology, communication, and bank operations
Technology, communication, and bank operations expense for the three months ended
September 30, 2018
excludes
$1.2 million
of debit and prepaid card interchange expense as a result of the adoption of the new revenue recognition guidance on January 1, 2018. If the three months ended
September 30, 2017
was presented on a consistent basis with the three months ended
September 30, 2018
, the reported amount of technology, communication, and bank operations expense of
$14.4 million
would have been $13.2 million. When presented on a consistent basis, technology, communication, and bank operations expense decreased $1.5 million primarily due to lower activity volumes in the BankMobile business segment.
Professional services
The
$2.7 million
decrease in professional services for the three months ended
September 30, 2018
compared to the three months ended September 30, 2017 was primarily attributable to reductions in consulting, legal, and other outside professional services as management continues its efforts to monitor and control expenses.
Merger and acquisition related expenses
The
$2.9 million
increase in merger and acquisition related expenses for the three months ended
September 30, 2018
compared to the three months ended September 30, 2017 was primarily due to the termination of the spin-off and merger agreement between Customers and Flagship on October 18, 2018. In connection with the termination of that agreement, Customers recognized expenses of
$2.7 million
during third quarter 2018 for amounts that, under the terms of the agreement, would have been reimbursed by Flagship only upon completion of the spin-off and merger.
Other non-interest expense
The
$1.4 million
decrease in other non-interest expense for the three months ended
September 30, 2018
compared to the three months ended September 30, 2017 was primarily attributable to $0.7 million in catch-up depreciation and amortization expense recorded in third quarter 2017 for BankMobile assets that were previously classified as held for sale as well as decreases in other miscellaneous expenses as management continues its efforts to monitor and control expenses.
INCOME TAXES
The table below presents income tax expense and the effective tax rate for the three months ended
September 30, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
Percentage Change
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Income before income tax expense
|
$
|
6,057
|
|
|
$
|
22,653
|
|
|
$
|
(16,596
|
)
|
|
(73.3
|
)%
|
Income tax expense
|
28
|
|
|
14,899
|
|
|
(14,871
|
)
|
|
(99.8
|
)%
|
Effective tax rate
|
0.46
|
%
|
|
65.77
|
%
|
|
|
|
|
The
$14.9 million
decrease in income tax expense for the three months ended
September 30, 2018
was primarily attributable to the elimination of deferred tax benefits from the other-than-temporary impairment loss on investment securities totaling $7.7 million for the three months ended September 30, 2017, the lowering of the corporate federal income tax rate from 35% to 21% due to the adoption of the Tax Cut and Jobs Act of 2017, a decrease in pre-tax income of
$16.6 million
for the three months ended September 30,
2018
compared to the three months ended September 30, 2017, and a $1.7 million favorable return to provision adjustment, which included the benefit of a research and development tax credit, recorded in third quarter 2018 upon completion of the 2017 income tax returns.
PREFERRED STOCK DIVIDENDS
Preferred stock dividends were
$3.6 million
for the three months ended
September 30, 2018
and
2017
, respectively. There were no changes to the amount of preferred stock outstanding or the dividend rates from
third
quarter 2017 to
third
quarter
2018
.
Nine Months Ended September 30, 2018
Compared to
Nine Months Ended September 30, 2017
Net income available to common shareholders
decreased
$3.4 million
, or
7.3%
, to
$43.0 million
for the
nine
months ended
September 30, 2018
when compared to net income available to common shareholders of
$46.4 million
for the
nine
months ended
September 30, 2017
. The
decreased
net income available to common shareholders resulted primarily from a decrease in net interest income of
$2.7 million
, or 1.4%, a decrease in non-interest income of
$20.1 million
, or
33.9%
, and an increase in non-interest expense of
$2.3 million
, or
1.4%
, offset in part by a decrease in the provision for loan losses of $1.7 million and a decrease in income tax expense of
$20.0 million
, or 58.4%.
Net interest income of
$196.4 million
decreased
$2.7 million
, or
1.4%
, for the
nine
months ended
September 30, 2018
when compared to net interest income of
$199.0 million
for the
nine months ended
September 30, 2017
. This decrease resulted primarily from a 13 basis point decrease in net interest margin (tax equivalent) to 2.58% for the nine months ended September 30, 2018 from 2.71% for the nine months ended September 30, 2017. The total cost of deposits and borrowings increased 55 basis points, which was mitigated in part by a 39 basis point increase in yield on interest-earning assets, primarily due to an increase in yield on loans of 34 basis points and a 36 basis point increase in yield on investment securities.
The provision for loan losses
decreased
$1.7 million
to
$4.3 million
for the
nine
months ended
September 30, 2018
when compared to the provision for loan losses of
$5.9 million
for the same period in
2017
. The provision for loan losses for the
nine
months ended
September 30, 2018
included $3.5 million for loan portfolio growth and $1.9 million for impaired loans, offset in part by a $1.2 million release that resulted from improved asset quality and lower incurred losses than previously estimated.
Non-interest income of
$39.1 million
decreased
$20.1 million
, or 33.9%, during the
nine
months ended
September 30, 2018
when compared to non-interest income of
$59.2 million
for the
nine
months ended
September 30, 2017
. Included within non-interest income for the
nine
months ended
September 30, 2018
was an
$18.7 million
loss realized from the sale of $495 million of lower-yielding investment securities and a $1.5 million negative mark-to-market adjustment on an equity investment. Also included within non-interest income for the
nine
months ended
September 30, 2018
was $3.9 million of debit and prepaid card interchange expense, which was recorded as a reduction to the gross amount of interchange and card revenue of $27.1 million as a result of the adoption of the new revenue recognition guidance as described in NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION on a modified retrospective basis. Prior to the adoption of the new revenue recognition guidance, these expenses were included within non-interest expense and reported as technology, communication, and bank operations expense. For the
nine
months ended
September 30, 2017
, debit and prepaid card interchange expense was $4.4 million. If the
nine
months ended
September 30, 2017
was presented on a consistent basis with the
nine
months ended
September 30, 2018
, the reported amount of non-interest income of $59.2 million would have been $54.8 million and the gross interchange and card revenue of $31.7 million would have been presented net of the debit and prepaid card interchange expense of $4.4 million, or $27.4 million. When presented on a consistent basis, interchange and card revenue decreased $4.2 million in 2018 as compared to the same period in 2017 due to lower activity volumes in the BankMobile business segment. Other decreases in total non-interest income for the nine months ended September 30, 2018 included decreases in deposit fees and mortgage warehouse transactional fees of
$2.2 million
and
$1.5 million
, respectively, primarily resulting from reduced transaction volumes. These decreases in non-interest income were offset in part by an increase in other non-interest income of
$5.8 million
, primarily due to a $3.3 million increase in revenue from commercial operating leases and a $2.8 million gain recognized from discontinuing cash flow hedge accounting for three interest rate swaps. For the nine months ended September 30, 2017, Customers realized $8.5 million of gains from the sale of investment securities and recognized a
$12.9 million
impairment loss on an equity investment.
Non-interest expense of
$163.1 million
increased
$2.3 million
, or
1.4%
, for the
nine
months ended
September 30, 2018
when compared to non-interest expense of
$160.8 million
for the
nine
months ended
September 30, 2017
. Total non-interest expense for the
nine
months ended
September 30, 2018
excludes $3.9 million of debit and prepaid card interchange expense as a result of the adoption of the new revenue recognition guidance on January 1, 2018. If the
nine
months ended
September 30, 2017
was presented on a consistent basis with the
nine
months ended
September 30, 2018
, the reported amount of non-interest expense of
$160.8 million
would have been $156.5 million, and technology, communication, and bank operations expense of
$33.2 million
would have been $28.9 million. When presented on a consistent basis, technology, communication and bank operations expense increased $4.1 million, or 14.1%, to
$32.9 million
for the
nine
months ended
September 30, 2018
from $28.9 million for the
nine
months ended
September 30, 2017
, given the continued investment in the BankMobile segment infrastructure and Customers' 2018 system conversion. Salaries and employee benefits increased
$8.6 million
resulting from salary increases to existing team members and an increase in headcount. Merger and acquisition related expenses were
$3.9 million
for the
nine
months ended
September 30, 2018
, compared to no similar expenses for the
nine
months ended
September 30, 2017
. These increases in non-interest expense were partially offset by a decrease in professional services expense of
$6.6 million
, primarily attributable to reductions in consulting, legal, and other professional services as management continues its efforts to monitor and control expenses.
Income tax expense of $14.3 million
decreased
$20.0 million, or 58.4%, for the nine months ended September 30, 2018 when compared to income tax expense of $34.2 million for the nine months ended September 30, 2017. The
decrease
in income tax expense was driven primarily by a lower federal income tax rate from the adoption of the Tax Cut and Jobs Act of 2017, a decrease in pre-tax income of $23.4 million, and a $1.7 million return to provision adjustment, which included the benefit of a research and development tax credit, recorded in third quarter 2018 upon completion of the 2017 income tax returns. Customers' effective tax rate
decreased
to 20.9% for the nine months ended September 30, 2018, compared to 37.4% for the same period in 2017. Income tax expense included $0.8 million and $4.6 million of tax benefits recognized for the increase in the value of restricted stock units vesting and the exercise of stock options since the award date for the nine months ended September 30, 2018 and 2017, respectively.
Preferred stock dividends were
$10.8 million
for the
nine
months ended
September 30, 2018
and 2017, respectively.
NET INTEREST INCOME
Net interest income (the difference between the interest earned on loans, investments and interest-earning deposits with banks, and interest paid on deposits, borrowed funds and subordinated debt) is the primary source of Customers' earnings.
