Customers Bancorp, Inc. - Quarter Report: 2020 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| ☒ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |||||||
For the quarterly period ended March 31, 2020 | ||||||||
| ☐ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |||||||
For the transition period from to . | ||||||||
001-35542
(Commission File number)
(Exact name of registrant as specified in its charter)
| Customers Bancorp, Inc. | ||
| Pennsylvania | 27-2290659 | |||||||||||||
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | |||||||||||||
1015 Penn Avenue
Suite 103
Wyomissing PA 19610
(Address of principal executive offices)
(610) 933-2000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbols | Name of Each Exchange on which Registered | ||||||||||||
| Voting Common Stock, par value $1.00 per share | CUBI | New York Stock Exchange | ||||||||||||
| Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C, par value $1.00 per share | CUBI/PC | New York Stock Exchange | ||||||||||||
| Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series D, par value $1.00 per share | CUBI/PD | New York Stock Exchange | ||||||||||||
| Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series E, par value $1.00 per share | CUBI/PE | New York Stock Exchange | ||||||||||||
| Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series F, par value $1.00 per share | CUBI/PF | New York Stock Exchange | ||||||||||||
| 5.375% Subordinated Notes due 2034 | CUBB | New York Stock Exchange | ||||||||||||
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | x | Accelerated filer | o | |||||||||||||||||
| Non-accelerated filer | o | Smaller Reporting Company | ☐ | |||||||||||||||||
| Emerging Growth Company | ☐ | |||||||||||||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | o | |||||||||||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No x
________________________________________
On April 30, 2020, 31,470,026 shares of Voting Common Stock were outstanding.
2
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
Table of Contents
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
| Ex-31.1 | ||||||||
| Ex-31.2 | ||||||||
| Ex-32.1 | ||||||||
| Ex-32.2 | ||||||||
| Ex-101 | ||||||||
2
GLOSSARY OF ABBREVIATIONS AND ACRONYMS
The following list of abbreviations and acronyms may be used throughout this Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Unaudited Consolidated Financial Statements and the Notes to the Unaudited Consolidated Financial Statements.
| 2004 Plan | 2012 Amendment and Restatement of the Customers Bancorp, Inc. Amended and Restated 2004 Incentive Equity and Deferred Compensation Plan | ||||
| 2010 Plan | 2010 Stock Option Plan | ||||
| 2019 Plan | 2019 Stock Incentive Plan | ||||
| ACL | Allowance for credit losses | ||||
| ASC | Accountings Standards Codification | ||||
| ALLL | Allowance for loan and lease losses | ||||
| AOCI | Accumulated other comprehensive income | ||||
| ASU | Accounting Standards Update | ||||
| ATM | Automated teller machine | ||||
| Bancorp | Customers Bancorp, Inc. | ||||
| Bank | Customers Bank | ||||
| BBB spread | BBB rated corporate bond spreads to U.S. Treasury securities | ||||
| BHCA | Bank Holding Company Act of 1956, as amended | ||||
| BMT | BankMobile Technologies, Inc. | ||||
| BOLI | Bank-owned life insurance | ||||
| BRRP | Bonus Recognition and Retention Program | ||||
| CCF | Customers Commercial Finance, LLC | ||||
| CECL | Current expected credit loss | ||||
| CEO | Chief Executive Officer | ||||
| CFO | Chief Financial Officer | ||||
| CFPB | Consumer Financial Protection Bureau | ||||
| COSO | Committee of Sponsoring Organizations of the Treadway Commission | ||||
| CRA | Community Reinvestment Act | ||||
| CPI | Consumer Price Index | ||||
| CUBI | Symbol for Customers Bancorp, Inc. common stock traded on the NYSE | ||||
| Customers | Customers Bancorp, Inc. and Customers Bank, collectively | ||||
| Customers Bancorp | Customers Bancorp, Inc. | ||||
| Department | Pennsylvania Department of Banking and Securities | ||||
| DIF | Deposit Insurance Fund | ||||
| Dodd-Frank Act | Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 | ||||
| DOE | United States Department of Education | ||||
| EGRRCPA | The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 | ||||
| EPS | Earnings per share | ||||
| ESPP | Employee Stock Purchase Plan | ||||
| EVE | Economic value of equity | ||||
| FASB | Financial Accounting Standards Board | ||||
| FDIC | Federal Deposit Insurance Corporation | ||||
| FDICIA | Federal Deposit Insurance Corporation Improvement Act of 1991 | ||||
| Federal Reserve Board | Board of Governors of the Federal Reserve System | ||||
| FERPA | Family Educational Rights and Privacy Act of 1975 | ||||
| FHA | Federal Housing Administration | ||||
| FHLB | Federal Home Loan Bank | ||||
| FPRD | Final Program Review Determination | ||||
| FRB | Federal Reserve Bank of Philadelphia | ||||
| FTC Act | Federal Trade Commission Act | ||||
| GDP | Gross domestic product | ||||
| GNMA | Government National Mortgage Association | ||||
| GLBA | Gramm-Leach-Bliley Act of 1999 | ||||
| HECM | Home Equity Conversion Mortgage | ||||
| HTM | Held to maturity | ||||
