ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - As Restated.
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 “Original Form 10-K Filing”), which was filed with the SEC on February 23, 2018, as such factors may be updated from time to time in our filings with the SEC, including our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Our actual results may differ materially from those reflected in the forward-looking statements. You are cautioned not to place undue reliance on any forward-looking statements we make, which speak only as of the date they are made. We do not undertake any obligation to release publicly or otherwise provide any revisions to any forward-looking statements we may make, including any forward-looking financial information, to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events, except as may be required under applicable law.
Management’s discussion and analysis represents an overview of the financial condition and results of operations, and highlights the significant changes in the financial condition and results of operations, as presented in the accompanying consolidated financial statements for Customers Bancorp, Inc. (the "Bancorp" or "Customers Bancorp"), a financial holding company, and its wholly owned subsidiaries, including Customers Bank (the "Bank"), collectively referred to as "Customers" herein. This information is intended to facilitate your understanding and assessment of significant changes and trends related to Customers' financial condition and results of operations as of and for the three
and six
months ended
June 30, 2018
. 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/A.
Restatement of Previously Issued Financial Statements
In November 2018, Customers determined that its commercial mortgage warehouse loans should have been classified as loans receivable, rather than loans held for sale. The discussion and analysis included herein has been amended and restated to present the corrected classification of Customers' commercial mortgage warehouse lending activities. Additional discussion regarding the restatement of previously issued financial statements is included in the Explanatory Note to this Form 10-Q/A and NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION included in Part 1 of this Form 10-Q/A.
Critical Accounting Policies
Customers has adopted various accounting policies that govern the application of accounting principles generally accepted in the United States of America and that are consistent with general practices within the banking industry in the preparation of its financial statements. Customers' significant accounting policies are described in “NOTE 4 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION” in Customers' audited financial statements included in its 2017 Form 10-K/A and updated in this Form 10-Q/A for the quarterly period ended June 30, 2018 in “
NOTE 3 - 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.
Second
Quarter Events of Note
Customers reported net income available to common shareholders of
$20.0 million
, or
$0.62
per diluted share, for
second
quarter
2018
. Customers' net income to common shareholders was
$40.6 million
, or
$1.26
per diluted share, for the
six
months ended
June 30, 2018
. Total assets were
$11.1 billion
at
June 30, 2018
, an increase of
$1.3 billion
from
December 31, 2017
, including $405.8 million of total loan growth and
$689.6 million
of investment securities growth. Customers expects a more moderate pace of growth through the rest of the year with an emphasis on shifting from lower yielding to higher yielding assets, and the development of sustainable deposits to replace short-term borrowings and fund future growth.
Asset quality remained exceptional with non-performing loans of
$26.0 million
, or 0.29% of total loans, and total non-performing assets (non-performing loans and other real estate owned) only
0.25%
of total assets at
June 30, 2018
, reflecting Customers' conservative lending practices and continued focus on credit risk management. Customers' level of non-performing loans to total loans at
June 30, 2018
remained well below industry average non-performing loans to total loans of
1.26%
and Customers' peer group non-performing loans to total loans of
0.82%
. Customers' capital ratios at the holding company and its bank subsidiary continue to exceed the “well-capitalized” threshold established by regulation at the Bank and exceed the applicable Basel III regulatory threshold ratios for the Bancorp and the Bank at
June 30, 2018
. Customers Bancorp's Tier 1 leverage ratio was
8.87%
, and its total risk-based capital ratio was
12.55%
, at
June 30, 2018
.
Results of Operations
Three Months Ended June 30, 2018
Compared to
Three Months Ended June 30, 2017
Net income available to common shareholders
decreased
$0.1 million
, or
0.3%
, to
$20.0 million
for the three months ended
June 30, 2018
when compared to net income available to common shareholders of
$20.1 million
for the three months ended
June 30, 2017
. The
decreased
net income available to common shareholders primarily resulted from an increase in non-interest expense of
$3.3 million
, or
6.6%
, a decrease in non-interest income of
$2.3 million
, or
12.3%
, and a decrease in net interest income of
$1.3 million
, or
1.9%
, offset in part by a decrease in income tax expense of
$5.5 million
and a decrease in the provision for loan losses of
$1.3 million
.
Net interest income of
$67.3 million
decreased
$1.3 million
, or
1.9%
, for the three months ended
June 30, 2018
when compared to net interest income of
$68.6 million
for the three months ended
June 30, 2017
. This decrease resulted primarily from an increase in the cost of funds, primarily in money market deposit accounts, certificates of deposit, and short term borrowings, driving a
16
basis point decline in net interest margin (tax-equivalent) to
2.62%
for
second
quarter
2018
from
2.78%
for
second
quarter
2017
. The 58 basis point higher cost of funds was offset in part by an increase in the average balance of interest-earning assets of
$0.4 billion
over the prior year period and a 37 basis point increase in the yield on loans.
The provision for loan losses
decreased
$1.3 million
for the three months ended
June 30, 2018
when compared to the provision for loan losses of
$0.5 million
for the three months ended
June 30, 2017
. The
second
quarter 2018 provision for loan losses included a release of
$0.8 million
that resulted from continued strong asset quality and lower incurred losses than previously estimated and a release of $0.3 million for impaired loans, offset in part by $0.3 million of provision for loan growth.
Non-interest income of
$16.1 million
decreased
$2.3 million
, or
12.3%
, for the three months ended
June 30, 2018
when compared to non-interest income of
$18.4 million
for the three months ended
June 30, 2017
. Included within non-interest income for the three months ended June 30, 2018 was $1.2 million of debit and prepaid card interchange expense, which was recorded as a reduction to the gross amount of interchange and card revenue of $7.6 million as a result of the adoption of the new revenue recognition guidance as described in
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
on a modified retrospective basis. Prior to the adoption of the new revenue recognition guidance, these expenses were included within non-interest expense and reported as technology, communication and bank operations expense. For the three months ended June 30, 2017, debit and prepaid card interchange expense was $1.3 million. If the three months ended June 30, 2017 was presented on a consistent basis with the three months ended June 30, 2018, the reported amount of non-interest income of $18.4 million would have been $17.1 million and the gross interchange and card revenue of $8.6 million would have been presented net of the debit and prepaid card interchange expense of $1.3 million, or $7.4 million. When presented on a consistent basis, the $1.0 million decline in interchange and card revenue was largely the result of lower activity volumes in the BankMobile business segment. Other decreases in total non-interest income for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 included
decrease
s in mortgage warehouse transactional fees and deposit fees of
$0.6 million
and
$0.5 million
, respectively, primarily resulting from reduced transaction volumes. For the three months ended
June 30, 2017
, Customers also realized $3.2 million of gains from the sale of investment securities. The decreases in non-interest income for the three months ended
June 30, 2018
were partially offset by an increase in other non-interest income of
$1.5 million
, primarily from increased income on commercial operating leases of $1.1 million, and a decline in other-than temporary impairment losses from the $2.9 million recognized in second quarter 2017.
Non-interest expense of
$53.8 million
increased
$3.3 million
, or
6.6%
, for the three months ended
June 30, 2018
when compared to non-interest expense of
$50.4 million
for the three months ended
June 30, 2017
. This
increase
resulted from increases in salaries and employee benefits of
$4.1 million
as Customers continues to hire new team members in the markets that it serves. Total non-interest expense for the three months ended June 30, 2018 excludes $1.2 million of debit and prepaid card interchange expense as a result of the adoption of the new revenue recognition guidance on January 1, 2018. If the three months ended June 30, 2017 was presented on a consistent basis with the three months ended June 30, 2018, the reported amount of non-interest expense of $50.4 million would have been $49.1 million and technology, communication, and bank operations expense of $8.9 million would have been $7.6 million. When presented on a consistent basis, technology, communication and bank operations expense increased $3.7 million, or 48.7%, to
$11.3 million
for the three months ended
June 30, 2018
from $7.6 million for the three months ended
June 30, 2017
given the continued investment in the BankMobile segment infrastructure and Customers' recent system conversion. These increases in non-interest expense were partially offset by a decrease in professional services of
$2.4 million
, primarily attributable to reductions in consulting, legal and other professional services as management continues its efforts to monitor and control expenses.
Income tax expense of
$6.8 million
decreased
$5.5 million
, or
44.7%
, for the three months ended
June 30, 2018
when compared to income tax expense of
$12.3 million
for the three months ended
June 30, 2017
. The
decrease
in income tax expense was driven primarily by a lower federal income tax rate from the adoption of the Tax Cut and Jobs Act of 2017, as well as by a decrease in pre-tax income of
$5.6 million
in
second
quarter
2018
compared to
second
quarter 2017. Customers' effective tax rate
decreased
to
22.37%
for the three months ended
June 30, 2018
, compared to
34.20%
for the same period in
2017
.
Preferred stock dividends were
$3.6 million
for the three months ended
June 30, 2018
and 2017, respectively.
NET INTEREST INCOME
Net interest income (the difference between the interest earned on loans, investments and interest-earning deposits with banks, and interest paid on deposits, borrowed funds and subordinated debt) is the primary source of Customers' earnings.
The following table summarizes Customers' net interest income and related interest spread and net interest margin for the periods indicated.