The following table summarizes Customers' net interest income and related interest spread and net interest margin for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2018
|
|
2017
|
|
Average
Balance
|
|
Interest
Income or
Expense
|
|
Average
Yield or
Cost (%)
|
|
Average
Balance
|
|
Interest
Income or
Expense
|
|
Average
Yield or
Cost (%)
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits
|
$
|
227,960
|
|
|
$
|
3,071
|
|
|
1.80
|
%
|
|
$
|
327,154
|
|
|
$
|
2,446
|
|
|
1.00
|
%
|
Investment securities (1)
|
1,109,555
|
|
|
26,932
|
|
|
3.24
|
%
|
|
971,710
|
|
|
21,017
|
|
|
2.88
|
%
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans to mortgage companies
|
1,677,895
|
|
|
61,294
|
|
|
4.88
|
%
|
|
1,734,874
|
|
|
53,860
|
|
|
4.15
|
%
|
Multi-family loans
|
3,584,640
|
|
|
102,859
|
|
|
3.84
|
%
|
|
3,496,276
|
|
|
96,570
|
|
|
3.69
|
%
|
Commercial and industrial loans (2)
|
1,716,907
|
|
|
59,682
|
|
|
4.65
|
%
|
|
1,416,418
|
|
|
44,034
|
|
|
4.16
|
%
|
Non-owner occupied commercial real estate
|
1,268,597
|
|
|
37,996
|
|
|
4.00
|
%
|
|
1,290,762
|
|
|
37,654
|
|
|
3.90
|
%
|
All other loans
|
469,877
|
|
|
17,155
|
|
|
4.88
|
%
|
|
501,799
|
|
|
16,590
|
|
|
4.42
|
%
|
Total loans (3)
|
8,717,916
|
|
|
278,986
|
|
|
4.28
|
%
|
|
8,440,129
|
|
|
248,708
|
|
|
3.94
|
%
|
Other interest-earning assets
|
122,736
|
|
|
5,660
|
|
|
6.17
|
%
|
|
102,590
|
|
|
3,061
|
|
|
3.99
|
%
|
Total interest earning assets
|
10,178,167
|
|
|
314,649
|
|
|
4.13
|
%
|
|
9,841,583
|
|
|
275,232
|
|
|
3.74
|
%
|
Non-interest-earning assets
|
398,570
|
|
|
|
|
|
|
367,595
|
|
|
|
|
|
Total assets
|
$
|
10,576,737
|
|
|
|
|
|
|
$
|
10,209,178
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking accounts
|
$
|
584,228
|
|
|
6,305
|
|
|
1.44
|
%
|
|
$
|
338,991
|
|
|
1,839
|
|
|
0.73
|
%
|
Money market deposit accounts
|
3,426,620
|
|
|
42,769
|
|
|
1.67
|
%
|
|
3,347,661
|
|
|
24,462
|
|
|
0.98
|
%
|
Other savings accounts
|
63,772
|
|
|
514
|
|
|
1.08
|
%
|
|
41,685
|
|
|
87
|
|
|
0.28
|
%
|
Certificates of deposit
|
2,041,721
|
|
|
27,191
|
|
|
1.78
|
%
|
|
2,489,970
|
|
|
22,546
|
|
|
1.21
|
%
|
Total interest-bearing deposits
|
6,116,341
|
|
|
76,779
|
|
|
1.68
|
%
|
|
6,218,307
|
|
|
48,934
|
|
|
1.05
|
%
|
Borrowings
|
2,278,262
|
|
|
41,516
|
|
|
2.44
|
%
|
|
1,836,654
|
|
|
27,255
|
|
|
1.98
|
%
|
Total interest-bearing liabilities
|
8,394,603
|
|
|
118,295
|
|
|
1.88
|
%
|
|
8,054,961
|
|
|
76,189
|
|
|
1.26
|
%
|
Non-interest-bearing deposits
|
1,165,478
|
|
|
|
|
|
|
1,185,062
|
|
|
|
|
|
Total deposits and borrowings
|
9,560,081
|
|
|
|
|
1.65
|
%
|
|
9,240,023
|
|
|
|
|
1.10
|
%
|
Other non-interest-bearing liabilities
|
81,663
|
|
|
|
|
|
|
72,622
|
|
|
|
|
|
Total liabilities
|
9,641,744
|
|
|
|
|
|
|
9,312,645
|
|
|
|
|
|
Shareholders’ Equity
|
934,993
|
|
|
|
|
|
|
896,533
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
$
|
10,576,737
|
|
|
|
|
|
|
$
|
10,209,178
|
|
|
|
|
|
Net interest income
|
|
|
196,354
|
|
|
|
|
|
|
199,043
|
|
|
|
Tax-equivalent adjustment (4)
|
|
|
514
|
|
|
|
|
|
|
399
|
|
|
|
Net interest earnings
|
|
|
$
|
196,868
|
|
|
|
|
|
|
$
|
199,442
|
|
|
|
Interest spread
|
|
|
|
|
2.48
|
%
|
|
|
|
|
|
2.64
|
%
|
Net interest margin
|
|
|
|
|
2.58
|
%
|
|
|
|
|
|
2.70
|
%
|
Net interest margin tax equivalent (4)
|
|
|
|
|
2.58
|
%
|
|
|
|
|
|
2.71
|
%
|
|
|
(1)
|
For presentation in this table, average balances and the corresponding average yields for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.
|
|
|
(2)
|
Includes owner occupied commercial real estate loans.
|
|
|
(3)
|
Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees.
|
|
|
(4)
|
Non-GAAP tax-equivalent basis, using an estimated marginal tax rate of 26% for the nine months ended September 30, 2018 and 35% for the nine months ended September 30, 2017 presented to approximate interest income as a taxable asset. Management uses non-GAAP measures to present historical periods comparable to the current period presentation. In addition, management believes the use of these non-GAAP measures provides additional clarity when assessing Customers’ financial results. These disclosures should not be viewed as substitutes for results determined to be in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other entities.
|
The following table presents the dollar amount of changes in interest income and interest expense for the major categories of interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2018 vs. 2017
|
|
Increase (Decrease) due
to Change in
|
|
|
|
Rate
|
|
Volume
|
|
Total
|
(amounts in thousands)
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
Interest-earning deposits
|
$
|
1,530
|
|
|
$
|
(905
|
)
|
|
$
|
625
|
|
Investment securities
|
2,738
|
|
|
3,177
|
|
|
5,915
|
|
Loans:
|
|
|
|
|
|
Commercial loans to mortgage companies
|
9,252
|
|
|
(1,818
|
)
|
|
7,434
|
|
Multi-family loans
|
3,811
|
|
|
2,478
|
|
|
6,289
|
|
Commercial and industrial loans, including owner occupied commercial real estate
|
5,597
|
|
|
10,051
|
|
|
15,648
|
|
Non-owner occupied commercial real estate
|
995
|
|
|
(653
|
)
|
|
342
|
|
All other loans
|
1,662
|
|
|
(1,097
|
)
|
|
565
|
|
Total loans
|
21,317
|
|
|
8,961
|
|
|
30,278
|
|
Other interest-earning assets
|
1,911
|
|
|
688
|
|
|
2,599
|
|
Total interest income
|
27,496
|
|
|
11,921
|
|
|
39,417
|
|
Interest expense
|
|
|
|
|
|
Interest checking accounts
|
2,580
|
|
|
1,886
|
|
|
4,466
|
|
Money market deposit accounts
|
17,717
|
|
|
590
|
|
|
18,307
|
|
Other savings accounts
|
360
|
|
|
67
|
|
|
427
|
|
Certificates of deposit
|
9,232
|
|
|
(4,587
|
)
|
|
4,645
|
|
Total interest-bearing deposits
|
29,889
|
|
|
(2,044
|
)
|
|
27,845
|
|
Borrowings
|
6,943
|
|
|
7,318
|
|
|
14,261
|
|
Total interest expense
|
36,832
|
|
|
5,274
|
|
|
42,106
|
|
Net interest income
|
$
|
(9,336
|
)
|
|
$
|
6,647
|
|
|
$
|
(2,689
|
)
|
Net interest income for the
nine months ended September 30, 2018
was
$196.4 million
, a decrease of
$2.7 million
, or
1.4%
, when compared to net interest income of
$199.0 million
for the
nine months ended September 30, 2017
, as net interest margin (tax equivalent)
narrowed
by
13
basis points to
2.58%
for the
nine months ended September 30, 2018
compared to
2.71%
for the
nine months ended September 30, 2017
. The net interest margin (tax equivalent) compression largely resulted from a
63
basis point increase in the cost of interest-bearing deposits, reflecting higher interest rates offered by Customers on its deposit products in order to remain competitive and attract new and retain existing deposit customers, and a
46
basis point increase in borrowing costs, reflecting higher short-term funding rates. The higher cost of funds was offset in part by a
39
basis point increase in the yield on interest-earning assets, primarily resulting from increased yields on all loan categories, reflecting higher short-term interest rates and increased prepayment fees of
$2.0 million
for the
nine months ended September 30, 2018
, compared to the
nine months ended September 30, 2017
.
Interest expense on total interest-bearing deposits increased
$27.8 million
for the
nine months ended September 30, 2018
, compared to the
nine months ended September 30, 2017
. This increase primarily resulted from the aforementioned increase in rates offered on all deposit categories. Interest expense on borrowings increased
$14.3 million
for the
nine months ended September 30, 2018
, compared to the
nine months ended September 30, 2017
. This increase was driven by increased volume as average borrowings increased by
$441.6 million
when compared to average borrowings for the
nine months ended September 30, 2017
, mostly due to higher average outstanding balances of short-term FHLB advances to fund the growth in interest-earning assets.