| Interest-only GNMA securities | Interest-only classes of Ginnie Mae guaranteed home equity conversation mortgage-backed securities | ||||
| IRS | Internal Revenue Service | ||||
| Legacy Loans | Total 2009 and prior loans | ||||
| LIBOR | London Interbank Offered Rate | ||||
3
| LIHTC | Low-Income Housing Tax Credit | ||||
| LPO | Limited Purpose Office | ||||
| MMDA | Money market deposit accounts | ||||
| NIM | Net interest margin, tax equivalent | ||||
| NM | Not meaningful | ||||
| Non-QM | Non-qualified mortgage | ||||
| NPA | Non-performing asset | ||||
| NPL | Non-performing loan | ||||
| NPRM | Notice of Proposed Rulemaking | ||||
| NYSE | New York Stock Exchange | ||||
| OCC | Office of the Comptroller of the Currency | ||||
| OCI | Other comprehensive income | ||||
| OFAC | Office of Foreign Assets Control | ||||
| OIS | Overnight index swap | ||||
| Order | Federal Deposit Insurance Act, as amended | ||||
| OREO | Other real estate owned | ||||
| OTTI | Other-than-temporary impairment | ||||
| PATRIOT Act | Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 | ||||
| PCAOB | Public Accounting Oversight Board (United States) | ||||
| PCD | Purchased with Credit Deterioration | ||||
| PCI | Purchased Credit-Impaired | ||||
| PPP | SBA Paycheck Protection Program | ||||
| ROU | Right-of-use | ||||
| SAB | Staff Accounting Bulletin | ||||
| SAG | Special Assets Group | ||||
| Sales Agreement | At Market Issuance Sales Agreement between Customers Bancorp and FBR Capital Markets & Co., Keefe, Bruyette & Woods, Inc. and Maxim Group LLC | ||||
| SBA | Small Business Administration | ||||
| SBA loans | Loans originated pursuant to the rules and regulations of the SBA | ||||
| SEC | U.S. Securities and Exchange Commission | ||||
| TDR | Troubled debt restructuring | ||||
| TRAC | Terminal Rental Adjustment Clause | ||||
| U.S. GAAP | Accounting principles generally accepted in the United States of America | ||||
| VA | United States Department of Veterans Affairs | ||||
4
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET — UNAUDITED
(amounts in thousands, except share and per share data)
| March 31, 2020 | December 31, 2019 | ||||||||||
| ASSETS | |||||||||||
| Cash and due from banks | $ | 18,842 | $ | 33,095 | |||||||
| Interest earning deposits | 237,390 | 179,410 | |||||||||
| Cash and cash equivalents | 256,232 | 212,505 | |||||||||
| Investment securities available for sale, at fair value | 712,657 | 595,876 | |||||||||
Loans held for sale (includes $1,388 and $2,130, respectively, at fair value) | 450,157 | 486,328 | |||||||||
| Loans receivable, mortgage warehouse, at fair value | 2,518,012 | 2,245,758 | |||||||||
| Loans and leases receivable | 7,353,262 | 7,318,988 | |||||||||
| Allowance for credit losses on loans and leases | (149,283) | (56,379) | |||||||||
| Total loans and leases receivable, net of allowance for credit losses on loans and leases | 9,721,991 | 9,508,367 | |||||||||
| FHLB, Federal Reserve Bank, and other restricted stock | 87,140 | 84,214 | |||||||||
| Accrued interest receivable | 40,570 | 38,072 | |||||||||
| Bank premises and equipment, net | 8,890 | 9,389 | |||||||||
| Bank-owned life insurance | 273,576 | 272,546 | |||||||||
| Other real estate owned | 131 | 173 | |||||||||
| Goodwill and other intangibles | 14,870 | 15,195 | |||||||||
| Other assets | 452,585 | 298,052 | |||||||||
| Total assets | $ | 12,018,799 | $ | 11,520,717 | |||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Liabilities: | |||||||||||
| Deposits: | |||||||||||
| Demand, non-interest bearing | $ | 1,435,151 | $ | 1,343,391 | |||||||
| Interest bearing | 6,978,492 | 7,305,545 | |||||||||
| Total deposits | 8,413,643 | 8,648,936 | |||||||||
| FRB advances | 175,000 | — | |||||||||
| Federal funds purchased | 705,000 | 538,000 | |||||||||
| FHLB advances | 1,260,000 | 850,000 | |||||||||
| Other borrowings | 123,732 | 123,630 | |||||||||
| Subordinated debt | 181,185 | 181,115 | |||||||||
| Accrued interest payable and other liabilities | 195,603 | 126,241 | |||||||||
| Total liabilities | 11,054,163 | 10,467,922 | |||||||||
Commitments and contingencies (NOTE 14) | |||||||||||
| Shareholders’ equity: | |||||||||||
Preferred stock, par value $1.00 per share; liquidation preference $25.00 per share; 100,000,000 shares authorized, 9,000,000 shares issued and outstanding as of March 31, 2020 and December 31, 2019 | 217,471 | 217,471 | |||||||||
Common stock, par value $1.00 per share; 200,000,000 shares authorized; 32,750,645 and 32,614,410 shares issued as of March 31, 2020 and December 31, 2019; 31,470,026 and 31,336,791 shares outstanding as of March 31, 2020 and December 31, 2019 | 32,751 | 32,617 | |||||||||
| Additional paid in capital | 446,840 | 444,218 | |||||||||
| Retained earnings | 319,529 | 381,519 | |||||||||
| Accumulated other comprehensive loss, net | (30,175) | (1,250) | |||||||||
Treasury stock, at cost (1,280,619 shares as of March 31, 2020 and December 31, 2019) | (21,780) | (21,780) | |||||||||
| Total shareholders’ equity | 964,636 | 1,052,795 | |||||||||
| Total liabilities and shareholders’ equity | $ | 12,018,799 | $ | 11,520,717 | |||||||
See accompanying notes to the unaudited consolidated financial statements.