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|
|
|
|
Three Months Ended June 30,
|
|
2018
|
|
2017
|
|
Average
Balance
|
|
Interest
Income or
Expense
|
|
Average
Yield or
Cost (%)
|
|
Average
Balance
|
|
Interest
Income or
Expense
|
|
Average
Yield or
Cost (%)
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits
|
$
|
188,880
|
|
|
$
|
839
|
|
|
1.78
|
%
|
|
$
|
203,460
|
|
|
$
|
549
|
|
|
1.08
|
%
|
Investment securities (1)
|
1,213,989
|
|
|
9,765
|
|
|
3.22
|
%
|
|
1,066,277
|
|
|
7,823
|
|
|
2.94
|
%
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans to mortgage companies
|
1,760,519
|
|
|
21,626
|
|
|
4.93
|
%
|
|
1,762,469
|
|
|
18,198
|
|
|
4.14
|
%
|
Multi-family loans
|
3,561,679
|
|
|
34,646
|
|
|
3.90
|
%
|
|
3,508,619
|
|
|
32,762
|
|
|
3.75
|
%
|
Commercial and industrial loans (2)
|
1,713,150
|
|
|
20,303
|
|
|
4.75
|
%
|
|
1,405,150
|
|
|
14,746
|
|
|
4.21
|
%
|
Non-owner occupied commercial real estate
|
1,269,373
|
|
|
12,830
|
|
|
4.05
|
%
|
|
1,299,809
|
|
|
12,964
|
|
|
4.00
|
%
|
All other loans
|
482,098
|
|
|
5,835
|
|
|
4.85
|
%
|
|
542,093
|
|
|
5,890
|
|
|
4.36
|
%
|
Total loans (3)
|
8,786,819
|
|
|
95,240
|
|
|
4.35
|
%
|
|
8,518,140
|
|
|
84,560
|
|
|
3.98
|
%
|
Other interest-earning assets
|
139,842
|
|
|
1,795
|
|
|
5.15
|
%
|
|
105,908
|
|
|
920
|
|
|
3.48
|
%
|
Total interest-earning assets
|
10,329,530
|
|
|
107,639
|
|
|
4.18
|
%
|
|
9,893,785
|
|
|
93,852
|
|
|
3.80
|
%
|
Non-interest-earning assets
|
391,660
|
|
|
|
|
|
|
371,548
|
|
|
|
|
|
Total assets
|
$
|
10,721,190
|
|
|
|
|
|
|
$
|
10,265,333
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking accounts
|
$
|
554,441
|
|
|
2,183
|
|
|
1.58
|
%
|
|
$
|
346,940
|
|
|
634
|
|
|
0.73
|
%
|
Money market deposit accounts
|
3,310,979
|
|
|
13,444
|
|
|
1.63
|
%
|
|
3,456,638
|
|
|
8,369
|
|
|
0.97
|
%
|
Other savings accounts
|
36,784
|
|
|
25
|
|
|
0.27
|
%
|
|
41,491
|
|
|
30
|
|
|
0.29
|
%
|
Certificates of deposit
|
1,960,007
|
|
|
8,530
|
|
|
1.75
|
%
|
|
2,413,241
|
|
|
7,195
|
|
|
1.20
|
%
|
Total interest-bearing deposits
|
5,862,211
|
|
|
24,182
|
|
|
1.65
|
%
|
|
6,258,310
|
|
|
16,228
|
|
|
1.04
|
%
|
Borrowings
|
2,736,644
|
|
|
16,135
|
|
|
2.36
|
%
|
|
1,951,282
|
|
|
9,018
|
|
|
1.85
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%
|
Total interest-bearing liabilities
|
8,598,855
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|
|
40,317
|
|
|
1.88
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%
|
|
8,209,592
|
|
|
25,246
|
|
|
1.23
|
%
|
Non-interest-bearing deposits
|
1,109,527
|
|
|
|
|
|
|
1,082,799
|
|
|
|
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|
Total deposits and borrowings
|
9,708,382
|
|
|
|
|
1.67
|
%
|
|
9,292,391
|
|
|
|
|
1.09
|
%
|
Other non-interest-bearing liabilities
|
84,788
|
|
|
|
|
|
|
74,429
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Total liabilities
|
9,793,170
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|
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|
|
|
9,366,820
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Shareholders’ Equity
|
928,020
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|
|
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|
|
|
898,513
|
|
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|
Total liabilities and shareholders’ equity
|
$
|
10,721,190
|
|
|
|
|
|
|
$
|
10,265,333
|
|
|
|
|
|
Net interest income
|
|
|
67,322
|
|
|
|
|
|
|
68,606
|
|
|
|
Tax-equivalent adjustment (4)
|
|
|
171
|
|
|
|
|
|
|
104
|
|
|
|
Net interest earnings
|
|
|
$
|
67,493
|
|
|
|
|
|
|
$
|
68,710
|
|
|
|
Interest spread
|
|
|
|
|
2.51
|
%
|
|
|
|
|
|
2.71
|
%
|
Net interest margin
|
|
|
|
|
2.61
|
%
|
|
|
|
|
|
2.78
|
%
|
Net interest margin tax equivalent (4)
|
|
|
|
|
2.62
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%
|
|
|
|
|
|
2.78
|
%
|
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(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.
|
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(3)
|
Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees.
|
|
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(4)
|
Non-GAAP tax-equivalent basis, using an estimated marginal tax rate of 26% for the three months ended June 30, 2018 and 35% for the three months ended June 30, 2017, presented to approximate interest income as a taxable asset. Management uses non-GAAP measures to present historical periods comparable to the current period presentation. In addition, management believes the use of these non-GAAP measures provides additional clarity when assessing Customers’ financial results. These disclosures should not be viewed as substitutes for results determined to be in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other entities.
|
The following table presents the dollar amount of changes in interest income and interest expense for the major categories of interest-earning assets and interest-bearing liabilities. 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.
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|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2018 vs. 2017
|
|
Increase (Decrease) due
to Change in
|
|
|
|
Rate
|
|
Volume
|
|
Total
|
(amounts in thousands)
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
Interest-earning deposits
|
$
|
332
|
|
|
$
|
(42
|
)
|
|
$
|
290
|
|
Investment securities
|
797
|
|
|
1,145
|
|
|
1,942
|
|
Loans:
|
|
|
|
|
|
Commercial loans to mortgage companies
|
3,448
|
|
|
(20
|
)
|
|
3,428
|
|
Multi-family loans
|
1,383
|
|
|
501
|
|
|
1,884
|
|
Commercial and industrial loans, including owner occupied commercial real estate
|
2,062
|
|
|
3,495
|
|
|
5,557
|
|
Non-owner occupied commercial real estate
|
172
|
|
|
(306
|
)
|
|
(134
|
)
|
All other loans
|
634
|
|
|
(689
|
)
|
|
(55
|
)
|
Total loans
|
7,699
|
|
|
2,981
|
|
|
10,680
|
|
Other interest-earning assets
|
524
|
|
|
351
|
|
|
875
|
|
Total interest income
|
9,352
|
|
|
4,435
|
|
|
13,787
|
|
Interest expense
|
|
|
|
|
|
Interest checking accounts
|
1,021
|
|
|
528
|
|
|
1,549
|
|
Money market deposit accounts
|
5,442
|
|
|
(367
|
)
|
|
5,075
|
|
Other savings accounts
|
(2
|
)
|
|
(3
|
)
|
|
(5
|
)
|
Certificates of deposit
|
2,867
|
|
|
(1,532
|
)
|
|
1,335
|
|
Total interest-bearing deposits
|
9,328
|
|
|
(1,374
|
)
|
|
7,954
|
|
Borrowings
|
2,894
|
|
|
4,223
|
|
|
7,117
|
|
Total interest expense
|
12,222
|
|
|
2,849
|
|
|
15,071
|
|
Net interest income
|
$
|
(2,870
|
)
|
|
$
|
1,586
|
|
|
$
|
(1,284
|
)
|
Net interest income for the three months ended
June 30, 2018
was
$67.3 million
, a decrease of
$1.3 million
, or
1.9%
, from net interest income of
$68.6 million
for the three months ended
June 30,
2017
, as net interest margin (tax equivalent)
narrowed
by
16
basis points to
2.62%
for
second
quarter
2018
compared to
2.78%
for
second
quarter
2017
. The net interest margin (tax equivalent) compression largely resulted from a
61
basis point increase in the cost of interest-bearing deposits, reflecting higher interest rates offered by Customers on its money market deposit accounts and certificates of deposits in order to remain competitive and attract new and retain existing deposit customers, and a 51 basis point increase in borrowing costs, reflecting higher short-term funding rates and a full-quarter effect of the $100 million 3.95% senior debt securities issued on June 30, 2017. The higher cost of funds was offset in part by a 38 basis point increase in the yield on interest-earning assets, primarily resulting from increased yields on commercial loans to mortgage companies, multi-family loans, and commercial and industrial loans, reflecting higher short-term interest rates and increased prepayment fees of $1.0 million in second quarter 2018 compared to second quarter 2017.
Interest expense on borrowings increased
$7.1 million
for the three months ended June 30,
2018
compared to the three months ended June 30,
2017
. This increase was primarily driven by higher average balances of borrowings, which increased
$0.8 billion
for the three months ended June 30,
2018
compared to the three months ended June 30,
2017
, primarily as a result of increases in the average balances of FHLB advances and senior note borrowings to fund the growth in interest-earning assets.
PROVISION FOR LOAN LOSSES
The provision for loan losses
decreased
by
$1.3 million
to a benefit of $0.8 million for the three months ended
June 30, 2018
, compared to expense of
$0.5 million
for the same period in
2017
. The provision for loan losses in
second
quarter
2018
included a release of
$0.8 million
that resulted from improved asset quality and lower incurred losses than previously estimated and a release of $0.3 million for impaired loans, offset in part by
$0.3 million
of provision for loan growth. The provision for loan losses in
second
quarter
2017
included a release of
$0.5 million
from improved asset quality and lower incurred losses than previously estimated, offset by
$0.6 million
of provision for impaired loans, and
$0.4 million
of provision for loan growth.
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
June 30, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2018
|
|
2017
|
(amounts in thousands)
|
|
|
|
Interchange and card revenue
|
$
|
6,382
|
|
|
$
|
8,648
|
|
Mortgage warehouse transactional fees
|
1,967
|
|
|
2,523
|
|
Bank-owned life insurance
|
1,869
|
|
|
2,258
|
|
Deposit fees
|
1,632
|
|
|
2,133
|
|
Gain on sale of SBA and other loans
|
947
|
|
|
573
|
|
Mortgage banking income
|
205
|
|
|
291
|
|
Gain on sale of investment securities
|
—
|
|
|
3,183
|
|
Impairment loss on investment securities
|
—
|
|
|
(2,882
|
)
|
Other
|
3,125
|
|
|
1,664
|
|
Total non-interest income
|
$
|
16,127
|
|
|
$
|
18,391
|
|
Non-interest income of
$16.1 million
decreased
$2.3 million
, or
12.3%
, for the three months ended
June 30, 2018
when compared to non-interest income of
$18.4 million
for the three months ended
June 30, 2017
. Included within non-interest income for the three months ended June 30, 2018 was $1.2 million of debit and prepaid card interchange expense, which was recorded as a reduction to the gross amount of interchange and card revenue of $7.6 million as a result of the adoption of the new revenue recognition guidance as described in
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
on a modified retrospective basis. Prior to the adoption of the new revenue recognition guidance, these expenses were included within non-interest expense and reported as technology, communication and bank operations expense. For the three months ended June 30, 2017, debit and prepaid card interchange expense was $1.3 million. If the three months ended June 30, 2017 was presented on a consistent basis with the three months ended June 30, 2018, the reported amount of non-interest income of $18.4 million would have been $17.1 million and the gross interchange and card revenue of $8.6 million would have been presented net of the debit and prepaid card interchange expense of $1.3 million, or $7.4 million. When presented on a consistent basis, the $1.0 million decline in interchange and card revenue was largely the result of lower activity volumes in the BankMobile business segment. Other decreases in total non-interest income for the three months ended June 30, 2018 compared to the three months ended June 30, 2017 included
decrease
s in mortgage warehouse transactional fees and deposit fees of
$0.6 million
and
$0.5 million
, or
22.0%
and
23.5%
, respectively, primarily resulting from reduced transaction volumes. BankMobile continues to focus on implementing its "Customers for Life" model and decrease its reliance on Disbursement related deposits. For the three months ended
June 30, 2017
, Customers also realized $3.2 million of gains from the sale of investment securities. The decreases in non-interest income for the three months ended
June 30, 2018
were partially offset by an increase in other non-interest income of
$1.5 million
, primarily from increased income on commercial operating leases of $1.1 million, and a decline in other-than temporary impairment losses from the $2.9 million recognized in second quarter 2017.