PROVISION FOR LOAN LOSSES
The provision for loan losses
decreased
by
$1.7 million
to
$4.3 million
for the
nine months ended September 30, 2018
, compared to
$5.9 million
for the same period in
2017
. The provision for loan losses for the
nine months ended September 30, 2018
included
$3.5 million
for loan portfolio growth and
$1.9 million
for impaired loans, offset in part by a release of
$1.2 million
resulting from improved asset quality and lower incurred losses than previously estimated. The provision for loan losses for the
nine months ended September 30, 2017
included
$2.3 million
for loan portfolio growth and $3.9 million for impaired loans, offset in part by a release of
$0.8 million
resulting from improved asset quality and lower incurred losses than previously estimated.
For more information about the provision and allowance for loan losses and our loss experience, see “Credit Risk” and “Asset Quality” herein.
NON-INTEREST INCOME
The table below presents the components of non-interest income for the
nine
months ended
September 30, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
Percentage Change
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Interchange and card revenue
|
$
|
23,127
|
|
|
$
|
31,729
|
|
|
$
|
(8,602
|
)
|
|
(27.1
|
)%
|
Bank-owned life insurance
|
5,769
|
|
|
5,297
|
|
|
472
|
|
|
8.9
|
%
|
Deposit fees
|
5,726
|
|
|
7,918
|
|
|
(2,192
|
)
|
|
(27.7
|
)%
|
Mortgage warehouse transactional fees
|
5,663
|
|
|
7,139
|
|
|
(1,476
|
)
|
|
(20.7
|
)%
|
Gain on sale of SBA and other loans
|
3,404
|
|
|
3,045
|
|
|
359
|
|
|
11.8
|
%
|
Mortgage banking income
|
532
|
|
|
703
|
|
|
(171
|
)
|
|
(24.3
|
)%
|
(Loss) gain on sale of investment securities
|
(18,659
|
)
|
|
8,532
|
|
|
(27,191
|
)
|
|
(318.7
|
)%
|
Impairment loss on investment securities
|
—
|
|
|
(12,934
|
)
|
|
12,934
|
|
|
(100.0
|
)%
|
Other
|
13,558
|
|
|
7,741
|
|
|
5,817
|
|
|
75.1
|
%
|
Total non-interest income
|
$
|
39,120
|
|
|
$
|
59,170
|
|
|
$
|
(20,050
|
)
|
|
(33.9
|
)%
|
Interchange and card revenue
Included within interchange and card revenue for the
nine
months ended
September 30, 2018
was
$3.9 million
of debit and prepaid card interchange expense, which was recorded as a reduction to the gross amount of interchange and card revenue of $27.1 million as a result of the adoption of the new revenue recognition guidance as described in NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION on a modified retrospective basis. Prior to the adoption of the new revenue recognition guidance, these expenses were included within non-interest expense and reported as technology, communication, and bank operations expense. For the
nine
months ended
September 30, 2017
, debit and prepaid card interchange expense was
$4.4 million
. If the
nine
months ended
September 30, 2017
was presented on a consistent basis with the
nine
months ended
September 30, 2018
, the reported amount of gross interchange and card revenue of
$31.7 million
would have been presented net of the debit and prepaid card interchange expense of
$4.4 million
, or $27.4 million. When presented on a consistent basis, interchange and card revenue decreased $4.2 million as a result of lower activity volumes in the BankMobile business segment.
Deposit fees
The
$2.2 million
decrease in deposit fees for the nine months ended
September 30, 2018
compared to the nine months ended September 30, 2017 primarily resulted from reduced transaction volumes at BankMobile.
Mortgage warehouse transactional fees
The
$1.5 million
decrease in mortgage warehouse transactional fees for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 primarily resulted from reduced transaction volumes and reduced per transaction fees in Customers' mortgage warehouse business due to the general slowdown of mortgage originations across the United States.
(Loss) gain on sale of investment securities
For the nine months ended September 30, 2018, Customers realized a loss of
$18.7 million
from the sale of $495 million of lower-yielding investment securities, compared to a gain of
$8.5 million
from the sale of $662 million of investment securities for the nine months ended
September 30, 2017
. The 2018 loss results from the fixed rate nature of the bonds relative to the higher market interest rates for those bonds in the third quarter of 2018.
Impairment loss on investment securities
There were no other-than-temporary impairment losses on investment securities for the nine months ended September 30, 2018. Customers recorded an other-than-temporary impairment loss of $12.9 million for the nine months ended September 30, 2017 for the full amount of decline in fair value of an equity investment below the cost basis established at December 31, 2016.
Other non-interest income
The
$5.8 million
increase in other non-interest income for the nine months ended
September 30, 2018
compared to the nine months ended September 30, 2017 was primarily due to a $2.8 million gain recognized from discontinuing cash flow hedge accounting for three interest rate swaps as of September 30, 2018 and a $3.3 million increase in income from commercial operating leases. These increases were offset in part by a $1.5 million negative mark-to-market adjustment on an equity investment.
NON-INTEREST EXPENSE
The table below presents the components of non-interest expense for the
nine
months ended
September 30, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
Percentage Change
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Salaries and employee benefits
|
$
|
78,135
|
|
|
$
|
69,569
|
|
|
$
|
8,566
|
|
|
12.3
|
%
|
Technology, communication, and bank operations
|
32,923
|
|
|
33,227
|
|
|
(304
|
)
|
|
(0.9
|
)%
|
Professional services
|
14,563
|
|
|
21,142
|
|
|
(6,579
|
)
|
|
(31.1
|
)%
|
Occupancy
|
8,876
|
|
|
8,228
|
|
|
648
|
|
|
7.9
|
%
|
FDIC assessments, non-income taxes, and regulatory fees
|
6,750
|
|
|
6,615
|
|
|
135
|
|
|
2.0
|
%
|
Provision for operating losses
|
3,930
|
|
|
4,901
|
|
|
(971
|
)
|
|
(19.8
|
)%
|
Merger and acquisition related expenses
|
3,920
|
|
|
—
|
|
|
3,920
|
|
|
N/A
|
|
Loan workout
|
1,823
|
|
|
1,844
|
|
|
(21
|
)
|
|
(1.1
|
)%
|
Advertising and promotion
|
1,529
|
|
|
1,108
|
|
|
421
|
|
|
38.0
|
%
|
Other real estate owned expenses
|
164
|
|
|
550
|
|
|
(386
|
)
|
|
(70.2
|
)%
|
Other
|
10,521
|
|
|
13,634
|
|
|
(3,113
|
)
|
|
(22.8
|
)%
|
Total non-interest expense
|
$
|
163,134
|
|
|
$
|
160,818
|
|
|
$
|
2,316
|
|
|
1.4
|
%
|
Salaries and employee benefits
The
$8.6 million
increase in salaries and employee benefits for the
nine
months ended
September 30, 2018
compared to the nine months ended September 30, 2017 was primarily due to salary increases for existing team members and increased headcount as Customers continues to hire new team members in the markets it serves.
Technology, communication, and bank operations
Technology, communication, and bank operations for the
nine
months ended
September 30, 2018
excludes
$3.9 million
of debit and prepaid card interchange expense as a result of the adoption of the new revenue recognition guidance on January 1, 2018. For the
nine
months ended
September 30, 2017
, debit and prepaid card interchange expense was
$4.4 million
. If the
nine
months ended
September 30, 2017
was presented on a consistent basis with the
nine
months ended
September 30, 2018
, the reported amount of technology, communication, and bank operations expense of
$33.2 million
would have been $28.9 million. When presented on a consistent basis, technology, communication and bank operations expense increased $4.1 million to
$32.9
million
for the nine months ended
September 30, 2018
from $28.9 million for the nine months ended
September 30, 2017
, as a result of the continued investment in the BankMobile segment infrastructure and Customers' 2018 system conversion.
Professional services
The
$6.6 million
decrease in professional services for the
nine
months ended
September 30, 2018
compared to the nine months ended September 30, 2017 was primarily driven by a reduction in expenses for consulting, legal, and other professional fees as management continues its efforts to monitor and control expenses.
Provision for operating losses
The
$3.9 million
provision for operating losses represents Customers' estimated liability for losses resulting from fraud or theft-based transactions that have generally been disputed by deposit account holders mainly from its BankMobile Disbursements business but where such disputes have not been resolved as of the end of the reporting period. The reserve is based on historical rates of loss on such transactions and the provision adjusts the reserve to the estimated liability.
Merger and acquisition related expenses
The
$3.9 million
increase in merger and acquisition related expenses for the nine months ended
September 30, 2018
compared to the nine months ended September 30, 2017 primarily related to the planned spin-off and merger of BankMobile and a residual expense resulting from the 2016 acquisition of the Disbursement business. Upon termination of the spin-off and merger agreement between Customers and Flagship on October 18, 2018, Customers recognized expenses of
$2.7 million
during third quarter 2018 for amounts that, under the terms of that agreement, would have been reimbursed by Flagship only upon completion of the spin-off and merger.
Other non-interest expense
The
$3.1 million
decrease in other non-interest expense for the nine months ended
September 30, 2018
compared to the nine months ended September 30, 2017 was generated by numerous specific cost saves and reflects management's continued efforts to monitor and control expenses.
INCOME TAXES
The table below presents income tax expense and the effective tax rate for the
nine
months ended
September 30, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
2018
|
|
2017
|
|
Change
|
|
Percentage Change
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Income before income tax expense
|
$
|
68,083
|
|
|
$
|
91,458
|
|
|
$
|
(23,375
|
)
|
|
(25.6
|
)%
|
Income tax expense
|
14,250
|
|
|
34,236
|
|
|
(19,986
|
)
|
|
(58.4
|
)%
|
Effective tax rate
|
20.93
|
%
|
|
37.43
|
%
|
|
|
|
|
The
$20.0 million
decrease in income tax expense for the
nine
months ended
September 30, 2018
was primarily attributable to the lowering of the corporate federal income tax rate from 35% to 21% due to the adoption of the Tax Cut and Jobs Act of 2017, a decrease in pre-tax income of
$23.4 million
, and a $1.7 million favorable return to provision adjustment, which included the benefit of a research and development tax credit, recorded in third quarter 2018 upon completion of the 2017 income tax returns. Offsetting these items was a lower tax benefit of $3.8 million recognized during the nine months ended September 30, 2018 compared to the same period in 2017 for an increase in the fair value of restricted stock units vesting and the exercise of stock options since the award date.