5
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS) — UNAUDITED
(amounts in thousands, except per share data)
| Three Months Ended March 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Interest income: | |||||||||||
| Loans and leases | $ | 116,080 | $ | 93,116 | |||||||
| Investment securities | 4,977 | 6,241 | |||||||||
| Other | 4,286 | 1,718 | |||||||||
| Total interest income | 125,343 | 101,075 | |||||||||
| Interest expense: | |||||||||||
| Deposits | 34,353 | 31,225 | |||||||||
| FHLB advances | 5,390 | 5,293 | |||||||||
| Subordinated debt | 2,689 | 1,684 | |||||||||
| Federal funds purchased and other borrowings | 1,590 | 3,569 | |||||||||
| Total interest expense | 44,022 | 41,771 | |||||||||
| Net interest income | 81,321 | 59,304 | |||||||||
| Provision for credit losses on loans and leases | 31,786 | 4,767 | |||||||||
| Net interest income after provision for credit losses on loans and leases | 49,535 | 54,537 | |||||||||
| Non-interest income: | |||||||||||
| Interchange and card revenue | 6,809 | 8,806 | |||||||||
| Deposit fees | 3,460 | 2,209 | |||||||||
| Commercial lease income | 4,268 | 2,401 | |||||||||
| Bank-owned life insurance | 1,762 | 1,816 | |||||||||
| Mortgage warehouse transactional fees | 1,952 | 1,314 | |||||||||
| Gain (loss) on sale of SBA and other loans | 11 | — | |||||||||
| Mortgage banking income | 296 | 167 | |||||||||
| Gain (loss) on sale of investment securities | 3,974 | — | |||||||||
| Unrealized gain (loss) on investment securities | (1,378) | 2 | |||||||||
| Other | 776 | 3,003 | |||||||||
| Total non-interest income | 21,930 | 19,718 | |||||||||
| Non-interest expense: | |||||||||||
| Salaries and employee benefits | 28,310 | 25,823 | |||||||||
| Technology, communication and bank operations | 13,050 | 11,953 | |||||||||
| Professional services | 7,670 | 4,573 | |||||||||
| Occupancy | 3,032 | 2,903 | |||||||||
| Commercial lease depreciation | 3,427 | 1,923 | |||||||||
| FDIC assessments, non-income taxes, and regulatory fees | 2,867 | 1,988 | |||||||||
| Provision for operating losses | 912 | 1,779 | |||||||||
| Advertising and promotion | 1,641 | 809 | |||||||||
| Merger and acquisition related expenses | 50 | — | |||||||||
| Loan workout | 366 | 320 | |||||||||
| Other real estate owned | 8 | 57 | |||||||||
| Other | 5,126 | 1,856 | |||||||||
| Total non-interest expense | 66,459 | 53,984 | |||||||||
| Income before income tax expense | 5,006 | 20,271 | |||||||||
| Income tax expense | 1,906 | 4,831 | |||||||||
| Net income | 3,100 | 15,440 | |||||||||
| Preferred stock dividends | 3,615 | 3,615 | |||||||||
| Net income (loss) available to common shareholders | $ | (515) | $ | 11,825 | |||||||
| Basic earnings (loss) per common share | $ | (0.02) | $ | 0.38 | |||||||
| Diluted earnings (loss) per common share | $ | (0.02) | $ | 0.38 | |||||||
See accompanying notes to the unaudited consolidated financial statements.
6
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) — UNAUDITED
(amounts in thousands)
| Three Months Ended March 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Net income | $ | 3,100 | $ | 15,440 | |||||||
| Unrealized gains (losses) on available for sale debt securities: | |||||||||||
| Unrealized gains (losses) arising during the period | (9,098) | 17,817 | |||||||||
| Income tax effect | 2,366 | (4,632) | |||||||||
| Reclassification adjustments for (gains) losses on securities included in net income | (3,974) | — | |||||||||
| Income tax effect | 1,033 | — | |||||||||
| Net unrealized gains (losses) on available for sale debt securities | (9,673) | 13,185 | |||||||||
| Unrealized gains (losses) on cash flow hedges: | |||||||||||
| Unrealized gains (losses) arising during the period | (27,697) | (6,939) | |||||||||
| Income tax effect | 7,351 | 1,804 | |||||||||
| Reclassification adjustment for (gains) losses included in net income | 1,478 | (413) | |||||||||
| Income tax effect | (384) | 107 | |||||||||
| Net unrealized gains (losses) on cash flow hedges | (19,252) | (5,441) | |||||||||
| Other comprehensive income (loss), net of income tax effect | (28,925) | 7,744 | |||||||||
| Comprehensive income (loss) | $ | (25,825) | $ | 23,184 | |||||||
See accompanying notes to the unaudited consolidated financial statements.