NON-INTEREST EXPENSE
The table below presents the components of non-interest expense for the three months ended
June 30, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
2018
|
|
2017
|
(amounts in thousands)
|
|
|
|
Salaries and employee benefits
|
$
|
27,748
|
|
|
$
|
23,651
|
|
Technology, communication and bank operations
|
11,322
|
|
|
8,910
|
|
Professional services
|
3,811
|
|
|
6,227
|
|
Occupancy
|
3,141
|
|
|
2,657
|
|
FDIC assessments, non-income taxes, and regulatory fees
|
2,135
|
|
|
2,416
|
|
Provision for operating losses
|
1,233
|
|
|
1,746
|
|
Merger and acquisition related expenses
|
869
|
|
|
—
|
|
Loan workout
|
648
|
|
|
408
|
|
Advertising and promotion
|
319
|
|
|
378
|
|
Other real estate owned expenses
|
58
|
|
|
160
|
|
Other
|
2,466
|
|
|
3,860
|
|
Total non-interest expense
|
$
|
53,750
|
|
|
$
|
50,413
|
|
Non-interest expense was
$53.8 million
for the three months ended
June 30, 2018
, an
increase
of
$3.3 million
, or
6.6%
from non-interest expense of
$50.4 million
for the three months ended
June 30, 2017
. As described above, total non-interest expense for the three months ended June 30, 2018 excludes $1.2 million of debit and prepaid card interchange expense as a result of the adoption of the new revenue recognition guidance on January 1, 2018. If the three months ended June 30, 2017 was presented on a consistent basis with the three months ended June 30, 2018, the reported amount of non-interest expense of $50.4 million would have been $49.1 million and technology, communication, and bank operations expense of $8.9 million would have been $7.6 million.
Salaries and employee benefits, which represent the largest component of non-interest expense,
increased
$4.1 million
, or
17.3%
, to
$27.7 million
for the three months ended
June 30, 2018
from
$23.7 million
for the three months ended
June 30, 2017
. The increase was primarily attributable to increases in compensation levels for existing team members, reflecting higher costs to maintain our workforce, and an increase in headcount as Customers continues to hire new team members in the markets it serves.
When presented on a consistent basis, technology, communication and bank operations expense increased $3.7 million, or 48.7%, to
$11.3 million
for the three months ended
June 30, 2018
from $7.6 million for the three months ended
June 30, 2017
given the continued investment in the BankMobile segment infrastructure and Customers' recent system conversion.
Merger and acquisition related expenses were $0.9 million for the three months ended June 30, 2018, compared to no similar expenses for the three months ended June 30, 2017. These charges include professional services expenses incurred in connection with the planned spin-off of the BankMobile business as well as a residual expense resulting from the 2016 acquisition of the Disbursements business.
These increases were partially offset by a decrease in professional services expense of
$2.4 million
, or
38.8%
, to
$3.8 million
for the three months ended
June 30, 2018
from
$6.2 million
for the three months ended
June 30, 2017
. This decrease was primarily attributable to reductions in consulting, legal and other professional services as management continues its efforts to monitor and control expenses.
INCOME TAXES
Income tax expense of
$6.8 million
decreased
$5.5 million
, or
44.7%
, resulting in an effective tax rate of
22.4%
for the three months ended
June 30, 2018
when compared to income tax expense of
$12.3 million
and an effective tax rate of
34.2%
for the three months ended
June 30, 2017
. The decrease in income tax expense and effective rate was driven by the lower corporate tax rate as a result of the Tax Cuts and Jobs Act enacted in December 2017, as well as a decrease in pre-tax income of
$5.6 million
in the three months ended June 30,
2018
compared to the three months ended June 30, 2017.
PREFERRED STOCK DIVIDENDS
Preferred stock dividends were
$3.6 million
for the three months ended
June 30, 2018
and
2017
, respectively. There were no changes to the amount of preferred stock outstanding or the dividend rates from second quarter 2017 to second quarter 2018.
Six Months Ended June 30, 2018
Compared to
Six Months Ended June 30, 2017
Net income available to common shareholders
decreased
$1.7 million
, or
3.9%
, to
$40.6 million
for the
six
months ended
June 30, 2018
when compared to net income available to common shareholders of
$42.2 million
for the
six
months ended
June 30, 2017
. The
decreased
net income available to common shareholders resulted primarily from an
increase
in non-interest expense of
$6.3 million
and a decrease in non-interest income of
$4.1 million
, offset in part by decreases in income tax expense of
$5.1 million
and the provision for loan losses of
$2.3 million
and an
increase
in net interest income of
$1.3 million
.
Net interest income
increased
$1.3 million
, or
1.0%
, for the
six
months ended
June 30, 2018
to
$132.4 million
when compared to net interest income of
$131.0 million
for the
six months ended
June 30, 2017
. This
increase
resulted primarily from an increase in the average balance of loans of $0.5 billion and a 29 basis point increase in the yield on loans. These increases were offset in part by a 53 basis point increase in the cost of interest-bearing deposits and a 30 basis point increase in the cost of borrowings for the first
six
months of
2018
when compared to the first
six
months of
2017
.
The provision for loan losses
decreased
$2.3 million
to
$1.3 million
for the
six
months ended
June 30, 2018
when compared to the provision for loan losses of
$3.6 million
for the same period in
2017
. The provision for loan losses of
$1.3 million
included $1.2 million for loan portfolio growth and $1.1 million for impaired loans, offset in part by a $0.9 million release that resulted from improved asset quality and lower incurred losses than previously estimated.
Non-interest income
decreased
$4.1 million
during the
six
months ended
June 30, 2018
to
$37.0 million
, compared to
$41.1 million
for the
six
months ended
June 30, 2017
. Included within non-interest income for the six months ended June 30, 2018 was $2.7 million of debit and prepaid card interchange expense, which was recorded as a reduction to the gross amount of interchange and card revenue of $18.8 million as a result of the adoption of the new revenue recognition guidance as described in
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
on a modified retrospective basis. Prior to the adoption of the new revenue recognition guidance, these expenses were included within non-interest expense and reported as technology, communication and bank operations expense. For the six months ended June 30, 2017, debit and prepaid card interchange expense was $3.2 million. If the six months ended June 30, 2017 was presented on a consistent basis with the six months ended June 30, 2018, the reported amount of non-interest income of $41.1 million would have been $38.0 million and the gross interchange and card revenue of $22.2 million would have been presented net of the debit and prepaid card interchange expense of $3.2 million, or $19.0 million. When presented on a consistent basis, the $3.0 million decline in interchange and card revenue was largely the result of lower activity volumes in the BankMobile business segment. Deposit fees of $3.7 million for the six months ended June 30, 2018 decreased
$1.5 million
compared to $5.3 million for the six months ended June 30, 2017, mostly driven by lower activity volumes in the BankMobile business segment. There was also a decrease of
$3.2 million
in gains realized from the sale of investment securities for the six months ended June 30, 2018, compared to the six months ended June 30, 2017. These decreases in non-interest income were offset in part by an increase in other non-interest income of
$2.5 million
, primarily driven by increased income on commercial operating leases, and a decline in other-than-temporary impairment losses from the
$4.6 million
recognized during the six months ended June 30, 2017.
Non-interest expense
increased
$6.3 million
, or
6.3%
, for the
six
months ended
June 30, 2018
to
$106.0 million
when compared to non-interest expense of
$99.8 million
for the
six
months ended
June 30, 2017
. The
increase
was mostly driven by increases in salaries and employee benefits of
$7.9 million
resulting from salary increases to existing team members as well as an increase in headcount as Customers continues to hire new team members in the markets that it serves. Total non-interest expense for the six months ended June 30, 2018 excludes $2.7 million of debit and prepaid card interchange expense as a result of the adoption of the new revenue recognition guidance on January 1, 2018. If the six months ended June 30, 2017 was presented on a consistent basis with the six months ended June 30, 2018, the reported amount of non-interest expense of $99.8 million would have been $96.6 million and technology, communication, and bank operations expense of $18.8 million would have been $15.7 million. When presented on a consistent basis, technology, communication and bank operations expense increased $5.6 million, or 35.7%, to $21.3 million for the six months ended June 30, 2018 from $15.7 million for the six months ended June 30, 2017 given the continued investment in the BankMobile segment infrastructure and Customers' recent system conversion. Merger and acquisition related expenses were
$1.0 million
for the six months ended
June 30, 2018
, compared to no similar expenses for the six months ended June 30, 2017. These expenses include professional services expenses incurred in connection with the planned spin-off of the BankMobile business as well as a residual expense resulting from the 2016 acquisition of the Disbursements business. These increases in non-interest expense were partially offset by a
decrease in professional services expense of
$3.9 million
, primarily attributable to reductions in consulting, legal and other professional services as management continues its efforts to monitor and control expenses.
Income tax expense
decreased
$5.1 million
for the
six
months ended
June 30, 2018
to
$14.2 million
when compared to income tax expense of
$19.3 million
for the same period in
2017
. The
decrease
in income tax expense was driven primarily by a decrease in pre-tax income of
$6.8 million
in the first
six
months of
2018
, as well as a lower federal income tax rate resulting from the Tax Cut and Jobs Act of 2017. Customers' effective tax rate
decreased
to
22.9%
for the
six
months ended
June 30, 2018
, compared to
28.1%
for the same period in
2017
. Income tax expense for the six months ended June 30, 2017 included the recognition of a tax benefit of $4.6 million for the development of tax strategies that would have allowed for the recognition of the tax benefit from losses that had been recorded for impairment charges on the Religare equity securities.
Preferred stock dividends were
$7.2 million
for the
six
months ended
June 30, 2018
and 2017, respectively.
NET INTEREST INCOME
Net interest income (the difference between the interest earned on loans, investments and interest-earning deposits with banks, and interest paid on deposits, borrowed funds and subordinated debt) is the primary source of Customers' earnings.