PREFERRED STOCK DIVIDENDS
Preferred stock dividends were
$10.8 million
for the
nine
months ended
September 30, 2018
and
2017
, respectively. There were no changes to the amount of preferred stock outstanding or the dividend rates for the first
nine
months of 2018 compared to the first
nine
months of 2017.
Financial Condition
General
Customers' total assets were
$10.6 billion
at
September 30, 2018
. This represented a
$0.8 billion
increase
from total assets of
$9.8 billion
at
December 31, 2017
. The increase in total assets was primarily attributable to increases in cash and cash equivalents of $0.5 billion, largely resulting from proceeds received from the sale of lower-yielding investment securities during third quarter 2018, and investment securities of $0.2 billion. Customers expects total assets to be under $10 billion by the end of 2018 as management focuses on optimizing balance sheet mix, enhancing liquidity, improving capital, expanding net interest margin, and maximizing the return on average assets.
Total liabilities were
$9.7 billion
at
September 30, 2018
. This represented a
$0.7 billion
increase
from
$8.9 billion
at
December 31, 2017
. The
increase
in total liabilities resulted primarily from an increase in total deposits of $1.7 billion, offset in part by reductions in FHLB advances of $0.8 billion and federal funds purchased of $0.2 billion.
The following table presents certain key condensed balance sheet data as of
September 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
|
Change
|
|
Percentage Change
|
(dollars in thousands)
|
|
|
(As Restated)
|
|
|
|
|
Cash and cash equivalents
|
$
|
666,034
|
|
|
$
|
146,323
|
|
|
$
|
519,711
|
|
|
355.2
|
%
|
Investment securities, at fair value
|
668,851
|
|
|
471,371
|
|
|
197,480
|
|
|
41.9
|
%
|
Loans held for sale (includes $1,383 and $1,886, respectively, at fair value)
|
1,383
|
|
|
146,077
|
|
|
(144,694
|
)
|
|
(99.1
|
)%
|
Loans receivable, mortgage warehouse, at fair value
|
1,516,327
|
|
|
1,793,408
|
|
|
(277,081
|
)
|
|
(15.4
|
)%
|
Loans receivable
|
7,239,950
|
|
|
6,768,258
|
|
|
471,692
|
|
|
7.0
|
%
|
Allowance for loan losses
|
(40,741
|
)
|
|
(38,015
|
)
|
|
(2,726
|
)
|
|
7.2
|
%
|
Total assets
|
10,617,104
|
|
|
9,839,555
|
|
|
777,549
|
|
|
7.9
|
%
|
Total deposits
|
8,513,714
|
|
|
6,800,142
|
|
|
1,713,572
|
|
|
25.2
|
%
|
Federal funds purchased
|
—
|
|
|
155,000
|
|
|
(155,000
|
)
|
|
(100.0
|
)%
|
FHLB advances
|
835,000
|
|
|
1,611,860
|
|
|
(776,860
|
)
|
|
(48.2
|
)%
|
Other borrowings
|
123,779
|
|
|
186,497
|
|
|
(62,718
|
)
|
|
(33.6
|
)%
|
Subordinated debt
|
108,953
|
|
|
108,880
|
|
|
73
|
|
|
0.1
|
%
|
Total liabilities
|
9,662,292
|
|
|
8,918,591
|
|
|
743,701
|
|
|
8.3
|
%
|
Total shareholders’ equity
|
954,812
|
|
|
920,964
|
|
|
33,848
|
|
|
3.7
|
%
|
Total liabilities and shareholders’ equity
|
10,617,104
|
|
|
9,839,555
|
|
|
777,549
|
|
|
7.9
|
%
|
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks and interest-earning deposits. Cash and due from banks consists mainly of vault cash and cash items in the process of collection. These balances totaled
$12.9 million
at
September 30, 2018
. This represented a
$7.4 million
decrease
from
$20.4 million
at
December 31, 2017
. These balances vary from day to day, primarily due to variations in customers’ deposit activities with Customers.
Interest-earning deposits consist of cash deposited at other banks, primarily the Federal Reserve Bank of Philadelphia. Interest-earning deposits were
$653.1 million
and
$125.9 million
at
September 30, 2018
and
December 31, 2017
, respectively. The increase in interest-earning deposits can be mostly attributed to proceeds received from the sale of lower-yielding investment securities in third quarter 2018, which were subsequently used to pay down FHLB advances in October 2018. Additionally, the balance of interest-earning deposits varies from day to day, depending on several factors, such as fluctuations in customers' deposits with Customers, payment of checks drawn on customers' accounts and strategic investment decisions made to maximize Customers' net interest income, while effectively managing interest-rate risk and liquidity.
Investment Securities
The investment securities portfolio is an important source of interest income and liquidity. It consists of mortgage-backed securities (guaranteed by an agency of the United States government), corporate debt and marketable equity securities. In addition to generating revenue, the investment portfolio is maintained to manage interest-rate risk, provide liquidity, provide collateral for other borrowings and diversify the credit risk of interest-earning assets. The portfolio is structured to optimize net interest income, given changes in the economic environment, liquidity position and balance sheet mix.
Investment securities totaled $668.9 million at September 30, 2018 compared to $471.4 million at December 31, 2017. The
increase
in investment securities was primarily the result of purchases of agency-guaranteed mortgage-backed securities and corporate securities totaling
$763.2 million
, largely during the first quarter of 2018, offset in part by the sale of $494.8 million of lower-yielding securities during the third quarter of this year, and maturities, calls and principal repayments totaling
$38.9 million
during the
nine
months ended
September 30, 2018
.
For financial reporting purposes, available-for-sale debt securities are carried at fair value. Unrealized gains and losses on available-for-sale debt securities are included in other comprehensive income and reported as a separate component of shareholders’ equity, net of the related tax effect. Beginning January 1, 2018, changes in the fair value of marketable equity securities previously classified as available for sale are recorded in earnings in the period in which they occur and are no longer deferred in accumulated other comprehensive income. Amounts previously recorded to accumulated other comprehensive income were reclassified to retained earnings on January 1, 2018. See NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION for additional details related to the adoption of ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
.
LOANS
Existing lending relationships are primarily with small and middle market businesses and individual consumers primarily in Southeastern Pennsylvania (Bucks, Berks, Chester, Philadelphia and Delaware Counties); Rye Brook, New York (Westchester County); Hamilton, New Jersey (Mercer County); Boston, Massachusetts; Providence, Rhode Island; Portsmouth, New Hampshire (Rockingham County); Manhattan and Melville, New York; Washington, D.C.; and Chicago, Illinois. The portfolio of loans to mortgage banking businesses is nationwide. The loan portfolio consists primarily of loans to support mortgage banking companies’ funding needs, multi-family/commercial real estate and commercial and industrial loans. Customers continues to focus on small and middle market business loans to grow its commercial lending efforts, particularly its commercial and industrial loan portfolio and its specialty mortgage lending business, and has announced its entry into non-QM residential mortgage lending and plans to increase its consumer lending activities. In addition, Customers has been deemphasizing its multi-family business and has significantly limited originations of loans yielding less than 5.25% in order to reduce net interest margin compression.
Commercial Lending
Customers' commercial lending is divided into five groups: Business Banking, Small and Middle Market Business Banking, Multi-Family and Commercial Real Estate Lending, Mortgage Banking Lending, and Equipment Finance. This grouping is designed to allow for greater resource deployment, higher standards of risk management, strong asset quality, lower interest- rate risk and higher productivity levels.
The commercial lending group focuses primarily on companies with annual revenues ranging from $1 million to $100 million, which typically have credit requirements between $0.5 million and $10 million.
The small and middle market business banking platform originates loans, including Small Business Administration loans, through the branch network sales force and a team of dedicated relationship managers. The support administration of this platform is centralized including risk management, product management, marketing, performance tracking and overall strategy. Credit and sales training has been established for Customers' sales force, ensuring that it has small business experts in place providing appropriate financial solutions to the small business owners in its communities. A division approach focuses on industries that offer high asset quality and are deposit rich to drive profitability.
In 2009, Customers launched its lending to mortgage banking businesses products, which primarily provides financing to mortgage bankers for residential mortgage originations from loan closing until sale in the secondary market. Many providers of liquidity in this segment exited the business in 2009 during a period of market turmoil. Customers saw an opportunity to provide liquidity to this business segment at attractive spreads. There was also the opportunity to attract escrow deposits and to generate fee income in this business. The goal of the mortgage banking business lending group is to originate loans that provide liquidity to mortgage banking companies. These loans are primarily used by mortgage companies to fund their pipelines from closing of individual mortgage loans until their sale into the secondary market. The underlying residential loans are taken as collateral for Customers' commercial loans to the mortgage companies. As of
September 30, 2018
and
December 31, 2017
, commercial loans to mortgage banking businesses totaled
$1.5 billion
and
$1.8 billion
, respectively, and are reported as loans receivable, mortgage warehouse, at fair value.
The goal of Customers' multi-family lending group is to build a portfolio of high-quality multi-family loans within Customers' covered markets, while cross selling other products and services. These lending activities primarily target the refinancing of loans with other banks using conservative underwriting standards and provide purchase money for new acquisitions by borrowers. The primary collateral for these loans is a first lien mortgage on the multi-family property, plus an assignment of all leases related to such property. As of
September 30, 2018
, Customers had multi-family loans of
$3.5 billion
outstanding, comprising approximately 40.0% of the total loan portfolio, compared to
$3.6 billion
, or approximately 41.9% of the total loan portfolio, at
December 31, 2017
.