7
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY — UNAUDITED
(amounts in thousands, except shares outstanding data)
| Three Months Ended March 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares of Preferred Stock Outstanding | Preferred Stock | Shares of Common Stock Outstanding | Common Stock | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | 9,000,000 | $ | 217,471 | 31,336,791 | $ | 32,617 | $ | 444,218 | $ | 381,519 | $ | (1,250) | $ | (21,780) | $ | 1,052,795 | |||||||||||||||||||||||||||||||||||||
| Cumulative effect from change in accounting principle - CECL | — | — | — | — | — | (61,475) | — | — | (61,475) | ||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 3,100 | — | — | 3,100 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | (28,925) | — | (28,925) | ||||||||||||||||||||||||||||||||||||||||||||
Preferred stock dividends(1) | — | — | — | — | — | (3,615) | — | — | (3,615) | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | 3,228 | — | — | — | 3,228 | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under share-based compensation arrangements | — | — | 133,235 | 134 | (606) | — | — | — | (472) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2020 | 9,000,000 | $ | 217,471 | 31,470,026 | $ | 32,751 | $ | 446,840 | $ | 319,529 | $ | (30,175) | $ | (21,780) | $ | 964,636 | |||||||||||||||||||||||||||||||||||||
| Three Months Ended March 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares of Preferred Stock Outstanding | Preferred Stock | Shares of Common Stock Outstanding | Common Stock | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Treasury Stock | Total | |||||||||||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | 9,000,000 | $ | 217,471 | 31,003,028 | $ | 32,252 | $ | 434,314 | $ | 316,651 | $ | (22,663) | $ | (21,209) | $ | 956,816 | |||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 15,440 | — | — | 15,440 | ||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — | — | — | — | 7,744 | — | 7,744 | ||||||||||||||||||||||||||||||||||||||||||||
Preferred stock dividends(1) | — | — | — | — | — | (3,615) | — | (3,615) | |||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | 2,109 | — | — | — | 2,109 | ||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under share-based compensation arrangements | — | — | 159,378 | 160 | 290 | — | — | — | 450 | ||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common shares | — | — | (31,159) | — | — | — | — | (571) | (571) | ||||||||||||||||||||||||||||||||||||||||||||
| Balance, March 31, 2019 | 9,000,000 | $ | 217,471 | 31,131,247 | $ | 32,412 | $ | 436,713 | $ | 328,476 | $ | (14,919) | $ | (21,780) | $ | 978,373 | |||||||||||||||||||||||||||||||||||||
(1)Dividends per share of $0.4375, $0.40625, $0.403125, and $0.375 per share were declared on Series C, D, E, and F preferred stock for the three months ended March 31, 2020 and 2019, respectively.
See accompanying notes to the unaudited consolidated financial statements.
8
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(amounts in thousands)
| Three Months Ended March 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Cash Flows from Operating Activities | |||||||||||
| Net income | $ | 3,100 | $ | 15,440 | |||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||
| Provision for credit losses on loan and lease losses | 31,786 | 4,767 | |||||||||
| Depreciation and amortization | 7,406 | 4,287 | |||||||||
| Share-based compensation expense | 3,463 | 2,381 | |||||||||
| Deferred taxes | (22,287) | 1,878 | |||||||||
| Net amortization (accretion) of investment securities premiums and discounts | 251 | 191 | |||||||||
| Unrealized (gain) loss on investment securities | 1,378 | (2) | |||||||||
| (Gain) loss on sale of investment securities | (3,974) | — | |||||||||
| (Gain) loss on sale of SBA and other loans | (170) | (138) | |||||||||
| Origination of loans held for sale | (7,046) | (8,182) | |||||||||
| Proceeds from the sale of loans held for sale | 7,948 | 8,225 | |||||||||
| Amortization (accretion) of fair value discounts and premiums | (378) | 162 | |||||||||
| Net (gain) loss on sales of other real estate owned | (4) | — | |||||||||
| Earnings on investment in bank-owned life insurance | (1,762) | (1,816) | |||||||||
| (Increase) decrease in accrued interest receivable and other assets | (93,856) | (28,109) | |||||||||
| Increase (decrease) in accrued interest payable and other liabilities | 39,004 | (5,096) | |||||||||
| Net Cash Used In Operating Activities | (35,141) | (6,012) | |||||||||
| Cash Flows from Investing Activities | |||||||||||
| Proceeds from maturities, calls and principal repayments of investment securities | 24,079 | 4,498 | |||||||||
| Purchases of investment securities available for sale | (158,782) | — | |||||||||
| Origination of mortgage warehouse loans | (9,791,820) | (5,039,797) | |||||||||
| Proceeds from repayments of mortgage warehouse loans | 9,520,758 | 4,965,022 | |||||||||
| Net (increase) decrease in loans and leases, excluding mortgage warehouse loans | 174,971 | 1,932 | |||||||||
| Purchase of loans | (193,363) | (129,289) | |||||||||
| Net proceeds from (purchases of) FHLB, Federal Reserve Bank, and other restricted stock | (2,926) | 9,269 | |||||||||
| Purchases of bank premises and equipment | (127) | (141) | |||||||||
| Proceeds from sales of other real estate owned | 77 | — | |||||||||
| Purchases of leased assets under lessor operating leases | (6,384) | (7,791) | |||||||||
| Net Cash Used In Investing Activities | (433,517) | (196,297) | |||||||||
| Cash Flows from Financing Activities | |||||||||||
| Net (decrease) increase in deposits | (235,293) | 283,082 | |||||||||
| Net increase (decrease) in short-term borrowed funds from the FRB | 175,000 | — | |||||||||
| Net increase (decrease) in short-term borrowed funds from the FHLB | 410,000 | (222,238) | |||||||||
| Net increase (decrease) in federal funds purchased | 167,000 | 201,000 | |||||||||
| Preferred stock dividends paid | (3,615) | (3,615) | |||||||||
| Purchase of treasury stock | — | (571) | |||||||||
| Payments of employee taxes withheld from share-based awards | (932) | (894) | |||||||||
| Proceeds from issuance of common stock | 225 | 1,072 | |||||||||
| Net Cash Provided By Financing Activities | 512,385 | 257,836 | |||||||||
| Net Increase (Decrease) in Cash and Cash Equivalents | 43,727 | 55,527 | |||||||||
| Cash and Cash Equivalents – Beginning | 212,505 | 62,135 | |||||||||
| Cash and Cash Equivalents – Ending | $ | 256,232 | $ | 117,662 | |||||||
| (continued) | |||||||||||
| Three Months Ended March 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Supplementary Cash Flow Information | |||||||||||
| Interest paid | $ | 42,167 | $ | 38,916 | |||||||
| Income taxes paid | 661 | 1,204 | |||||||||
| Non-cash Operating and Investing Activities: | |||||||||||
| Transfer of loans to other real estate owned | $ | 31 | $ | 160 | |||||||
| Unsettled sales of investment securities | 104,469 | — | |||||||||
| Unsettled purchases of investment securities | 97,247 | — | |||||||||
See accompanying notes to the unaudited consolidated financial statements.