The following table summarizes Customers' net interest income and related interest spread and net interest margin for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
Average
Balance
|
|
Interest
Income or
Expense
|
|
Average
Yield or
Cost (%)
|
|
Average
Balance
|
|
Interest
Income or
Expense
|
|
Average
Yield or
Cost (%)
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits
|
$
|
186,470
|
|
|
$
|
1,533
|
|
|
1.66
|
%
|
|
$
|
350,693
|
|
|
$
|
1,523
|
|
|
0.88
|
%
|
Investment securities (1)
|
1,150,064
|
|
|
18,437
|
|
|
3.21
|
%
|
|
948,657
|
|
|
13,710
|
|
|
2.91
|
%
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
Commercial loans to mortgage companies
|
1,676,601
|
|
|
40,021
|
|
|
4.81
|
%
|
|
1,622,182
|
|
|
32,761
|
|
|
4.07
|
%
|
Multi-family loans
|
3,599,593
|
|
|
67,958
|
|
|
3.81
|
%
|
|
3,423,449
|
|
|
63,270
|
|
|
3.73
|
%
|
Commercial and industrial loans (2)
|
1,683,566
|
|
|
37,990
|
|
|
4.55
|
%
|
|
1,378,085
|
|
|
28,241
|
|
|
4.13
|
%
|
Non-owner occupied commercial real estate
|
1,275,404
|
|
|
25,243
|
|
|
3.99
|
%
|
|
1,288,610
|
|
|
24,948
|
|
|
3.90
|
%
|
All other loans
|
406,519
|
|
|
9,959
|
|
|
4.94
|
%
|
|
479,242
|
|
|
10,747
|
|
|
4.52
|
%
|
Total loans (3)
|
8,641,683
|
|
|
181,171
|
|
|
4.23
|
%
|
|
8,191,568
|
|
|
159,967
|
|
|
3.94
|
%
|
Other interest-earning assets
|
128,396
|
|
|
3,463
|
|
|
5.44
|
%
|
|
91,026
|
|
|
1,746
|
|
|
3.87
|
%
|
Total interest earning assets
|
10,106,613
|
|
|
204,604
|
|
|
4.08
|
%
|
|
9,581,944
|
|
|
176,946
|
|
|
3.72
|
%
|
Non-interest-earning assets
|
393,066
|
|
|
|
|
|
|
356,311
|
|
|
|
|
|
Total assets
|
$
|
10,499,679
|
|
|
|
|
|
|
$
|
9,938,255
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking accounts
|
$
|
526,995
|
|
|
3,615
|
|
|
1.38
|
%
|
|
$
|
332,673
|
|
|
1,131
|
|
|
0.69
|
%
|
Money market deposit accounts
|
3,356,717
|
|
|
24,914
|
|
|
1.50
|
%
|
|
3,306,988
|
|
|
14,595
|
|
|
0.89
|
%
|
Other savings accounts
|
37,138
|
|
|
50
|
|
|
0.27
|
%
|
|
42,383
|
|
|
58
|
|
|
0.28
|
%
|
Certificates of deposit
|
1,916,421
|
|
|
15,396
|
|
|
1.62
|
%
|
|
2,555,488
|
|
|
14,767
|
|
|
1.17
|
%
|
Total interest-bearing deposits
|
5,837,271
|
|
|
43,975
|
|
|
1.52
|
%
|
|
6,237,532
|
|
|
30,551
|
|
|
0.99
|
%
|
Borrowings
|
2,461,085
|
|
|
28,276
|
|
|
2.31
|
%
|
|
1,543,154
|
|
|
15,371
|
|
|
2.01
|
%
|
Total interest-bearing liabilities
|
8,298,356
|
|
|
72,251
|
|
|
1.75
|
%
|
|
7,780,686
|
|
|
45,922
|
|
|
1.19
|
%
|
Non-interest-bearing deposits
|
1,193,769
|
|
|
|
|
|
|
1,198,355
|
|
|
|
|
|
Total deposits and borrowings
|
9,492,125
|
|
|
|
|
1.53
|
%
|
|
8,979,041
|
|
|
|
|
1.03
|
%
|
Other non-interest-bearing liabilities
|
80,074
|
|
|
|
|
|
|
75,876
|
|
|
|
|
|
Total liabilities
|
9,572,199
|
|
|
|
|
|
|
9,054,917
|
|
|
|
|
|
Shareholders’ Equity
|
927,480
|
|
|
|
|
|
|
883,338
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
$
|
10,499,679
|
|
|
|
|
|
|
$
|
9,938,255
|
|
|
|
|
|
Net interest income
|
|
|
132,353
|
|
|
|
|
|
|
131,024
|
|
|
|
Tax-equivalent adjustment (4)
|
|
|
342
|
|
|
|
|
|
|
197
|
|
|
|
Net interest earnings
|
|
|
$
|
132,695
|
|
|
|
|
|
|
$
|
131,221
|
|
|
|
Interest spread
|
|
|
|
|
2.55
|
%
|
|
|
|
|
|
2.69
|
%
|
Net interest margin
|
|
|
|
|
2.64
|
%
|
|
|
|
|
|
2.75
|
%
|
Net interest margin tax equivalent (4)
|
|
|
|
|
2.64
|
%
|
|
|
|
|
|
2.76
|
%
|
|
|
(1)
|
For presentation in this table, average balances and the corresponding average yields for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.
|
|
|
(2)
|
Includes owner occupied commercial real estate loans.
|
|
|
(3)
|
Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees.
|
|
|
(4)
|
Non-GAAP tax-equivalent basis, using an estimated marginal tax rate of 26% for the six months ended June 30, 2018 and 35% for the six months ended June 30, 2017 presented to approximate interest income as a taxable asset. Management uses non-GAAP measures to present historical periods comparable to the current period presentation. In addition, management believes the use of these non-GAAP measures provides additional clarity when assessing Customers’ financial results. These disclosures should not be viewed as substitutes for results determined to be in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other entities.
|
The following table presents the dollar amount of changes in interest income and interest expense for the major categories of interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2018 vs. 2017
|
|
Increase (Decrease) due
to Change in
|
|
|
|
Rate
|
|
Volume
|
|
Total
|
(amounts in thousands)
|
|
|
|
|
|
Interest income
|
|
|
|
|
|
Interest-earning deposits
|
$
|
942
|
|
|
$
|
(932
|
)
|
|
$
|
10
|
|
Investment securities
|
1,606
|
|
|
3,121
|
|
|
4,727
|
|
Loans:
|
|
|
|
|
|
Commercial loans to mortgage companies
|
6,130
|
|
|
1,130
|
|
|
7,260
|
|
Multi-family loans
|
1,383
|
|
|
3,305
|
|
|
4,688
|
|
Commercial and industrial loans, including owner occupied commercial real estate
|
3,054
|
|
|
6,695
|
|
|
9,749
|
|
Non-owner occupied commercial real estate
|
552
|
|
|
(257
|
)
|
|
295
|
|
All other loans
|
935
|
|
|
(1,723
|
)
|
|
(788
|
)
|
Total loans
|
12,054
|
|
|
9,150
|
|
|
21,204
|
|
Other interest-earning assets
|
855
|
|
|
862
|
|
|
1,717
|
|
Total interest income
|
15,457
|
|
|
12,201
|
|
|
27,658
|
|
Interest expense
|
|
|
|
|
|
Interest checking accounts
|
1,578
|
|
|
906
|
|
|
2,484
|
|
Money market deposit accounts
|
10,096
|
|
|
223
|
|
|
10,319
|
|
Other savings accounts
|
(1
|
)
|
|
(7
|
)
|
|
(8
|
)
|
Certificates of deposit
|
4,884
|
|
|
(4,255
|
)
|
|
629
|
|
Total interest-bearing deposits
|
16,557
|
|
|
(3,133
|
)
|
|
13,424
|
|
Borrowings
|
2,649
|
|
|
10,256
|
|
|
12,905
|
|
Total interest expense
|
19,206
|
|
|
7,123
|
|
|
26,329
|
|
Net interest income
|
$
|
(3,749
|
)
|
|
$
|
5,078
|
|
|
$
|
1,329
|
|
Net interest income for the
six months ended June 30, 2018
was
$132.4 million
, an increase of
$1.3 million
, or
1.0%
, when compared to net interest income of
$131.0 million
for the
six
months ended
June 30, 2017
. This increase was primarily driven by increased average loan and security balances of
$0.7 billion
and higher yields on commercial loans to mortgage companies.
Net interest margin (tax equivalent)
narrowed
by
12
basis points to
2.64%
for the six months ended June 30, 2018, compared to 2.76% for the
six
months ended
June 30, 2017
. The net interest margin compression largely resulted from a
53
basis point increase in the cost of interest-bearing deposits, reflecting higher interest rates offered by Customers on its money market deposit accounts and certificates of deposits in order to remain competitive and attract new and retain existing deposit customers. The higher cost of funds was offset in part by a
36
basis point increase in the yield on interest-earning assets, primarily due to an increase in the yield on commercial loans to mortgage companies, reflecting higher short-term interest rates.
Interest expense on total interest-bearing deposits increased
$13.4 million
for the
six
months ended
June 30, 2018
compared to the
six
months ended
June 30, 2017
. This increase primarily resulted from the aforementioned increase in rates offered on money market deposit accounts and certificates of deposit.
Interest expense on borrowings increased
$12.9 million
for the
six
months ended
June 30, 2018
, compared to the
six
months ended
June 30, 2017
. This increase was driven by increased volume as average borrowings increased by
$917.9 million
when compared to average borrowings for the
six
months ended
June 30, 2017
, mostly due to higher average outstanding balances of short-term FHLB advances and senior note borrowings to fund the growth in interest-earning assets.
PROVISION FOR LOAN LOSSES
The provision for loan losses
decreased
by
$2.3 million
to
$1.3 million
for the
six
months ended
June 30, 2018
, compared to
$3.6 million
for the same period in
2017
. The provision for loan losses for the
six
months ended
June 30, 2018
included $1.2 million for loan portfolio growth, $1.1 million for impaired loans, offset in part by a release of
$0.9 million
resulting from improved asset quality and lower incurred losses than previously estimated. The provision for loan losses for the
six
months ended
June 30, 2017
included
$3.1 million
for impaired loans and
$0.9 million
for loan portfolio growth, offset in part by a release of $0.5 million resulting from improved asset quality and lower incurred losses than previously estimated.
For more information about the provision and allowance for loan losses and our loss experience, see “Credit Risk” and “Asset Quality” herein.