The equipment finance group offers equipment financing and leasing products and services for a broad range of asset classes. It services vendors, dealers, independent finance companies, bank-owned leasing companies, and strategic direct customers in the plastics, packaging, machine tool, construction, transportation and franchise markets. As of
September 30, 2018
and
December 31, 2017
, Customers had
$157.4 million
and
$152.5 million
, respectively, of equipment finance loans outstanding. As of
September 30, 2018
and
December 31, 2017
, Customers had
$39.3 million
and
$26.6 million
of equipment finance leases, respectively. As of
September 30, 2018
and
December 31, 2017
, Customers had
$40.7 million
and
$21.7 million
, respectively, of operating leases entered into under this program, net of accumulated depreciation of
$3.4 million
and
$0.5 million
, respectively.
As of
September 30, 2018
, Customers had $8.1 billion in commercial loans outstanding, totaling approximately 92.6% of its total loan portfolio, which includes loans held for sale and loans receivable mortgage warehouse at fair value, compared to commercial loans outstanding of $8.4 billion, comprising approximately 96.2% of its loan portfolio, at
December 31, 2017
.
Consumer Lending
Customers provides home equity and residential mortgage loans to customers. Underwriting standards for home equity lending are conservative and lending is offered to solidify customer relationships and grow relationship revenues in the long term. This lending is important in Customers' efforts to grow total relationship revenues for its consumer households. As of
September 30, 2018
, Customers had
$645.0 million
in consumer loans outstanding, or 7.4% of the total loan portfolio, compared to
$329.8 million
, or 3.8% of the total loan portfolio, as of
December 31, 2017
. During
third
quarter
2018
, Customers purchased
$72.7 million
of residential mortgage and other consumer loans from third party financial institutions. Customers plans to expand its product offerings in real estate secured consumer lending, as well as other consumer lending activities, and has announced its entry into the non-QM residential mortgage market.
Customers has launched a community outreach program in Philadelphia to finance homeownership in urban communities. As part of this program, Customers is offering an “Affordable Mortgage Product." This community outreach program is penetrating the underserved population, especially in low and moderate income neighborhoods. As part of this commitment, a loan production office was opened in Progress Plaza, 1501 North Broad Street, Philadelphia, PA. The program includes homebuyer seminars that prepare potential homebuyers for homeownership by teaching money management and budgeting skills, including the financial responsibilities that come with having a mortgage and owning a home. The “Affordable Mortgage Product” is offered throughout Customers' assessment areas.
Loans Held for Sale
The composition of loans held for sale as of
September 30, 2018
and
December 31, 2017
was as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
2018
|
|
2017
|
(amounts in thousands)
|
|
|
(As Restated)
|
Commercial loans:
|
|
|
|
Multi-family loans at lower of cost or fair value
|
$
|
—
|
|
|
$
|
144,191
|
|
Total commercial loans held for sale
|
—
|
|
|
144,191
|
|
Consumer loans:
|
|
|
|
Residential mortgage loans, at fair value
|
1,383
|
|
|
1,886
|
|
Loans held for sale
|
$
|
1,383
|
|
|
$
|
146,077
|
|
At
September 30, 2018
, loans held for sale totaled
$1.4 million
, or 0.02% of the total loan portfolio, and
$146.1 million
, or 1.7% of the total loan portfolio, at
December 31, 2017
. Loans held for sale are carried on the balance sheet at either fair value (due to the election of the fair value option) or at the lower of cost or fair value. An allowance for loan losses is not recorded on loans that are classified as held for sale.
Loans Receivable
Loans receivable (excluding loans held for sale and loans reported at their fair value), net of the allowance for loan losses, increased by
$469.0 million
to
$7.2 billion
at
September 30, 2018
from
$6.7 billion
at
December 31, 2017
. Loans receivable as of
September 30, 2018
and
December 31, 2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
2018
|
|
2017
|
(amounts in thousands)
|
|
|
(As Restated)
|
Loans receivable, mortgage warehouse, at fair value
|
$
|
1,516,327
|
|
|
$
|
1,793,408
|
|
Loans receivable:
|
|
|
|
Commercial:
|
|
|
|
Multi-family
|
3,504,540
|
|
|
3,502,381
|
|
Commercial and industrial (including owner occupied commercial real estate)
|
1,841,704
|
|
|
1,633,818
|
|
Commercial real estate non-owner occupied
|
1,157,849
|
|
|
1,218,719
|
|
Construction
|
95,250
|
|
|
85,393
|
|
Total commercial loans receivable
|
6,599,343
|
|
|
6,440,311
|
|
Consumer:
|
|
|
|
Residential real estate
|
509,853
|
|
|
234,090
|
|
Manufactured housing
|
82,589
|
|
|
90,227
|
|
Other
|
51,210
|
|
|
3,547
|
|
Total consumer loans receivable
|
643,652
|
|
|
327,864
|
|
Loans receivable
|
7,242,995
|
|
|
6,768,175
|
|
Deferred (fees)/costs and unamortized (discounts)/premiums, net
|
(3,045
|
)
|
|
83
|
|
Allowance for loan losses
|
(40,741
|
)
|
|
(38,015
|
)
|
Total loans receivable, net of allowance for loan losses
|
$
|
8,715,536
|
|
|
$
|
8,523,651
|
|
Credit Risk
Customers manages credit risk by maintaining diversification in its loan portfolio, establishing and enforcing prudent underwriting standards and collection efforts, and continuous and periodic loan classification reviews. Management also considers the effect of credit risk on financial performance by reviewing quarterly and maintaining an adequate allowance for loan losses. Credit losses are charged when they are identified, and provisions are added when it is estimated that a loss has occurred, to the allowance for loan losses at least quarterly. The allowance for loan losses is estimated at least quarterly.
The provision for loan losses was
$2.9 million
and
$2.4 million
for the three months ended
September 30, 2018
and
2017
, respectively, and
$4.3 million
and
$5.9 million
for the
nine
months ended
September 30, 2018
and
2017
, respectively. The allowance for loan losses maintained for loans receivable (excluding loans held for sale and loans receivable mortgage warehouse loans, at fair value) was
$40.7 million
, or
0.56%
of loans receivable, at
September 30, 2018
and
$38.0 million
, or
0.56%
of loans receivable, at
December 31, 2017
. Net charge-offs were
$0.5 million
for the
three months ended September 30, 2018
, a
decrease
of
$2.0 million
compared to the same period in
2017
. The
decrease
in net charge-offs period over period was mainly driven by a decrease in net charge-off activities in the commercial and industrial loan portfolio. Net charge-offs were
$1.5 million
for the
nine
months ended
September 30, 2018
, a
decrease
of
$3.4 million
compared to the same period in
2017
. The
decrease
in net charge-offs period over period was mainly driven by a decrease in net charge-off activities related to the commercial and industrial loan portfolio. This decrease was partially offset by an increase in net charge-off activities in the other consumer loan portfolio.
The table below presents changes in the Bank’s allowance for loan losses for the periods indicated.
Analysis of the Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
(amounts in thousands)
|
|
|
|
|
|
|
|
Balance at the beginning of the period
|
$
|
38,288
|
|
|
$
|
38,458
|
|
|
$
|
38,015
|
|
|
$
|
37,315
|
|
Loan charge-offs (1)
|
|
|
|
|
|
|
|
Commercial and industrial
|
90
|
|
|
2,032
|
|
|
314
|
|
|
4,079
|
|
Commercial real estate owner occupied
|
—
|
|
|
—
|
|
|
501
|
|
|
—
|
|
Commercial real estate non-owner occupied
|
—
|
|
|
77
|
|
|
—
|
|
|
485
|
|
Residential real estate
|
—
|
|
|
120
|
|
|
407
|
|
|
410
|
|
Other consumer
|
437
|
|
|
356
|
|
|
1,155
|
|
|
602
|
|
Total Charge-offs
|
527
|
|
|
2,585
|
|
|
2,377
|
|
|
5,576
|
|
Loan recoveries (1)
|
|
|
|
|
|
|
|
Commercial and industrial
|
30
|
|
|
54
|
|
|
205
|
|
|
337
|
|
Commercial real estate owner occupied
|
—
|
|
|
—
|
|
|
326
|
|
|
9
|
|
Commercial real estate non-owner occupied
|
5
|
|
|
—
|
|
|
5
|
|
|
—
|
|
Construction
|
11
|
|
|
27
|
|
|
231
|
|
|
157
|
|
Residential real estate
|
6
|
|
|
7
|
|
|
69
|
|
|
34
|
|
Other consumer
|
4
|
|
|
1
|
|
|
10
|
|
|
101
|
|
Total Recoveries
|
56
|
|
|
89
|
|
|
846
|
|
|
638
|
|
Total net charge-offs
|
471
|
|
|
2,496
|
|
|
1,531
|
|
|
4,938
|
|
Provision for loan losses
|
2,924
|
|
|
2,352
|
|
|
4,257
|
|
|
5,937
|
|
Balance at the end of the period
|
$
|
40,741
|
|
|
$
|
38,314
|
|
|
$
|
40,741
|
|
|
$
|
38,314
|
|
|
|
(1)
|
Charge-offs and recoveries on purchased-credit-impaired loans that are accounted for in pools are recognized on a net basis when the pool matures.
|
The allowance for loan losses is based on a quarterly evaluation of the loan portfolio and is maintained at a level that management considers adequate to absorb probable losses incurred as of the balance sheet date. All commercial loans, with the exception of mortgage warehouse loans, at fair value, are assigned internal credit-risk ratings, based upon an assessment of the borrower, the structure of the transaction and the available collateral and/or guarantees. All loans are monitored regularly by the responsible officer, and the risk ratings are adjusted when considered appropriate. The risk assessment allows management to identify problem loans timely. Management considers a variety of factors and recognizes the inherent risk of loss that always exists in the lending process. Management uses a disciplined methodology to estimate an appropriate level of allowance for loan losses. Refer to Critical Accounting Policies herein and NOTE 4 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION to Customers' audited financial statements in its 2017 Form 10-K for further discussion on management's methodology for estimating the allowance for loan losses.