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CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
NOTE 1 — DESCRIPTION OF THE BUSINESS
Customers Bancorp, Inc. (“Customers Bancorp”) is a bank holding company engaged in banking activities through its wholly owned subsidiary, Customers Bank ("the Bank”), collectively referred to as “Customers” herein.
Customers Bancorp and its wholly owned subsidiaries, the Bank, and non-bank subsidiaries, serve residents and businesses in Southeastern Pennsylvania (Bucks, Berks, Chester, Philadelphia and Delaware Counties); Rye Brook, New York (Westchester County); Hamilton, New Jersey (Mercer County); Boston, Massachusetts; Providence, Rhode Island; Portsmouth, New Hampshire (Rockingham County); Manhattan and Melville, New York; Washington, D.C.; Chicago, Illinois; and nationally for certain loan and deposit products. The Bank has 13 full-service branches and provides commercial banking products, primarily loans and deposits. In addition, Customers Bank also administratively supports loan and other financial products, including equipment finance leases, to customers through its limited-purpose offices in Boston, Massachusetts; Providence, Rhode Island; Portsmouth, New Hampshire; Manhattan and Melville, New York; Philadelphia, Pennsylvania; Washington, D.C.; and Chicago, Illinois. The Bank also serves specialty niche businesses nationwide, including its commercial loans to mortgage banking businesses, commercial equipment financing, specialty lending and consumer loans through relationships with fintech companies. In addition, BankMobile, a division of Customers Bank, offers state-of-the-art high-tech digital banking services to consumers, students and the "under banked" nationwide, along with "Banking as a Service" offerings with white label partners.
The Bank is subject to regulation of the Pennsylvania Department of Banking and Securities and the Federal Reserve Bank and is periodically examined by those regulatory authorities. Customers Bancorp has made certain equity investments through its wholly owned subsidiaries CB Green Ventures Pte Ltd. and CUBI India Ventures Pte Ltd.
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation
The interim unaudited consolidated financial statements have been prepared in conformity with U.S. GAAP and pursuant to the rules and regulations of the SEC. These interim unaudited consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the financial position and the results of operations and cash flows of Customers Bancorp and subsidiaries for the interim periods presented. Certain information and footnote disclosures normally included in the annual consolidated financial statements have been omitted from these interim unaudited consolidated financial statements as permitted by SEC rules and regulations. The December 31, 2019 consolidated balance sheet presented in this report has been derived from Customers Bancorp’s audited 2019 consolidated financial statements. Management believes that the disclosures are adequate to present fairly the consolidated financial statements as of the dates and for the periods presented. These interim unaudited consolidated financial statements should be read in conjunction with the 2019 consolidated financial statements of Customers Bancorp and subsidiaries included in Customers' Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 2, 2020 (the "2019 Form 10-K"). The 2019 Form 10-K describes Customers Bancorp’s significant accounting policies, which include its policies on Principles of Consolidation; Cash and Cash Equivalents and Statements of Cash Flows; Restrictions on Cash and Amounts due from Banks; Business Combinations; Investment Securities; Loan Accounting Framework; Loans Held for Sale and Loans at Fair Value; Loans Receivable - Mortgage Warehouse, at Fair Value; Loans and Leases Receivable; Purchased Loans; ALLL; Goodwill and Other Intangible Assets; FHLB, Federal Reserve Bank, and Other Restricted Stock; OREO; BOLI; Bank Premises and Equipment; Lessor Operating Leases; Treasury Stock; Income Taxes; Share-Based Compensation; Transfer of Financial Assets; Segment Information; Derivative Instruments and Hedging; Comprehensive Income (Loss); EPS; Loss Contingencies; and Collaborative Arrangements. There have been no material changes to Customers Bancorp's significant accounting policies noted above for the three months ended March 31, 2020, except for the adoption of ASU 2016-13 Financial Instruments - Credit Losses ("ASC 326"): Measurement of Credit Losses on Financial Instruments, which is discussed below in Adoption of New Accounting Standard, and replaces our prior ALLL policy.
New Accounting Standards
Presented below are recently issued accounting standards that Customers has adopted as well as those that the FASB has issued but are not yet effective.
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Accounting Standards Adopted in 2020
Allowance for Credit Losses
On January 1, 2020, Customers adopted ASC 326, which replaced the incurred loss methodology with an expected loss methodology that is referred to as CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and net investments in leases recognized by Customers as a lessor in accordance with ASC 842. CECL also applies to off-balance sheet credit exposures not accounted for as insurance, such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments. ASC 326 also made changes to the accounting for AFS debt securities, which now requires credit losses to be presented as an allowance, rather than as a write-down on AFS debt securities that management does not intend to sell or believes that it is more likely than not they will not be required to sell.