NON-INTEREST INCOME
The table below presents the components of non-interest income for the
six
months ended
June 30, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
(amounts in thousands)
|
|
|
|
Interchange and card revenue
|
$
|
16,043
|
|
|
$
|
22,158
|
|
Bank-owned life insurance
|
3,900
|
|
|
3,624
|
|
Mortgage warehouse transactional fees
|
3,854
|
|
|
4,743
|
|
Deposit fees
|
3,724
|
|
|
5,260
|
|
Gain on sale of SBA and other loans
|
2,308
|
|
|
1,901
|
|
Mortgage banking income
|
325
|
|
|
446
|
|
Gain on sale of investment securities
|
—
|
|
|
3,183
|
|
Impairment loss on investment securities
|
—
|
|
|
(4,585
|
)
|
Other
|
6,883
|
|
|
4,414
|
|
Total non-interest income
|
$
|
37,037
|
|
|
$
|
41,144
|
|
Non-interest income
decreased
$4.1 million
during the
six
months ended
June 30, 2018
to
$37.0 million
, compared to
$41.1 million
for the
six
months ended
June 30, 2017
. Included within non-interest income for the six months ended June 30, 2018 was $2.7 million of debit and prepaid card interchange expense, which was recorded as a reduction to the gross amount of interchange and card revenue of $18.8 million as a result of the adoption of the new revenue recognition guidance as described in
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
on a modified retrospective basis. Prior to the adoption of the new revenue recognition guidance, these expenses were included within non-interest expense and reported as technology, communication and bank operations expense. For the six months ended June 30, 2017, debit and prepaid card interchange expense was $3.2 million. If the six months ended June 30, 2017 was presented on a consistent basis with the six months ended June 30, 2018, the reported amount of non-interest income of $41.1 million would have been $38.0 million and the gross interchange and card revenue of $22.2 million would have been presented net of the debit and prepaid card interchange expense of $3.2 million, or $19.0 million. When presented on a consistent basis, the $3.0 million decline in interchange and card revenue was largely the result of lower activity volumes in the BankMobile business segment. Deposit fees of $3.7 million for the six months ended June 30, 2018 decreased
$1.5 million
compared to $5.3 million for the six months ended June 30, 2017, mostly driven by lower activity volumes in the BankMobile business segment. There was also a decrease of
$3.2 million
in gains realized from the sale of investment securities for the six months ended June 30, 2018 compared to the six months ended June 30, 2017. These decreases in non-interest income were offset in part by an increase in other non-interest income of
$2.5 million
, primarily driven by increased income on commercial operating leases, and a decline in other-than-temporary impairment losses from the
$4.6 million
recognized during the six months ended June 30, 2017 for the decline in market value of the Religare equity securities.
NON-INTEREST EXPENSE
The table below presents the components of non-interest expense for the
six
months ended
June 30, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
(amounts in thousands)
|
|
|
|
Salaries and employee benefits
|
$
|
52,673
|
|
|
$
|
44,763
|
|
Technology, communication and bank operations
|
21,266
|
|
|
18,827
|
|
Professional services
|
9,820
|
|
|
13,739
|
|
Occupancy
|
5,975
|
|
|
5,371
|
|
FDIC assessments, non-income taxes, and regulatory fees
|
4,335
|
|
|
4,141
|
|
Provision for operating losses
|
2,759
|
|
|
3,392
|
|
Loan workout
|
1,307
|
|
|
929
|
|
Merger and acquisition related expenses
|
975
|
|
|
—
|
|
Advertising and promotion
|
709
|
|
|
704
|
|
Other real estate owned expenses
|
98
|
|
|
105
|
|
Other
|
6,114
|
|
|
7,807
|
|
Total non-interest expense
|
$
|
106,031
|
|
|
$
|
99,778
|
|
Non-interest expense was
$106.0 million
for the
six
months ended
June 30, 2018
, an increase of
$6.3 million
from non-interest expense of
$99.8 million
for the
six
months ended
June 30, 2017
. As described above, total non-interest expense for the six months ended June 30, 2018 excludes $2.7 million of debit and prepaid card interchange expense as a result of the adoption of the new revenue recognition guidance on January 1, 2018. If the six months ended June 30, 2017 was presented on a consistent basis with the six months ended June 30, 2018, the reported amount of non-interest expense of $99.8 million would have been $96.6 million and technology, communication, and bank operations expense of $18.8 million would have been $15.7 million.
Salaries and employee benefits, which represent the largest component of non-interest expense, increased
$7.9 million
, or
17.7%
, to
$52.7 million
for the
six
months ended
June 30, 2018
, reflecting salary increases for existing team members and increased headcount as Customers continues to hire new team members in the markets it serves.
When presented on a consistent basis, technology, communication and bank operations expense increased $5.6 million, or 35.7%, to $21.3 million for the six months ended June 30, 2018 from $15.7 million for the six months ended June 30, 2017 given the continued investment in the BankMobile segment infrastructure and Customers' recent system conversion.
Merger and acquisition related expenses were
$1.0 million
for the six months ended
June 30, 2018
, compared to no similar expenses for the six months ended June 30, 2017. These expenses include professional services expenses incurred in connection with the planned spin-off of the BankMobile business as well as a residual expense resulting from the 2016 acquisition of the Disbursements business.
Occupancy expense increased
$0.6 million
, or
11.2%
, to
$6.0 million
for the
six
months ended
June 30, 2018
from
$5.4 million
for the
six
months ended
June 30, 2017
as Customers expanded into different geographical markets.
Professional services expense
decreased
by
$3.9 million
, or
28.5%
, to
$9.8 million
for the
six
months ended
June 30, 2018
from
$13.7 million
for the
six
months ended
June 30, 2017
. This decrease was primarily driven by a reduction in expenses for consulting, legal, and other professional fees as management continues its efforts to monitor and control expenses.
Provision for operating losses decreased by
$0.6 million
, or
18.7%
, to
$2.8 million
for the
six
months ended
June 30, 2018
from
$3.4 million
for the
six
months ended
June 30, 2017
. The provision for operating losses represents Customers' estimated liability for losses resulting from fraud or theft-based transactions that have generally been disputed by deposit account holders mainly from its BankMobile Disbursements business but where such disputes have not been resolved as of the end of the reporting period. The reserve is based on historical rates of loss on such transactions.
INCOME TAXES
Income tax expense
decreased
$5.1 million
for the
six
months ended
June 30, 2018
to
$14.2 million
when compared to income tax expense of
$19.3 million
for the same period in
2017
. The
decrease
in income tax expense was driven primarily by a decrease in pre-tax income of
$6.8 million
in the first
six
months of
2018
. Customers' effective tax rate
decreased
to
22.9%
for the
six
months ended
June 30, 2018
, compared to
28.1%
for the same period in
2017
. The decrease in the effective tax rate was primarily driven by lower federal income tax tax rates following the enactment of the Tax Cuts and Jobs Act in December 2017 and a lower taxable income for the
six
months ended
June 30, 2018
compared to the same period in
2017
. In the six months ended June 30, 2017, there was a recognition of a tax benefit of $4.6 million for the development of tax strategies that would have allowed for the recognition of the tax benefit from losses that had been recorded for impairment charges on the Religare equity securities.
PREFERRED STOCK DIVIDENDS
Preferred stock dividends were
$7.2 million
for the
six
months ended
June 30, 2018
and
June 30, 2017
, respectively. There were no changes to the amount of preferred stock outstanding or the dividend rates for the first six months of 2018 compared to the first six months of 2017.
Financial Condition
General
Customers' total assets were
$11.1 billion
at
June 30, 2018
. This represented a
$1.3 billion
, or
12.7%
,
increase
from total assets of
$9.8 billion
at
December 31, 2017
. At December 31, 2017, Customers had strategically reduced total assets to under $10 billion to improve capital ratios and to continue to maintain its small issuer status under the Durbin Amendment to maximize interchange revenue until July 1, 2019. The change in Customers' financial position at
June 30, 2018
compared to December 31, 2017 occurred primarily as a result of an increase in total investment securities of
$0.7 billion
, or
146.3%
, to
$1.2 billion
at
June 30, 2018
compared to
$0.5 billion
at
December 31, 2017
, primarily driven by growth in agency-guaranteed mortgage-backed securities and corporate bonds. The increase in total assets was also attributable to an increase in total loans outstanding, including loans held for sale, of
$405.8 million
, or
4.7%
, since
December 31, 2017
, primarily driven by growth in commercial and industrial loans (including owner occupied commercial real estate loans) of
$172.5 million
, commercial loans to mortgage banking business of
$142.7 million
, and consumer loans of
$253.8 million
. These increases were offset in part by a decrease in multi-family loans of
$103.8 million
.
Total liabilities were
$10.2 billion
at
June 30, 2018
. This represented a
$1.2 billion
, or
13.9%
,
increase
from
$8.9 billion
at
December 31, 2017
. The
increase
in total liabilities resulted primarily from FHLB borrowings, which
increased
by
$0.8 billion
, or
48.3%
, to
$2.4 billion
at
June 30, 2018
from
$1.6 billion
at
December 31, 2017
, and total deposits, which
increased
$495.8 million
, or
7.3%
, to
$7.3 billion
at
June 30, 2018
from
$6.8 billion
at
December 31, 2017
. These increases were offset in part by a decrease in Federal funds purchased of
$50.0 million
, or
32.3%
, to
$105.0 million
at
June 30, 2018
from
$155.0 million
at
December 31, 2017
.
The following table presents certain key condensed balance sheet data as of
June 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
|
|
|
|
(amounts in thousands)
|
|
|
|
Cash and cash equivalents
|
$
|
251,726
|
|
|
$
|
146,323
|
|
Investment securities, at fair value
|
1,161,000
|
|
|
471,371
|
|
Loans held for sale (includes $1,043 and $1,886, respectively, at fair value) - as restated
|
1,043
|
|
|
146,077
|
|
Loans receivable, mortgage warehouse, at fair value - as restated
|
1,930,738
|
|
|
1,793,408
|
|
Loans receivable
|
7,181,726
|
|
|
6,768,258
|
|
Allowance for loan losses
|
(38,288
|
)
|
|
(38,015
|
)
|
Total assets
|
11,092,846
|
|
|
9,839,555
|
|
Total deposits
|
7,295,954
|
|
|
6,800,142
|
|
Federal funds purchased
|
105,000
|
|
|
155,000
|
|
FHLB advances
|
2,389,797
|
|
|
1,611,860
|
|
Other borrowings
|
186,888
|
|
|
186,497
|
|
Subordinated debt
|
108,929
|
|
|
108,880
|
|
Total liabilities
|
10,156,619
|
|
|
8,918,591
|
|
Total shareholders’ equity
|
936,227
|
|
|
920,964
|
|
Total liabilities and shareholders’ equity
|
11,092,846
|
|
|
9,839,555
|
|
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks and interest-earning deposits. Cash and due from banks consists mainly of vault cash and cash items in the process of collection. These balances totaled
$23.0 million
at
June 30, 2018
. This represented a
$2.6 million
increase
from
$20.4 million
at
December 31, 2017
. These balances vary from day to day, primarily due to variations in customers’ deposits with Customers.
Interest-earning deposits consist of cash deposited at other banks, primarily the Federal Reserve Bank of Philadelphia. Interest-earning deposits were
$228.8 million
and
$125.9 million
at
June 30, 2018
and
December 31, 2017
, respectively. This balance varies from day to day, depending on several factors, such as fluctuations in customers' deposits with Customers, payment of checks drawn on customers' accounts and strategic investment decisions made to maximize Customers' net interest income, while effectively managing interest-rate risk and liquidity. Customers targeted a lower cash balance at December 31, 2017 consistent with its objectives of reducing total assets below $10 billion at December 31, 2017.