Approximately
83%
of Customers' commercial real estate, commercial and residential construction, consumer residential and commercial and industrial loan types have real estate as collateral (collectively, “the real estate portfolio”). Customers' lien position on the real estate collateral will vary on a loan-by-loan basis and will change as a result of changes in the value of the collateral. Current appraisals providing current value estimates of the property are received when Customers' credit group determines that the facts and circumstances have significantly changed since the date of the last appraisal, including that real estate values have deteriorated. The credit committee and loan officers review loans that are 15 or more days delinquent and all non-accrual loans on a periodic basis. In addition, loans where the loan officers have identified a “borrower of interest” are discussed to determine if additional analysis is necessary to apply the risk-rating criteria properly. The risk ratings for the real estate loan portfolio are determined based upon the current information available, including but not limited to discussions with the borrower, updated financial information, economic conditions within the geographic area and other factors that may affect the cash flow of the loan. If a loan is individually evaluated for impairment, the collateral value or discounted cash flow analysis is generally used to determine the estimated fair value of the underlying collateral, net of estimated selling costs, and compared to the outstanding loan balance to determine the amount of reserve necessary, if any. Appraisals used in this evaluation process are typically less than two years aged. For loans where real estate is not the primary source of collateral, updated financial information is obtained, including accounts receivable and inventory aging reports and relevant supplemental financial data to estimate the fair value of the loan, net of estimated selling costs, and compared to the outstanding loan balance to estimate the required reserve.
These impairment measurements are inherently subjective as they require material estimates, including, among others, estimates of property values in appraisals, the amounts and timing of expected future cash flows on individual loans, and general considerations for historical loss experience, economic conditions, uncertainties in estimating losses and inherent risks in the various credit portfolios, all of which require judgment and may be susceptible to significant change over time and as a result of changing economic conditions or other factors. Pursuant to ASC 310-10-35,
Loan Impairment,
and ASC 310-40,
Troubled Debt Restructurings by Creditors
, impaired loans, consisting primarily of non-accrual and restructured loans, are considered in the methodology for determining the allowance for loan losses. Impaired loans are generally evaluated based on the expected future cash flows or the fair value of the underlying collateral (less estimated costs to sell) if principal repayment is expected to come from the sale or operation of such collateral.
Asset Quality
Customers divides its loan portfolio into two categories to analyze and understand loan activity and performance: loans that were originated and loans that were acquired. Customers further segments the originated and acquired loan categories by loan product or other characteristic generally defining a shared characteristic with other loans in the same group. Customers' originated loans were subject to the current underwriting standards that were put in place in 2009. Management believes this segmentation better reflects the risk in the portfolio and the various types of reserves that are available to absorb loan losses that may emerge in future periods. Credit losses from originated loans are absorbed by the allowance for loan losses. Credit losses from acquired loans are absorbed by the allowance for loan losses, nonaccretable difference fair value marks, and cash reserves. As described below, the allowance for loan losses is intended to absorb only those losses estimated to have been incurred after acquisition, whereas the fair value mark and cash reserves absorb losses estimated to have been embedded in the acquired loans at acquisition. The schedule that follows includes both loans held for sale and loans held for investment.
Asset Quality at September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Type
|
Total Loans
|
|
Current
|
|
30-89
Days Past Due
|
|
90
Days or More Past Due and
Accruing
|
|
Non-
accrual/
NPL (a)
|
|
OREO
(b)
|
|
NPA
(a)+(b)
|
|
NPL
to
Loan
Type
(%)
|
|
NPA
to
Loans +
OREO
(%)
|
(dollars in thousands)
|
|
|
|
Originated Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-Family
|
$
|
3,502,079
|
|
|
$
|
3,500,736
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,343
|
|
|
$
|
—
|
|
|
$
|
1,343
|
|
|
0.04
|
%
|
|
0.04
|
%
|
Commercial & Industrial (1)
|
1,760,668
|
|
|
1,746,352
|
|
|
—
|
|
|
—
|
|
|
14,316
|
|
|
621
|
|
|
14,937
|
|
|
0.81
|
%
|
|
0.85
|
%
|
Commercial Real Estate Non-Owner Occupied
|
1,144,214
|
|
|
1,144,214
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
%
|
|
—
|
%
|
Residential
|
106,052
|
|
|
103,018
|
|
|
979
|
|
|
—
|
|
|
2,055
|
|
|
57
|
|
|
2,112
|
|
|
1.94
|
%
|
|
1.99
|
%
|
Construction
|
95,250
|
|
|
95,250
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
%
|
|
—
|
%
|
Other consumer
|
1,359
|
|
|
1,322
|
|
|
37
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
%
|
|
—
|
%
|
Total Originated Loans (2)
|
6,609,622
|
|
|
6,590,892
|
|
|
1,016
|
|
|
—
|
|
|
17,714
|
|
|
678
|
|
|
18,392
|
|
|
0.27
|
%
|
|
0.28
|
%
|
Loans Acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Acquisitions
|
131,854
|
|
|
125,399
|
|
|
1,969
|
|
|
480
|
|
|
4,006
|
|
|
400
|
|
|
4,406
|
|
|
3.04
|
%
|
|
3.33
|
%
|
Loan Purchases
|
501,519
|
|
|
492,971
|
|
|
3,518
|
|
|
3,109
|
|
|
1,921
|
|
|
372
|
|
|
2,293
|
|
|
0.38
|
%
|
|
0.46
|
%
|
Total Loans Acquired
|
633,373
|
|
|
618,370
|
|
|
5,487
|
|
|
3,589
|
|
|
5,927
|
|
|
772
|
|
|
6,699
|
|
|
0.94
|
%
|
|
1.06
|
%
|
Deferred costs and unamortized premiums, net
|
(3,045
|
)
|
|
(3,045
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Loans Receivable
|
7,239,950
|
|
|
7,206,217
|
|
|
6,503
|
|
|
3,589
|
|
|
23,641
|
|
|
1,450
|
|
|
25,091
|
|
|
0.33
|
%
|
|
0.35
|
%
|
Loans Receivable, Mortgage Warehouse, at Fair Value
|
1,516,327
|
|
|
1,516,327
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Total Loans Held for Sale
|
1,383
|
|
|
1,383
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Total Portfolio
|
$
|
8,757,660
|
|
|
$
|
8,723,927
|
|
|
$
|
6,503
|
|
|
$
|
3,589
|
|
|
$
|
23,641
|
|
|
$
|
1,450
|
|
|
$
|
25,091
|
|
|
0.27
|
%
|
|
0.29
|
%
|
(1) Commercial & industrial loans, including owner occupied commercial real estate loans.
(2) Does not include loans receivable, mortgage warehouse, at fair value.
Asset Quality at September 30, 2018 (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Type
|
Total Loans
|
|
NPL
|
|
ALL
|
|
Cash
Reserve
|
|
Total
Credit
Reserves
|
|
Reserves
to Loans
(%)
|
|
Reserves
to NPLs
(%)
|
(dollars in thousands)
|
|
Originated Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-Family
|
$
|
3,502,079
|
|
|
$
|
1,343
|
|
|
$
|
11,829
|
|
|
$
|
—
|
|
|
$
|
11,829
|
|
|
0.34
|
%
|
|
880.79
|
%
|
Commercial & Industrial (1)
|
1,760,668
|
|
|
14,316
|
|
|
15,268
|
|
|
—
|
|
|
15,268
|
|
|
0.87
|
%
|
|
106.65
|
%
|
Commercial Real Estate Non-Owner Occupied
|
1,144,214
|
|
|
—
|
|
|
4,246
|
|
|
—
|
|
|
4,246
|
|
|
0.37
|
%
|
|
—
|
%
|
Residential
|
106,052
|
|
|
2,055
|
|
|
2,048
|
|
|
—
|
|
|
2,048
|
|
|
1.93
|
%
|
|
99.66
|
%
|
Construction
|
95,250
|
|
|
—
|
|
|
1,062
|
|
|
—
|
|
|
1,062
|
|
|
1.11
|
%
|
|
—
|
%
|
Other consumer
|
1,359
|
|
|
—
|
|
|
103
|
|
|
—
|
|
|
103
|
|
|
7.58
|
%
|
|
—
|
%
|
Total Originated Loans (2)
|
6,609,622
|
|
|
17,714
|
|
|
34,556
|
|
|
—
|
|
|
34,556
|
|
|
0.52
|
%
|
|
195.08
|
%
|
Loans Acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Acquisitions
|
131,854
|
|
|
4,006
|
|
|
3,773
|
|
|
—
|
|
|
3,773
|
|
|
2.86
|
%
|
|
94.18
|
%
|
Loan Purchases
|
501,519
|
|
|
1,921
|
|
|
2,412
|
|
|
527
|
|
|
2,939
|
|
|
0.59
|
%
|
|
152.99
|
%
|
Total Loans Acquired
|
633,373
|
|
|
5,927
|
|
|
6,185
|
|
|
527
|
|
|
6,712
|
|
|
1.06
|
%
|
|
113.24
|
%
|
Deferred costs and unamortized premiums, net
|
(3,045
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Loans Receivable
|
7,239,950
|
|
|
23,641
|
|
|
40,741
|
|
|
527
|
|
|
41,268
|
|
|
0.57
|
%
|
|
174.56
|
%
|
Loans Receivable, Mortgage Warehouse, at Fair Value
|
1,516,327
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Total Loans Held for Sale
|
1,383
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Total Portfolio
|
$
|
8,757,660
|
|
|
$
|
23,641
|
|
|
$
|
40,741
|
|
|
$
|
527
|
|
|
$
|
41,268
|
|
|
0.47
|
%
|
|
174.56
|
%
|
(1) Commercial & industrial loans, including owner occupied commercial real estate loans.