Customers adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost, net investments in leases, and off-balance sheet credit exposures. Results for reporting periods beginning after December 31, 2019 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. Customers recorded a net decrease to retained earnings of $61.5 million, net of deferred taxes of $21.5 million, as of January 1, 2020 for the cumulative effect of adopting ASC 326. Customers adopted ASC 326 using the prospective transition approach for PCD financial assets that were previously classified as PCI and accounted for under ASC 310-30. In accordance with the standard, Customers did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $0.2 million of the allowance for credit losses on PCD loans and leases. The remaining noncredit discount of $0.3 million, based on the adjusted amortized cost basis, will be accreted into interest income at the effective interest rate as of January 1, 2020.
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The following table illustrates the impact of adopting ASC 326:
(amounts in thousands)
| Pre-ASC 326 Adoption | Impact of ASC 326 Adoption | As Reported Under ASC 326 | ||||||||||||||||||
| Assets | ||||||||||||||||||||
| Loans receivable, mortgage warehouse, at fair value | $ | 2,245,758 | $ | — | $ | 2,245,758 | ||||||||||||||
| Loans and leases receivable | ||||||||||||||||||||
| Multi-family | 1,907,331 | 7 | 1,907,338 | |||||||||||||||||
| Commercial and industrial | 1,891,152 | 3 | 1,891,155 | |||||||||||||||||
| Commercial real estate owner occupied | 551,948 | 100 | 552,048 | |||||||||||||||||
| Commercial real estate non-owner occupied | 1,222,772 | 41 | 1,222,813 | |||||||||||||||||
| Construction | 117,617 | — | 117,617 | |||||||||||||||||
| Total commercial loans and leases receivable | 5,690,820 | 151 | 5,690,971 | |||||||||||||||||
| Residential real estate | 382,634 | 32 | 382,666 | |||||||||||||||||
| Manufactured housing | 71,359 | 37 | 71,396 | |||||||||||||||||
| Other consumer | 1,174,175 | 12 | 1,174,187 | |||||||||||||||||
| Total consumer loans receivable | 1,628,168 | 81 | 1,628,249 | |||||||||||||||||
| Loans and leases receivable | 7,318,988 | 232 | 7,319,220 | |||||||||||||||||
| Allowance for credit losses on loans and leases | (56,379) | (79,829) | (136,208) | |||||||||||||||||
| Total loans and leases receivable, net of allowance for credit losses on loans and leases | 9,508,367 | (79,596) | 9,428,771 | |||||||||||||||||
| Liabilities | ||||||||||||||||||||
| Allowance for credit losses on lending-related commitments | 49 | 3,388 | 3,437 | |||||||||||||||||
| Net deferred tax (asset) liability | 11,740 | (21,510) | (9,770) | |||||||||||||||||
| Equity | ||||||||||||||||||||
| Retained earnings | $ | 381,519 | $ | (61,475) | $ | 320,044 | ||||||||||||||
Allowance for Credit Losses on Loans and Leases
The allowance for credit losses on loans and leases is a valuation account that is deducted from the loan or lease’s amortized cost basis to present the net amount expected to be collected on the loans and leases. Loans and leases deemed to be uncollectible are charged against the allowance for credit losses on loans and leases, and subsequent recoveries, if any, are credited to the allowance for credit losses on loans and leases. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Changes to the allowance for credit losses on loans and leases are recorded through the provision for credit losses on loans and leases. The allowance for credit losses on loans and leases is maintained at a level considered appropriate to absorb expected credit losses over the expected life of the portfolio as of the reporting date.
The allowance for credit losses on loans and leases is measured on a collective (pool) basis when similar risk characteristics exist. Customers' loan portfolio segments include commercial and consumer. Each of these two loan portfolio segments is comprised of multiple loan classes. Loan classes are characterized by similarities in loan type, collateral type, risk attributes and the manner in which credit risk is assessed and monitored. The commercial segment is composed of multi-family, commercial and industrial, commercial real estate owner occupied, commercial real estate non-owner occupied and construction loan classes. The consumer segment is composed of residential real estate, manufactured housing and other consumer. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. For individually assessed loans, see related details in the Individually Assessed Loans section below.
The allowance for credit losses on collectively assessed loans and leases is measured over the expected life of the loan or lease using lifetime loss rate models which consider historical loan performance, loan or borrower attributes and forecasts of future economic
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conditions in addition to information about past events and current conditions. Significant loan/borrower attributes utilized in the models include origination date, maturity date, collateral property type, internal risk rating, delinquency status, borrower state and FICO score at origination. Customers uses external sources in the creation of its forecasts, including current economic conditions and forecasts for macroeconomic variables over its reasonable and supportable forecast period (e.g., GDP growth rate, unemployment rate, BBB spread, commercial real estate and home price index). After the reasonable and supportable forecast period, which ranges from two to five years, the models revert the forecasted macroeconomic variables to their historical long-term trends, without specific predictions for the economy, over the expected life of the pool. The lifetime loss rate models also incorporate prepayment assumptions into estimated lifetime loss rates. Customers runs the CECL impairment models on a quarterly basis and qualitatively adjusts model results for risk factors that are not considered within the models but which are relevant in assessing the expected credit losses within the loan and lease pools. Management generally considers the following qualitative factors:
•Volume and severity of past-due loans, non-accrual loans and classified loans;
•Lending policies and procedures, including underwriting standards and historically based loss/collection, charge-off and recovery practices;
•Nature and volume of the portfolio;
•Existence and effect of any credit concentrations and changes in the level of such concentrations;
•Risk ratings;
•The value of the underlying collateral for loans that are not collateral dependent;
•Changes in the quality of the loan review system;
•Experience, ability and depth of lending management and staff;
•Other external factors, such as changes in legal, regulatory or competitive environment; and
•Model and data limitations.