In connection with the June 2016 acquisition of the Disbursement business from Higher One, as of
June 30, 2018
and December 31, 2017, Customers had $5 million in an escrow account restricted in use with a third party to be paid to Higher One upon the second anniversary of the transaction closing, or at a later date as otherwise agreed to by both parties. Also, in connection with the planned spin-off and merger, Customers had $1.0 million in an escrow account with a third party that is reserved for payment to Flagship Community Bank in the event the amended and restated agreement with Flagship is terminated for reasons described in the agreement. See NOTE 2 - SPIN-OFF AND MERGER for additional details related to this escrow account. In connection with the purchase of certain university relationships in January 2018, Customers placed $1.5 million in an escrow account with a third party that is reserved for payment to a third party by December 31, 2018.
Investment Securities
The investment securities portfolio is an important source of interest income and liquidity. It consists of mortgage-backed securities (guaranteed by an agency of the United States government), corporate 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.
At
June 30, 2018
, investment securities were
$1.2 billion
, compared to
$0.5 billion
at
December 31, 2017
, an increase of
$0.7 billion
. The
increase
was primarily the result of purchases of agency-guaranteed mortgage-backed securities and corporate
securities totaling
$763.2 million
during the six months ended
June 30, 2018
, offset in part by maturities, calls and principal repayments in the amount of
$26.2 million
during the six months ended
June 30, 2018
.
For financial reporting purposes, available-for-sale debt securities are carried at fair value. Unrealized gains and losses on available-for-sale debt securities are included in other comprehensive 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 will be recorded in earnings in the period in which they occur and will no longer be deferred in accumulated other comprehensive income. Amounts previously recorded to accumulated other comprehensive income were reclassified to retained earnings on January 1, 2018. See
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
for additional details related to the adoption of ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
.
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 warehouse lending business, and has recently announced its entry into non-QM residential mortgage lending. In addition, Customers has been deemphasizing its multi-family business and has significantly limited originations of loans yielding less than 5% 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
June 30, 2018
and December 31, 2017, commercial loans to mortgage banking businesses totaled
$1.9 billion
and
$1.8 billion
, respectively, and are reported as loans receivable, mortgage warehouse, at fair value on the consolidated balance sheets.
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
June 30, 2018
, Customers had multi-family loans of
$3.5 billion
outstanding, comprising approximately 38.9% 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
June 30, 2018
and
December 31, 2017
, Customers had $167.2 million and $152.5 million, respectively, of equipment finance loans outstanding. As of
June 30, 2018
and
December 31, 2017
, Customers had $35.1 million and $26.6 million of equipment finance leases, respectively. As of
June 30, 2018
and
December 31, 2017
, Customers had $26.5 million and $21.7 million, respectively, of operating leases entered into under this program, net of accumulated depreciation of $2.3 million and $0.5 million, respectively.
As of
June 30, 2018
, Customers had $8.5 billion in commercial loans outstanding, totaling approximately 93.6% of its total loan portfolio, which includes loans held for sale, compared to commercial loans outstanding of $8.4 billion, comprising approximately 96.2% of its loan portfolio, at
December 31, 2017
.
Consumer Lending
Customers provides 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
June 30, 2018
, Customers had
$583.5 million
in consumer loans outstanding, or 6.4% of the total loan portfolio, compared to $329.8 million, or 3.8% of the total loan portfolio, as of December 31, 2017. In second quarter 2018, Customers purchased
$277.4 million
of
thirty
-year fixed-rate residential mortgage loans from Third Federal Savings & Loan. Customers plans to expand its product offerings in real estate secured consumer lending in 2018 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
June 30, 2018
and
December 31, 2017
was as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
2018
|
|
2017
|
(amounts in thousands)
|
(As Restated)
|
|
(As Restated)
|
Commercial loans:
|
|
|
|
Multi-family loans at lower of cost or fair value
|
$
|
—
|
|
|
$
|
144,191
|
|
Total commercial loans held for sale
|
—
|
|
|
144,191
|
|
Consumer loans:
|
|
|
|
Residential mortgage loans, at fair value
|
1,043
|
|
|
1,886
|
|
Loans held for sale
|
$
|
1,043
|
|
|
$
|
146,077
|
|
At
June 30, 2018
, loans held for sale totaled
$1.0 million
, or 0.01% 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 $413.2 million to $7.1 billion at
June 30, 2018
from $6.7 billion at
December 31, 2017
. Total loans receivable as of
June 30, 2018
and
December 31, 2017
consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
2018
|
|
2017
|
(amounts in thousands)
|
(As Restated)
|
|
(As Restated)
|
Loans receivable, mortgage warehouse, at fair value
|
$
|
1,930,738
|
|
|
$
|
1,793,408
|
|
Loans receivable:
|
|
|
|
Commercial:
|
|
|
|
Multi-family
|
$
|
3,542,770
|
|
|
$
|
3,502,381
|
|
Commercial and industrial (including owner occupied commercial real estate)
|
1,811,751
|
|
|
1,633,818
|
|
Commercial real estate non-owner occupied
|
1,155,998
|
|
|
1,218,719
|
|
Construction
|
88,141
|
|
|
85,393
|
|
Total commercial loans receivable
|
6,598,660
|
|
|
6,440,311
|
|
Consumer:
|
|
|
|
Residential real estate
|
493,222
|
|
|
234,090
|
|
Manufactured housing
|
85,328
|
|
|
90,227
|
|
Other
|
3,874
|
|
|
3,547
|
|
Total consumer loans receivable
|
582,424
|
|
|
327,864
|
|
Loans receivable
|
7,181,084
|
|
|
6,768,175
|
|
Deferred costs and unamortized premiums, net
|
642
|
|
|
83
|
|
Allowance for loan losses
|
(38,288
|
)
|
|
(38,015
|
)
|
Total loans receivable, net of allowance for loan losses
|
$
|
9,074,176
|
|
|
$
|
8,523,651
|
|
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
$(0.8) million
and
$0.5 million
for the three months ended
June 30, 2018
and
2017
, respectively, and
$1.3 million
and
$3.6 million
for the six months ended
June 30, 2018
and
2017
, respectively. The allowance for loan losses maintained for loans receivable (excluding loans held for sale and loans receivable, mortgage warehouse, at fair value) was
$38.3 million
, or
0.53%
of loans receivable, at
June 30, 2018
and
$38.0 million
, or
0.56%
of loans receivable, at
December 31, 2017
. Net charge-offs were $0.4 million for the three months ended June 30, 2018, a decrease of $1.5 million compared to the same period in 2017. The decrease in net charge-offs period over period was mainly driven by a decrease in charge-off activities in the commercial and industrial loan portfolio and an increase in recoveries in the commercial real estate owner occupied and construction loan portfolios. Net charge-offs were
$1.1 million
for the
six
months ended
June 30, 2018
, a decrease of
$1.4 million
compared to the same period in
2017
. The decrease in net charge-offs period over period was mainly driven by decreases in charge-off activities related to the commercial and industrial loan portfolio and the commercial real estate non-owner occupied loan portfolio, partially offset by an increase in charge-off activities in the commercial real estate owner occupied portfolio and in the other consumer loan portfolio.
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
June 30,
|
|
Six Months Ended
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
(amounts in thousands)
|
|
|
|
|
|
|
|
Balance at the beginning of the period
|
$
|
39,499
|
|
|
$
|
39,883
|
|
|
$
|
38,015
|
|
|
$
|
37,315
|
|
Loan charge-offs (1)
|
|
|
|
|
|
|
|
Commercial and industrial
|
174
|
|
|
1,849
|
|
|
224
|
|
|
2,047
|
|
Commercial real estate owner occupied
|
483
|
|
|
—
|
|
|
501
|
|
|
—
|
|
Commercial real estate non-owner occupied
|
—
|
|
|
4
|
|
|
—
|
|
|
408
|
|
Residential real estate
|
42
|
|
|
69
|
|
|
407
|
|
|
290
|
|
Other consumer
|
462
|
|
|
226
|
|
|
718
|
|
|
246
|
|
Total Charge-offs
|
1,161
|
|
|
2,148
|
|
|
1,850
|
|
|
2,991
|
|
Loan recoveries (1)
|
|
|
|
|
|
|
|
Commercial and industrial
|
140
|
|
|
68
|
|
|
175
|
|
|
283
|
|
Commercial real estate owner occupied
|
326
|
|
|
9
|
|
|
326
|
|
|
9
|
|
Construction
|
209
|
|
|
49
|
|
|
220
|
|
|
130
|
|
Residential real estate
|
56
|
|
|
6
|
|
|
63
|
|
|
27
|
|
Other consumer
|
3
|
|
|
56
|
|
|
6
|
|
|
100
|
|
Total Recoveries
|
734
|
|
|
188
|
|
|
790
|
|
|
549
|
|
Total net charge-offs
|
427
|
|
|
1,960
|
|
|
1,060
|
|
|
2,442
|
|
Provision for loan losses
|
(784
|
)
|
|
535
|
|
|
1,333
|
|
|
3,585
|
|
Balance at the end of the period
|
$
|
38,288
|
|
|
$
|
38,458
|
|
|
$
|
38,288
|
|
|
$
|
38,458
|
|
|
|
(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/A 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
June 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
(%)
|
(amounts in thousands)
|
|
|
|
Originated Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-Family
|
$
|
3,540,261
|
|
|
$
|
3,538,918
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,343
|
|
|
$
|
—
|
|
|
$
|
1,343
|
|
|
0.04
|
%
|
|
0.04
|
%
|
Commercial & Industrial (1)
|
1,728,577
|
|
|
1,713,369
|
|
|
1,087
|
|
|
—
|
|
|
14,121
|
|
|
667
|
|
|
14,788
|
|
|
0.82
|
%
|
|
0.86
|
%
|
Commercial Real Estate Non-Owner Occupied
|
1,140,483
|
|
|
1,138,133
|
|
|
—
|
|
|
—
|
|
|
2,350
|
|
|
—
|
|
|
2,350
|
|
|
0.21
|
%
|
|
0.21
|
%
|
Residential
|
106,076
|
|
|
103,426
|
|
|
748
|
|
|
—
|
|
|
1,902
|
|
|
57
|
|
|
1,959
|
|
|
1.79
|
%
|
|
1.85
|
%
|
Construction
|
88,141
|
|
|
88,141
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
%
|
|
—
|
%
|
Other consumer
|
1,752
|
|
|
1,716
|
|
|
36
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
%
|
|
—
|
%
|
Total Originated Loans (2)
|
6,605,290
|
|
|
6,583,703
|
|
|
1,871
|
|
|
—
|
|
|
19,716
|
|
|
724
|
|
|
20,440
|
|
|
0.30
|
%
|
|
0.31
|
%
|
Loans Acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Acquisitions
|
136,070
|
|
|
130,316
|
|
|
1,015
|
|
|
475
|
|
|
4,264
|
|
|
704
|
|
|
4,968
|
|
|
3.13
|
%
|
|
3.63
|
%
|
Loan Purchases
|
439,724
|
|
|
430,415
|
|
|
3,517
|
|
|
3,777
|
|
|
2,015
|
|
|
277
|
|
|
2,292
|
|
|
0.46
|
%
|
|
0.52
|
%
|
Total Loans Acquired
|
575,794
|
|
|
560,731
|
|
|
4,532
|
|
|
4,252
|
|
|
6,279
|
|
|
981
|
|
|
7,260
|
|
|
1.09
|
%
|
|
1.26
|
%
|
Deferred costs and unamortized premiums, net
|
642
|
|
|
642
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Loans Receivable
|
7,181,726
|
|
|
7,145,076
|
|
|
6,403
|
|
|
4,252
|
|
|
25,995
|
|
|
1,705
|
|
|
27,700
|
|
|
0.36
|
%
|
|
0.39
|
%
|
Loans Receivable, Mortgage Warehouse, at Fair Value - As Restated
|
1,930,738
|
|
|
1,930,738
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Total Loans Held for Sale - As Restated
|
1,043
|
|
|
1,043
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
Total Portfolio
|
$
|
9,113,507
|
|
|
$
|
9,076,857
|
|
|
$
|
6,403
|
|
|
$
|
4,252
|
|
|
$
|
25,995
|
|
|
$
|
1,705
|
|
|
$
|
27,700
|
|
|
0.29
|
%
|
|
0.30
|
%
|
|
|
(1)
|
Commercial & industrial loans, including owner occupied commercial real estate loans.