(2) Does not include loans receivable, mortgage warehouse, at fair value.
Originated Loans
Post 2009 originated loans (excluding loans held for sale and loans receivable mortgage warehouse at fair value) totaled
$6.6 billion
at
September 30, 2018
, compared to
$6.4 billion
at
December 31, 2017
. The management team adopted new underwriting standards that management believes better limits risks of loss in 2009 and has worked to maintain these standards. Only
$17.7 million
, or
0.27%
of post 2009 originated loans, were non-performing at
September 30, 2018
, compared to
$20.0 million
of post 2009 originated loans, or
0.31%
of post 2009 originated loans, at
December 31, 2017
. The post 2009 originated loans were supported by an allowance for loan losses of
$34.6 million
(
0.52%
of post 2009 originated loans) and
$33.3 million
(
0.52%
of post 2009 originated loans), respectively, at
September 30, 2018
and
December 31, 2017
. Total 2009 and prior loans ("legacy loans") were
$23.4 million
and
$25.6 million
at
September 30, 2018
and
December 31, 2017
, respectively.
Loans Acquired
At
September 30, 2018
, total acquired loans were
$633.4 million
, or
8.7%
of loans receivable, compared to
$328.8 million
, or
4.9%
of loans receivable, at
December 31, 2017
. Non-performing acquired loans totaled
$5.9 million
and
$6.4 million
at
September 30, 2018
and
December 31, 2017
, respectively. When loans are acquired, they are recorded on the balance sheet at fair value. Acquired loans include purchased portfolios, FDIC failed-bank acquisitions, and unassisted acquisitions. Of the manufactured housing loans purchased prior to 2012,
$48.0 million
were supported by a
$0.5 million
cash reserve at
September 30, 2018
, compared to
$51.9 million
supported by a cash reserve of
$0.6 million
at
December 31, 2017
. The cash reserve was created as part of the purchase transaction to absorb losses and is maintained in a demand deposit account at the Bank. All current losses and delinquent interest are absorbed by this reserve and any recoveries of those losses, as well as the proceeds from the sale of the repossessed properties securing the loans, are placed back into the reserve. For the manufactured housing loans purchased in 2012, the seller has an obligation to pay the Bank the full payoff amount of the defaulted loan, including any principal, unpaid interest, or advances on the loans, once the borrower vacates the property. At
September 30, 2018
,
$27.8 million
of these loans were outstanding, compared to
$31.4 million
at
December 31, 2017
.
The price paid for acquired loans considered management’s judgment as to the credit and interest rate risk inherent in the portfolio at the time of purchase. Every quarter, management reassesses the risk and adjusts the cash flow forecast to incorporate changes in the credit outlook. Generally, a decrease in forecasted cash flows for a purchased loan will result in a provision for loan losses, and absent charge-offs, an increase in the allowance for loan losses. Acquired loans have a significantly higher percentage of non-performing loans than loans originated after September 2009. Management acquired these loans with the expectation that non-performing loan levels would be elevated, and therefore incorporated that expectation into the price paid. Customers has assigned these loans to its Special Assets Group, a team that focuses on workouts for these acquired non-performing assets. Total acquired loans were supported by reserves (allowance for loan losses and cash reserves) of
$6.7 million
(
1.06%
of total acquired loans) and
$5.4 million
(
1.64%
of total acquired loans) at
September 30, 2018
and
December 31, 2017
, respectively.
DEPOSITS
The components of deposits were as follows at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
December 31,
2017
|
|
Change
|
|
Percentage Change
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Demand, non-interest bearing
|
$
|
1,338,167
|
|
|
$
|
1,052,115
|
|
|
$
|
286,052
|
|
|
27.2
|
%
|
Demand, interest bearing
|
833,176
|
|
|
523,848
|
|
|
309,328
|
|
|
59.0
|
%
|
Savings, including MMDA
|
3,948,890
|
|
|
3,318,486
|
|
|
630,404
|
|
|
19.0
|
%
|
Time, $100,000 and over
|
1,271,783
|
|
|
1,284,855
|
|
|
(13,072
|
)
|
|
(1.0
|
)%
|
Time, other
|
1,121,698
|
|
|
620,838
|
|
|
500,860
|
|
|
80.7
|
%
|
Total deposits
|
$
|
8,513,714
|
|
|
$
|
6,800,142
|
|
|
$
|
1,713,572
|
|
|
25.2
|
%
|
Customers offers a variety of deposit accounts, including checking, savings, money market deposit accounts (“MMDA”), and time deposits. Deposits are primarily obtained from Customers' geographic service area and nationwide through branchless digital banking, deposit brokers, listing services and other relationships. Transaction deposits increased by
$1.2 billion
, or
25.0%
, to
$6.1 billion
at
September 30, 2018
, from
$4.9 billion
at
December 31, 2017
. This increase is primarily driven by Customers' initiative to improve its net interest margin by expanding its sources of lower-cost funding. These efforts, along with the seasonality of the Disbursement business, resulted in increases to nearly all deposit categories. Total time deposits were
$2.4 billion
at
September 30, 2018
, an increase of
$0.5 billion
, or
25.6%
, from
$1.9 billion
at
December 31, 2017
.
At
September 30, 2018
, the Bank had
$1.9 billion
in state and municipal deposits to which it had pledged available borrowing capacity through the FHLB to the depositor through a letter of credit arrangement. At
September 30, 2018
, the balance of state and municipal deposits was
$1.9 billion
.
BORROWINGS
Borrowed funds from various sources are generally used to supplement deposit growth and meet other operating needs. Customers' borrowings generally include short-term and long-term advances from the FHLB, federal funds purchased, senior unsecured notes and subordinated debt. Subordinated debt is also considered as Tier 2 capital for certain regulatory calculations. As of
September 30, 2018
and
December 31, 2017
, total outstanding borrowings were
$1.1 billion
and
$2.1 billion
, respectively, which represented a
decrease
of
$1.0 billion
, or
48.2%
. These repayments of borrowings are in line with Customers' strategy to reduce its cost of funding and focus on deposit growth in order to improve net interest margins. On July 31, 2018, the 6.375% senior notes with an aggregate principal amount of $63.3 million issued by Customers Bancorp in July 2013 matured and were paid in full.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity for a financial institution is a measure of that institution’s ability to meet depositors’ needs for funds, to satisfy or fund loan commitments, and for other operating purposes. Ensuring adequate liquidity is an objective of the asset/liability management process. Customers coordinates its management of liquidity with its interest rate sensitivity and capital position, and strives to maintain a strong liquidity position.
Customers' investment portfolio provides periodic cash flows through regular maturities and amortization and can be used as collateral to secure additional liquidity funding. As of
September 30, 2018
and December 31, 2017, Customers had unpledged marketable investments of
$481.8 million
and
$454.4 million
, respectively. Customers' principal sources of funds are deposits, borrowings, principal and interest payments on loans, other funds from operations, and proceeds from common and preferred stock issuances. Borrowing arrangements are maintained with the Federal Home Loan Bank and the Federal Reserve Bank of Philadelphia to meet short-term liquidity needs. Longer-term borrowing arrangements are also maintained with the Federal Home Loan Bank. As of
September 30, 2018
, Customers' borrowing capacity with the Federal Home Loan Bank was
$4.5 billion
, of which
$0.8 billion
was utilized in borrowings and
$1.9 billion
of available capacity was utilized to collateralize state and municipal deposits. As of
December 31, 2017
, Customers' borrowing capacity with the Federal Home Loan Bank was
$4.3 billion
, of which
$1.6 billion
was utilized in borrowings and
$1.8 billion
of available capacity was utilized to collateralize state and municipal deposits. As of
September 30, 2018
and
December 31, 2017
, Customers' borrowing capacity with the Federal Reserve Bank of Philadelphia was
$90.8 million
and
$142.5 million
, respectively.
Net cash flows
provided by
operating activities were
$98.4 million
during the
nine
months ended
September 30, 2018
, compared to
$30.3 million
during the
nine
months ended
September 30, 2017
.
Net cash flows
used in
investment activities were
$0.3 billion
during the
nine
months ended
September 30, 2018
, compared to
$1.1 billion
during the
nine
months ended
September 30, 2017
.