Customers has elected to not estimate an allowance for credit losses on accrued interest receivable, as it already has a policy in place to reverse or write-off accrued interest, through interest income, in a timely manner. Accrued interest receivable is presented as part of other assets in the consolidated balance sheet.
Purchased Credit Deteriorated (“PCD”) Loans and Leases
PCD assets are acquired individual loans and leases (or acquired groups of loans and leases with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by an acquirer’s assessment. PCD loans and leases are recorded at their purchase price plus the allowance for credit losses expected at the time of acquisition, or “gross up” of the amortized cost basis. The January 1, 2020 transition adjustment discussed above was established for these loans and leases without affecting the income statement or retained earnings. Changes in the current estimate of the allowance for credit losses after acquisition from the estimated allowance previously recorded are reported in the income statement as provision for credit losses expense or reversal of provision for credit losses in subsequent periods as they arise. Purchased loans or leases that do not qualify as PCD assets are accounted for similar to originated assets, whereby an allowance for credit losses is recognized with a corresponding increase to the income statement provision for credit losses. Evidence that purchased loans and leases, measured at amortized cost, have more-than-insignificant deterioration in credit quality since origination and, therefore meet the PCD definition, may include loans and leases that are past-due, in non-accrual status, poor borrower credit score, recent loan-to-value percentages and other standard indicators (i.e., TDR, charge-offs and bankruptcy).
Allowance for Credit Losses on Lending-Related Commitments
Customers estimates expected credit losses over the contractual period in which it is exposed to credit risk on contractual obligations to extend credit, unless the obligation is unconditionally cancellable by Customers. The allowance for credit losses on lending-related commitments is recorded in accrued interest payable and other liabilities in the consolidated balance sheet and is recorded as a provision for credit losses within other non-interest expense in the consolidated income statement. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives. Customers estimates the expected credit losses for undrawn commitments using a usage given default calculation. The lifetime loss rates for off-balance sheet credit exposures are calculated in the same manner as on-balance sheet credit exposures, using the same models and economic forecasts, adjusted for the estimated likelihood that funding will occur.
Individually Assessed Loans and Leases
ASC 326 provides that a loan or lease is measured individually if it does not share similar risk characteristics with other financial assets. For Customers, loans and leases which are identified to be individually assessed under CECL typically would have been evaluated
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individually as impaired loans using accounting guidance in effect in periods prior to the adoption of CECL and include troubled debt restructurings (TDRs) and collateral dependent loans.
TDRs
A loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties is considered to be a TDR. The allowance for credit loss on a TDR is measured using the same method as all other loans held for investment, except in cases when the value of a concession cannot be measured using a method other than the discounted cash flow (“DCF”) method. When the value of a concession is measured using the DCF method, the allowance for credit loss is determined by discounting the expected future cash flows at the original effective interest rate of the loan.
Collateral Dependent Loans
Customers considers a loan to be collateral dependent when foreclosure of the underlying collateral is probable. Customers has also elected to apply the practical expedient to measure expected credit losses of a collateral dependent asset using the fair value of the collateral, less any estimated costs to sell, when foreclosure is not probable but repayment of the loan is expected to be provided substantially through the operation or sale of the collateral, and the borrower is experiencing financial difficulty.
Allowance for Credit Losses on Available for Sale Securities
For AFS debt securities in an unrealized loss position, Customers first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, Customers evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses on AFS securities is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses on AFS securities is recognized in other comprehensive income.
Changes in the allowance for credit losses on AFS securities are recorded as provision, or reversal of provision for credit losses on AFS securities in other non-interest income within the consolidated income statement. Losses are charged against the allowance for credit losses on AFS securities when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable on AFS debt securities totaled $4.7 million at March 31, 2020 and is excluded from the estimate of credit losses.
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Other Accounting Standards Adopted in 2020
| Standard | Summary of guidance | Effects on Financial Statements | ||||||||||||
ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments Issued April 2019 | • Clarifies the scope of the credit losses standard and addresses issues related to accrued interest receivable balances, recoveries, variable interest rates, and prepayments. • Addresses partial-term fair value hedges, fair value hedge basis adjustments and certain transition requirements. • Addresses recognizing and measuring financial instruments, specifically the requirement for remeasurement under ASC 820 when using the measurement alternative, certain disclosure requirements and which equity securities have to be remeasured at historical exchange rates. • Topic 326 Amendments - Effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption permitted. Topic 815 Amendments - Effective for first annual period beginning after the issuance date of this ASU (i.e., fiscal year 2020). Entities that have already adopted the amendments in ASU 2017-12 may elect either to retrospectively apply all the amendments or to prospectively apply all amendments as of the date of adoption. Topic 825 Amendments - Effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. | • Customers adopted on January 1, 2020. • The adoption of this guidance relating to Topics 815 and 825 did not have a material impact on Customers' financial condition, results of operations and consolidated financial statements. Please refer to ASU 2016-13 for further discussion on Customers' adoption of ASU 2016-13 (Topic 326). | ||||||||||||
ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606 Issued November 2018 | • Clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all the guidance in Topic 606 should be applied, including recognition, measurement, presentation, and disclosure requirements. • Adds unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within scope of Topic 606. • Requires that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer. • Effective for fiscal year beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption permitted. | • Customers adopted on January 1, 2020. • The adoption of this guidance did not have a material impact on Customers' financial condition, results of operations and consolidated financial statements. | ||||||||||||
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Other Accounting Standards Adopted in 2020 (continued)
| Standard | Summary of guidance | Effects on Financial Statements | ||||||||||||
ASU 2018-15, Internal-Use Software (Subtopic 350-40): Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract Issued August 2018 | • Clarifies that service contracts with hosting arrangements must follow internal-use software guidance Subtopic 350-40 when determining which implementation costs to capitalize as an asset related to the service contract and which costs to expense. • Also clarifies that capitalized implementation costs of a hosting arrangement that is a service contract are to be amortized over the term of the hosting arrangement, which includes the noncancelable period of the arrangement plus options to extend the arrangement if reasonably certain to exercise. • Clarifies that existing impairment guidance in Subtopic 350-40 must be applied to the capitalized implementation costs as if they were long-lived assets. • Applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. • Effective for fiscal year beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption permitted. | • Customers adopted on January 1, 2020. • The adoption of this guidance did not have a material impact on Customers' financial condition, results of operations and consolidated financial statements. | ||||||||||||
Accounting Standards Issued But Not Yet Adopted
| Standard | Summary of guidance | Effects on Financial Statements | ||||||||||||
| ASU 2020-04, Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting Issued March 2020 | • Provides optional guidance for a limited period of time to ease the potential burden in accounting for (or derecognizing the effects of) reference rate reform on financial reporting. Specifically, the amendments provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. These relate only to those contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. • Effective as of March 12, 2020 and can be adopted anytime during the period of January 1, 2020 through December 31, 2022. | • Customers intends to adopt this guidance during adoption period and is currently evaluating the expected impact of this ASU on its financial condition, results of operations and consolidated financial statements. | ||||||||||||
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NOTE 3 — EARNINGS (LOSS) PER SHARE
The following are the components and results of Customers' earnings (loss) per common share calculations for the periods presented.