|
|
|
(2)
|
Does not include loans receivable, mortgage warehouse, at fair value.
|
Asset Quality at
June 30, 2018
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Type
|
Total Loans
|
|
NPL
|
|
ALL
|
|
Cash
Reserve
|
|
Total
Credit
Reserves
|
|
Reserves
to Loans
(%)
|
|
Reserves
to NPLs
(%)
|
(amounts in thousands)
|
|
Originated Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-Family
|
$
|
3,540,261
|
|
|
$
|
1,343
|
|
|
$
|
12,072
|
|
|
$
|
—
|
|
|
$
|
12,072
|
|
|
0.34
|
%
|
|
898.88
|
%
|
Commercial & Industrial (1)
|
1,728,577
|
|
|
14,121
|
|
|
14,643
|
|
|
—
|
|
|
14,643
|
|
|
0.85
|
%
|
|
103.70
|
%
|
Commercial Real Estate Non-Owner Occupied
|
1,140,483
|
|
|
2,350
|
|
|
4,260
|
|
|
—
|
|
|
4,260
|
|
|
0.37
|
%
|
|
181.28
|
%
|
Residential
|
106,076
|
|
|
1,902
|
|
|
2,047
|
|
|
—
|
|
|
2,047
|
|
|
1.93
|
%
|
|
107.62
|
%
|
Construction
|
88,141
|
|
|
—
|
|
|
992
|
|
|
—
|
|
|
992
|
|
|
1.13
|
%
|
|
—
|
%
|
Other consumer
|
1,752
|
|
|
—
|
|
|
131
|
|
|
—
|
|
|
131
|
|
|
7.48
|
%
|
|
—
|
%
|
Total Originated Loans (2)
|
6,605,290
|
|
|
19,716
|
|
|
34,145
|
|
|
—
|
|
|
34,145
|
|
|
0.52
|
%
|
|
173.18
|
%
|
Loans Acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Acquisitions
|
136,070
|
|
|
4,264
|
|
|
3,990
|
|
|
—
|
|
|
3,990
|
|
|
2.93
|
%
|
|
93.57
|
%
|
Loan Purchases
|
439,724
|
|
|
2,015
|
|
|
153
|
|
|
510
|
|
|
663
|
|
|
0.15
|
%
|
|
32.90
|
%
|
Total Loans Acquired
|
575,794
|
|
|
6,279
|
|
|
4,143
|
|
|
510
|
|
|
4,653
|
|
|
0.81
|
%
|
|
74.10
|
%
|
Deferred costs and unamortized premiums, net
|
642
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Loans Receivable
|
7,181,726
|
|
|
25,995
|
|
|
38,288
|
|
|
510
|
|
|
38,798
|
|
|
0.54
|
%
|
|
149.25
|
%
|
Loans Receivable, Mortgage Warehouse, at Fair Value - As Restated
|
1,930,738
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
Total Loans Held for Sale - As Restated
|
1,043
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Total Portfolio
|
$
|
9,113,507
|
|
|
$
|
25,995
|
|
|
$
|
38,288
|
|
|
$
|
510
|
|
|
$
|
38,798
|
|
|
0.43
|
%
|
|
149.25
|
%
|
|
|
(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
June 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
$19.7 million
, or
0.30%
of post 2009 originated loans, were non-performing at
June 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
$34.1 million
(
0.52%
of post 2009 originated loans) and $33.3 million (0.52% of post 2009 originated loans), respectively, at
June 30, 2018
and
December 31, 2017
. Total 2009 and prior loans ("legacy loans") were $22.5 million and $25.6 million at
June 30, 2018
and
December 31, 2017
, respectively.
Loans Acquired
At
June 30, 2018
, total acquired loans were
$575.8 million
, or
8.0%
of loans receivable, compared to $328.8 million, or 4.9% of loans receivable, at
December 31, 2017
. Non-performing acquired loans totaled
$6.3 million
and $6.4 million at
June 30, 2018
and
December 31, 2017
, respectively. When loans are acquired, they are recorded on the balance sheet at fair value. Acquired loans include purchased portfolios, FDIC failed-bank acquisitions, and unassisted acquisitions. Of the manufactured housing loans purchased from Tammac prior to 2012, $49.4
million were supported by a
$0.5 million
cash reserve at
June 30, 2018
, compared to $51.9 million supported by a cash reserve of $0.6 million at
December 31, 2017
. The cash reserve was created as part of the purchase transaction to absorb losses and is maintained in a demand deposit account at the Bank. All current losses and delinquent interest are absorbed by this reserve and any recoveries of those losses, as well as the proceeds from the sale of the repossessed properties securing the loans, are placed back into the reserve. For the manufactured housing loans purchased in 2012, Tammac has an obligation to pay the Bank the full payoff amount of the defaulted loan, including any principal, unpaid interest, or advances on the loans, once the borrower vacates the property. At
June 30, 2018
, $29.2 million of these loans were outstanding, compared to $31.4 million at
December 31, 2017
.
The price paid for acquired loans considered management’s judgment as to the credit and interest rate risk inherent in the portfolio at the time of purchase. Every quarter, management reassesses the risk and adjusts the cash flow forecast to incorporate changes in the credit outlook. Generally, a decrease in forecasted cash flows for a purchased loan will result in a provision for loan losses, and absent charge-offs, an increase in the allowance for loan losses. Acquired loans have a significantly higher percentage of non-performing loans than loans originated after September 2009. Management acquired these loans with the expectation that non-performing loan levels would be elevated, and therefore incorporated that expectation
into the price paid. Customers has assigned these loans to its Special Assets Group, a team that focuses on workouts for these acquired non-performing assets. Total acquired loans were supported by reserves (allowance for loan losses and cash reserves) of
$4.7 million
(
0.81%
of total acquired loans) and $5.4 million (1.64% of total acquired loans) at
June 30, 2018
and
December 31, 2017
, respectively.
DEPOSITS
Customers offers a variety of deposit accounts, including checking, savings, money market deposit accounts (“MMDA”) and time deposits. Deposits are primarily obtained from Customers' geographic service area and nationwide through deposit brokers, listing services and other relationships. Total deposits were
$7.3 billion
at
June 30, 2018
, an increase of
$0.5 billion
, or
7.3%
, from
$6.8 billion
at
December 31, 2017
. Transaction deposits increased by
$0.3 billion
, or
6.7%
, to
$5.2 billion
at
June 30, 2018
, from
$4.9 billion
at
December 31, 2017
, with non-interest bearing deposits increasing by
$38.6 million
. Interest-bearing demand deposits were
$0.6 billion
at
June 30, 2018
, an increase of
$99.5 million
, or
19.0%
, from
$0.5 billion
at
December 31, 2017
. Savings, including MMDA, totaled
$3.5 billion
at
June 30, 2018
, an increase of
$191.2 million
, or
5.8%
, from
$3.3 billion
at
December 31, 2017
. This increase was primarily attributed to an increase in money market deposit accounts. Total time deposits were
$2.1 billion
at
June 30, 2018
, an increase of
$166.5 million
, or
8.7%
, from
$1.9 billion
at
December 31, 2017
. At
June 30, 2018
, the Bank had
$1.6 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
June 30, 2018
, the balance of state and municipal deposits was $1.5 billion.
The components of deposits were as follows at the dates indicated:
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
(amounts in thousands)
|
|
|
|
Demand, non-interest bearing
|
$
|
1,090,744
|
|
|
$
|
1,052,115
|
|
Demand, interest bearing
|
623,343
|
|
|
523,848
|
|
Savings, including MMDA
|
3,509,706
|
|
|
3,318,486
|
|
Time, $100,000 and over
|
1,055,341
|
|
|
1,284,855
|
|
Time, other
|
1,016,820
|
|
|
620,838
|
|
Total deposits
|
$
|
7,295,954
|
|
|
$
|
6,800,142
|
|
BORROWINGS
Borrowed funds from various sources are generally used to supplement deposit growth and meet other operating needs. Customers' borrowings generally include short-term and long-term advances from the FHLB, federal funds purchased, senior unsecured notes and subordinated debt. Subordinated debt is also considered as Tier 2 capital for certain regulatory calculations. As of
June 30, 2018
and
December 31, 2017
, total outstanding borrowings were
$2.8 billion
and
$2.1 billion
, respectively, which represented an
increase
of
$0.7 billion
, or
35.3%
. This
increase
was primarily the result of an increase in investments and loans receivable increasing the need for short-term borrowings.
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
June 30, 2018
and December 31, 2017, Customers had unpledged marketable investments of
$476.0 million
and
$454.4 million
, respectively. Customers' principal sources of funds are deposits, borrowings, principal and interest payments on loans, 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
June 30, 2018
, Customers' borrowing capacity with the Federal Home Loan Bank was
$4.9 billion
, of which
$2.4 billion
was utilized in borrowings and
$1.6 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
June 30, 2018
and
December 31, 2017
, Customers' borrowing capacity with the Federal Reserve Bank of Philadelphia was
$136.9 million
and
$142.5 million
, respectively.