Cash
used in
investment activities consisted of the following:
|
|
•
|
Originations of mortgage warehouse loans totaled
$21.7 billion
during the
nine
months ended
September 30, 2018
, compared to
$22.7 billion
during the
nine
months ended
September 30, 2017
.
|
|
|
•
|
Purchases of investment securities available for sale totaled
$763.2 million
during the
nine
months ended
September 30, 2018
, compared to
$796.6 million
during the
nine
months ended
September 30, 2017
.
|
|
|
•
|
Cash flows used to fund new loans held for investment totaled
$20.5 million
and
$921.0 million
during the
nine
months ended
September 30, 2018
and
2017
, respectively.
|
|
|
•
|
Cash flows used to purchase loans totaled
$347.7 million
and
$262.6 million
during the
nine
months ended
September 30, 2018
and
2017
, respectively.
|
|
|
•
|
Purchases of bank owned life insurance policies were
$90.0 million
during the
nine
months ended
September 30, 2017
. There were no such purchases of bank owned life insurance policies during the
nine
months ended
September 30, 2018
.
|
|
|
•
|
Net purchases of FHLB, Federal Reserve Bank, and other restricted stock totaled $30.2 million during the nine months ended September 30, 2017.
|
|
|
•
|
Purchases of leased assets under operating leases were
$21.8 million
during the
nine
months ended
September 30, 2018
. There were no such purchases of leased assets under operating leases during the
nine
months ended
September 30, 2017
.
|
Cash provided by investment activities consisted of the following:
|
|
•
|
Proceeds from repayments of mortgage warehouse loans totaled
$22.0 billion
during the
nine
months ended
September 30, 2018
, compared to
$22.9 billion
during the
nine
months ended
September 30, 2017
.
|
|
|
•
|
Proceeds from maturities, calls and principal repayments of securities available for sale totaled
$38.9 million
for the
nine
months ended
September 30, 2018
, compared to
$36.5 million
for the
nine
months ended
September 30, 2017
.
|
|
|
•
|
Proceeds from sales of investment securities available for sale amounted to
$476.2 million
during the
nine
months ended
September 30, 2018
, compared to
$670.5 million
for the
nine
months ended
September 30, 2017
.
|
|
|
•
|
Proceeds from the sale of loans held for investment totaled $
42.2 million
during the
nine
months ended
September 30, 2018
, compared to $
124.7 million
during the
nine
months ended
September 30, 2017
.
|
|
|
•
|
Proceeds from FHLB, Federal Reserve Bank and other restricted stock totaled
$31.7 million
during the
nine
months ended
September 30, 2018
.
|
Net cash flows
provided by
financing activities were
$0.7 billion
during the
nine
months ended
September 30, 2018
, compared to
$1.0 billion
for the
nine
months ended
September 30, 2017
. During the
nine
months ended
September 30, 2018
, a net increase in deposits provided cash flows of
$1.7 billion
, and proceeds from issuance of common stock provided
$3.4 million
. These cash flow increases were partially offset by repayments of short-term borrowed funds from the FHLB totaling
$776.9 million
, federal funds purchased of
$155.0 million
, and long-term debt of $63.3 million, and preferred stock dividends paid of
$10.8 million
. During the
nine
months ended
September 30, 2017
, a net increase in short-term borrowed funds from the FHLB provided net cash flows of
$0.6 billion
, a net increase in deposits provided cash flows of
$293.3 million
, proceeds from the issuance of five-year senior notes provided
$98.6 million
, and a net increase in federal funds purchased provided net cash flows of
$64.0 million
, partially offset by the payment of preferred stock dividends of
$10.8 million
. These financing activities provided sufficient cash flows to support Customers' investing and operating activities.
On July 31, 2018, the 6.375% senior notes with an aggregate principal amount of
$63.3 million
issued by Customers Bancorp in July 2013 matured. Customers had sufficient funds accumulated at the Bancorp to make payment to the debtholders upon maturity of the senior notes. Overall, based on our core deposit base and available sources of borrowed funds, management believes that Customers has adequate resources to meet its short-term and long-term cash requirements for the foreseeable future.
CAPITAL ADEQUACY AND SHAREHOLDERS' EQUITY
Shareholders’ equity
increased
$33.8 million
, or
3.7%
, to
$954.8 million
at
September 30, 2018
when compared to shareholders' equity of
$921.0 million
at
December 31, 2017
. The primary components of the net
increase
were as follows:
|
|
•
|
net income of
$53.8 million
for the
nine
months ended
September 30, 2018
;
|
|
|
•
|
share-based compensation expense of
$5.6 million
for the
nine
months ended
September 30, 2018
; and
|
|
|
•
|
issuance of common stock under share-based compensation arrangements of
$3.7 million
for the
nine
months ended
September 30, 2018
.
|
The increases were offset in part by:
|
|
•
|
other comprehensive loss of
$18.6 million
for the
nine
months ended
September 30, 2018
, arising primarily from unrealized fair value losses recognized on available-for-sale debt securities; and
|
|
|
•
|
preferred stock dividends of
$10.8 million
for the
nine
months ended
September 30, 2018
.
|
The Bank and Customers Bancorp are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on Customers' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank and Bancorp must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items, as calculated under the regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Bancorp to maintain minimum amounts and ratios (set forth in the following table) of common equity Tier 1, Tier 1, and total capital to risk-weighted assets, and Tier 1 capital to average assets (as defined in the regulations). At
September 30, 2018
and
December 31, 2017
, the Bank and the Bancorp met all capital adequacy requirements to which they were subject.
Generally, to comply with the regulatory definition of adequately capitalized, or well capitalized, respectively, or to comply with the Basel III capital requirements, an institution must at least maintain the common equity Tier 1, Tier 1, and total risk-based capital ratios and the Tier 1 leverage ratio in excess of the related minimum ratios set forth in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum Capital Levels to be Classified as:
|
|
Actual
|
|
Adequately Capitalized
|
|
Well Capitalized
|
|
Basel III Compliant
|
(dollars in thousands)
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
As of September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
740,968
|
|
|
8.703
|
%
|
|
$
|
383,113
|
|
|
4.500
|
%
|
|
N/A
|
|
|
N/A
|
|
|
$
|
542,744
|
|
|
6.375
|
%
|
Customers Bank
|
$
|
1,054,869
|
|
|
12.393
|
%
|
|
$
|
383,042
|
|
|
4.500
|
%
|
|
$
|
553,282
|
|
|
6.500
|
%
|
|
$
|
542,642
|
|
|
6.375
|
%
|
Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
958,418
|
|
|
11.257
|
%
|
|
$
|
510,818
|
|
|
6.000
|
%
|
|
N/A
|
|
|
N/A
|
|
|
$
|
670,448
|
|
|
7.875
|
%
|
Customers Bank
|
$
|
1,054,869
|
|
|
12.393
|
%
|
|
$
|
510,722
|
|
|
6.000
|
%
|
|
$
|
680,963
|
|
|
8.000
|
%
|
|
$
|
670,323
|
|
|
7.875
|
%
|
Total capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
1,080,245
|
|
|
12.688
|
%
|
|
$
|
681,090
|
|
|
8.000
|
%
|
|
N/A
|
|
|
N/A
|
|
|
$
|
840,721
|
|
|
9.875
|
%
|
Customers Bank
|
$
|
1,204,825
|
|
|
14.154
|
%
|
|
$
|
680,963
|
|
|
8.000
|
%
|
|
$
|
851,204
|
|
|
10.000
|
%
|
|
$
|
840,563
|
|
|
9.875
|
%
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
958,418
|
|
|
8.913
|
%
|
|
$
|
430,099
|
|
|
4.000
|
%
|
|
N/A
|
|
|
N/A
|
|
|
$
|
430,099
|
|
|
4.000
|
%
|
Customers Bank
|
$
|
1,054,869
|
|
|
9.814
|
%
|
|
$
|
429,939
|
|
|
4.000
|
%
|
|
$
|
537,423
|
|
|
5.000
|
%
|
|
$
|
429,939
|
|
|
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 capital ratios above reflect the capital requirements under "Basel III" adopted effective first quarter 2015 and the capital conservation buffer phased in beginning January 1, 2016. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers. As of
September 30, 2018
, the Bank and Customers Bancorp were in compliance with the Basel III requirements. See "
NOTE 8
- REGULATORY CAPITAL" to Customers' unaudited financial statements for additional discussion regarding regulatory capital requirements.
OFF-BALANCE SHEET ARRANGEMENTS
Customers is involved with financial instruments and other commitments with off-balance sheet risks. Financial instruments with off-balance sheet risks are incurred in the normal course of business to meet the financing needs of the Bank's customers. These financial instruments include commitments to extend credit, including unused portions of lines of credit, and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the balance sheets.
With commitments to extend credit, exposures to credit loss in the event of non-performance by the other party to the financial instrument is represented by the contractual amount of those instruments. The same credit policies are used in making commitments and conditional obligations as for on-balance sheet instruments. Because they involve credit risk similar to extending a loan, commitments to extend credit are subject to the Bank’s credit policy and other underwriting standards.
As of
September 30, 2018
and
December 31, 2017
, the following off-balance sheet commitments, financial instruments and other arrangements were outstanding:
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
December 31, 2017
|
(amounts in thousands)
|
|
Commitments to fund loans
|
$
|
171,538
|
|
|
$
|
333,874
|
|
Unfunded commitments to fund mortgage warehouse loans
|
1,535,720
|
|
|
1,567,139
|
|
Unfunded commitments under lines of credit and credit card
|
821,601
|
|
|
485,345
|
|
Letters of credit
|
45,188
|
|
|
39,890
|
|
Other unused commitments
|
5,104
|
|
|
6,679
|
|
Commitments to fund loans, unfunded commitments to fund mortgage warehouse loans, unfunded commitments under lines of credit letters of credit and credit cards are agreements to extend credit to or for the benefit of a customer in the ordinary course of the Bank's business.
Commitments to fund loans and unfunded commitments under lines of credit may be obligations of the Bank as long as there is no violation of any condition established in the contract. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if the Bank deems it necessary upon extension of credit, is based upon management’s credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.
Mortgage warehouse loan commitments are agreements to fund the pipelines of mortgage banking businesses from closing of individual mortgage loans until their sale into the secondary market. Most of the individual mortgage loans are insured or guaranteed by the U.S. government through one of its programs such as FHA, VA, or are conventional loans eligible for sale to Fannie Mae and Freddie Mac. These commitments generally fluctuate monthly based on changes in interest rates, refinance activity, new home sales and laws and regulation.
Outstanding letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Letters of credit may obligate the Bank to fund draws under those letters of credit whether or not a customer continues to meet the conditions of the extension of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Effect of Government Monetary Policies
Our earnings are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. An important function of the Federal Reserve Board is to regulate the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities and changes in reserve requirements against member bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits, and their use may also affect rates charged on loans or paid for deposits.