Net cash flows
provided by
operating activities were
$65.5 million
during the
six
months ended
June 30, 2018
, compared to net cash flows
provided by
operating activities of
$12.3 million
during the
six
months ended
June 30, 2017
.
Net cash flows
used in
investing activities were
$1.2 billion
during the
six
months ended
June 30, 2018
, compared to net cash flows
used in
investing activities of
$1.3 billion
during the
six
months ended
June 30, 2017
.
Cash used in investing activities consisted of the following:
|
|
•
|
The origination of mortgage warehouse loans totaled
$14.3 billion
during the
six
months ended
June 30, 2018
, compared to
$14.7 billion
during the
six
months ended
June 30, 2017
.
|
|
|
•
|
Purchases of investment securities available for sale totaled
$763.2 million
during the
six
months ended
June 30, 2018
, compared to
$644.0 million
during the
six
months ended
June 30, 2017
.
|
|
|
•
|
Cash flows used to fund new loans held for investment totaled
$18.7 million
and
$572.3 million
during the
six
months ended
June 30, 2018
and
2017
, respectively.
|
|
|
•
|
Cash flows used to purchase loans totaled
$278.5 million
and
$262.6 million
during the
six
months ended
June 30, 2018
and
2017
, respectively.
|
|
|
•
|
Purchases of bank owned life insurance policies were
$50.0 million
during the six months ended
June 30, 2017
. There were no such purchases of bank owned life insurance policies during the
six
months ended
June 30, 2018
.
|
|
|
•
|
Net purchases of FHLB, Federal Reserve Bank and other restricted stock totaled
$30.1 million
and
$61.3 million
during the
six
months ended
June 30, 2018
and
2017
, respectively.
|
|
|
•
|
Purchases of leased assets under operating leases were
$6.5 million
during the six months ended
June 30, 2018
. There were no such purchases of leased assets under operating leases during the six months ended
June 30, 2017
.
|
Cash provided by investing activities consisted of the following:
|
|
•
|
Proceeds from repayments of mortgage warehouse loans totaled
$14.1 billion
for the
six
months ended
June 30, 2018
, compared to
$14.7 billion
for the
six
months ended
June 30, 2017
.
|
|
|
•
|
Proceeds from maturities, calls and principal repayments of securities available for sale totaled
$26.2 million
for the
six
months ended
June 30, 2018
, compared to
$22.8 million
for the
six
months ended
June 30, 2017
.
|
|
|
•
|
Proceeds from sales of investment securities available for sale amounted to
$116.0 million
during the six months ended
June 30, 2017
. There were no such sales of investments securities during the six months ended
June 30, 2018
.
|
|
|
•
|
Proceeds from the sale of loans held for investment totaled $
29.0 million
during the
six
months ended
June 30, 2018
, compared to $
112.9 million
during the
six
months ended
June 30, 2017
.
|
Net cash flows
provided by
financing activities were
$1.2 billion
during the
six
months ended
June 30, 2018
, compared to
$1.5 billion
for the
six
months ended
June 30, 2017
. During the
six
months ended
June 30, 2018
, a net increase in short-term borrowed funds from the FHLB provided net cash flows of
$777.9 million
and an increase in deposits provided net cash flows of
$495.8 million
. These cash flow increases were partially offset by a net cash flow usage in federal funds purchased of
$50.0 million
, and preferred stock dividends paid of
$7.2 million
. During the
six
months ended
June 30, 2017
, a net increase in short-term borrowed funds from the FHLB provided net cash flows of
$1.1 billion
, a net increase in deposits provided net cash flows of
$171.6 million
, proceeds from the issuance of five-year senior notes provided $98.6 million, and a net increase in federal funds purchased provided net cash flows of
$67.0 million
, partially offset by the payment of preferred stock dividends of
$7.2 million
. These financing activities provided sufficient cash flows to support Customers' investing and operating activities.
On July 31, 2018, the 6.375% senior notes with an aggregate principal amount of $63.3 million issued by Customers Bancorp in July 2013 matured. Customers had sufficient funds accumulated at the Bancorp to make payment to the debtholders upon maturity of the senior notes. Overall, based on our core deposit base and available sources of borrowed funds, management believes that Customers has adequate resources to meet its short-term and long-term cash requirements for the foreseeable future.
CAPITAL ADEQUACY AND SHAREHOLDERS' EQUITY
Shareholders’ equity
increased
$15.3 million
to
$936.2 million
at
June 30, 2018
when compared to shareholders' equity of
$921.0 million
at
December 31, 2017
, an increase of
1.7%
. The primary components of the net
increase
were as follows:
|
|
•
|
net income of
$47.8 million
for the
six
months ended
June 30, 2018
;
|
|
|
•
|
share-based compensation expense of
$3.7 million
for the
six
months ended
June 30, 2018
; and
|
|
|
•
|
issuance of common stock under share-based compensation arrangements of
$3.2 million
for the
six
months ended
June 30, 2018
.
|
The increases were offset in part by:
|
|
•
|
other comprehensive loss of
$32.3 million
for the
six
months ended
June 30, 2018
, arising primarily from unrealized fair value losses recognized on available-for-sale debt securities; and
|
|
|
•
|
preferred stock dividends of
$7.2 million
for the
six
months ended
June 30, 2018
.
|
The Bank and Customers Bancorp are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on Customers' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank and Bancorp must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items, as calculated under the regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Bancorp to maintain minimum amounts and ratios (set forth in the following table) of common equity Tier 1, Tier 1, and total capital to risk-weighted assets, and Tier 1 capital to average assets (as defined in the regulations). At
June 30, 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
|
(amounts in thousands)
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
As of June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
735,609
|
|
|
8.611
|
%
|
|
$
|
384,418
|
|
|
4.500
|
%
|
|
N/A
|
|
|
N/A
|
|
|
$
|
544,591
|
|
|
6.375
|
%
|
Customers Bank
|
$
|
1,054,613
|
|
|
12.351
|
%
|
|
$
|
384,232
|
|
|
4.500
|
%
|
|
$
|
555,002
|
|
|
6.500
|
%
|
|
$
|
544,329
|
|
|
6.375
|
%
|
Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
953,025
|
|
|
11.156
|
%
|
|
$
|
512,557
|
|
|
6.000
|
%
|
|
N/A
|
|
|
N/A
|
|
|
$
|
672,731
|
|
|
7.875
|
%
|
Customers Bank
|
$
|
1,054,613
|
|
|
12.351
|
%
|
|
$
|
512,309
|
|
|
6.000
|
%
|
|
$
|
683,079
|
|
|
8.000
|
%
|
|
$
|
672,406
|
|
|
7.875
|
%
|
Total capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
1,072,072
|
|
|
12.550
|
%
|
|
$
|
683,409
|
|
|
8.000
|
%
|
|
N/A
|
|
|
N/A
|
|
|
$
|
843,583
|
|
|
9.875
|
%
|
Customers Bank
|
$
|
1,202,070
|
|
|
14.078
|
%
|
|
$
|
683,079
|
|
|
8.000
|
%
|
|
$
|
853,849
|
|
|
10.000
|
%
|
|
$
|
843,176
|
|
|
9.875
|
%
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
953,025
|
|
|
8.866
|
%
|
|
$
|
429,963
|
|
|
4.000
|
%
|
|
N/A
|
|
|
N/A
|
|
|
$
|
429,963
|
|
|
4.000
|
%
|
Customers Bank
|
$
|
1,054,613
|
|
|
9.822
|
%
|
|
$
|
429,471
|
|
|
4.000
|
%
|
|
$
|
536,839
|
|
|
5.000
|
%
|
|
$
|
429,471
|
|
|
4.000
|
%
|
As of December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
689,494
|
|
|
8.805
|
%
|
|
$
|
352,368
|
|
|
4.500
|
%
|
|
N/A
|
|
|
N/A
|
|
|
$
|
450,248
|
|
|
5.750
|
%
|
Customers Bank
|
$
|
1,023,564
|
|
|
13.081
|
%
|
|
$
|
352,122
|
|
|
4.500
|
%
|
|
$
|
508,621
|
|
|
6.500
|
%
|
|
$
|
449,934
|
|
|
5.750
|
%
|
Tier 1 capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
906,963
|
|
|
11.583
|
%
|
|
$
|
469,824
|
|
|
6.000
|
%
|
|
N/A
|
|
|
N/A
|
|
|
$
|
567,704
|
|
|
7.250
|
%
|
Customers Bank
|
$
|
1,023,564
|
|
|
13.081
|
%
|
|
$
|
469,496
|
|
|
6.000
|
%
|
|
$
|
625,994
|
|
|
8.000
|
%
|
|
$
|
567,307
|
|
|
7.250
|
%
|
Total capital (to risk-weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
1,021,601
|
|
|
13.047
|
%
|
|
$
|
626,432
|
|
|
8.000
|
%
|
|
N/A
|
|
|
N/A
|
|
|
$
|
724,313
|
|
|
9.250
|
%
|
Customers Bank
|
$
|
1,170,666
|
|
|
14.961
|
%
|
|
$
|
625,994
|
|
|
8.000
|
%
|
|
$
|
782,493
|
|
|
10.000
|
%
|
|
$
|
723,806
|
|
|
9.250
|
%
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
906,963
|
|
|
8.937
|
%
|
|
$
|
405,949
|
|
|
4.000
|
%
|
|
N/A
|
|
|
N/A
|
|
|
$
|
405,949
|
|
|
4.000
|
%
|
Customers Bank
|
$
|
1,023,564
|
|
|
10.092
|
%
|
|
$
|
405,701
|
|
|
4.000
|
%
|
|
$
|
507,126
|
|
|
5.000
|
%
|
|
$
|
405,701
|
|
|
4.000
|
%
|
The capital ratios above reflect the capital requirements under "Basel III" effective during first quarter 2015 and the capital conservation buffer effective January 1, 2016. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers. As of
June 30, 2018
, the Bank and Customers Bancorp were in compliance with the Basel III requirements. See "
NOTE 9
- 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
June 30, 2018
and
December 31, 2017
, the following off-balance sheet commitments, financial instruments and other arrangements were outstanding:
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
(amounts in thousands)
|
|
Commitments to fund loans
|
$
|
346,648
|
|
|
$
|
333,874
|
|
Unfunded commitments to fund mortgage warehouse loans
|
1,268,637
|
|
|
1,567,139
|
|
Unfunded commitments under lines of credit
|
759,100
|
|
|
485,345
|
|
Letters of credit
|
38,718
|
|
|
39,890
|
|
Other unused commitments
|
6,319
|
|
|
6,679
|
|
Commitments to fund loans, unfunded commitments to fund mortgage warehouse loans, unfunded commitments under lines of credit and letters of credit are agreements to extend credit to or for the benefit of a customer in the ordinary course of the Bank's business.
Commitments to 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.