| Three Months Ended March 31, | |||||||||||
| (amounts in thousands, except share and per share data) | 2020 | 2019 | |||||||||
| Net income (loss) available to common shareholders | $ | (515) | $ | 11,825 | |||||||
| Weighted-average number of common shares outstanding – basic | 31,391,151 | 31,047,191 | |||||||||
| Share-based compensation plans | — | 435,676 | |||||||||
| Weighted-average number of common shares – diluted | 31,391,151 | 31,482,867 | |||||||||
| Basic earnings (loss) per common share | $ | (0.02) | $ | 0.38 | |||||||
| Diluted earnings (loss) per common share | $ | (0.02) | $ | 0.38 | |||||||
The following are securities that could potentially dilute basic earnings (loss) per common share in future periods that were not included in the computation of diluted earnings (loss) per common share because either the performance conditions for certain of the share-based compensation awards have not been met or to do so would have been anti-dilutive for the periods presented.
| Three Months Ended March 31, | |||||||||||
| 2020 | 2019 | ||||||||||
| Share-based compensation awards | 6,718,131 | 2,159,232 | |||||||||
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NOTE 4 — CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT
The following tables present the changes in accumulated other comprehensive income (loss) by component for the three months ended March 31, 2020 and 2019. All amounts are presented net of tax. Amounts in parentheses indicate reductions to AOCI.
| Three Months Ended March 31, 2020 | |||||||||||||||||
| (amounts in thousands) | Unrealized Gains (Losses) on Available for Sale Securities (1) | Unrealized Gains (Losses) on Cash Flow Hedges (2) | Total | ||||||||||||||
| Balance - December 31, 2019 | $ | 14,287 | $ | (15,537) | $ | (1,250) | |||||||||||
| Unrealized gains (losses) arising during period, before tax | (9,098) | (27,697) | (36,795) | ||||||||||||||
| Income tax effect | 2,366 | 7,351 | 9,717 | ||||||||||||||
| Other comprehensive income (loss) before reclassifications | (6,732) | (20,346) | (27,078) | ||||||||||||||
| Reclassification adjustments for losses (gains) included in net income, before tax | (3,974) | 1,478 | (2,496) | ||||||||||||||
| Income tax effect | 1,033 | (384) | 649 | ||||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) to net income | (2,941) | 1,094 | (1,847) | ||||||||||||||
| Net current-period other comprehensive income (loss) | (9,673) | (19,252) | (28,925) | ||||||||||||||
| Balance - March 31, 2020 | $ | 4,614 | $ | (34,789) | $ | (30,175) | |||||||||||
| Three Months Ended March 31, 2019 | |||||||||||||||||
| (amounts in thousands) | Unrealized Gains (Losses) on Available for Sale Securities (1) | Unrealized Gains (Losses) on Cash Flow Hedges (2) | Total | ||||||||||||||
| Balance - December 31, 2018 | $ | (21,741) | $ | (922) | $ | (22,663) | |||||||||||
| Unrealized gains (losses) arising during period, before tax | 17,817 | (6,939) | 10,878 | ||||||||||||||
| Income tax effect | (4,632) | 1,804 | (2,828) | ||||||||||||||
| Other comprehensive income (loss) before reclassifications | 13,185 | (5,135) | 8,050 | ||||||||||||||
| Reclassification adjustments for losses (gains) included in net income, before tax | — | (413) | (413) | ||||||||||||||
| Income tax effect | — | 107 | 107 | ||||||||||||||
Amounts reclassified from accumulated other comprehensive income (loss) to net income | — | (306) | (306) | ||||||||||||||
| Net current-period other comprehensive income (loss) | 13,185 | (5,441) | 7,744 | ||||||||||||||
| Balance - March 31, 2019 | $ | (8,556) | $ | (6,363) | $ | (14,919) | |||||||||||
(1)Reclassification amounts for available for sale debt securities are reported as gain or loss on sale of investment securities on the consolidated statements of income.
(2)Reclassification amounts for cash flow hedges are reported as interest expense for the applicable hedged items on the consolidated statements of income.
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NOTE 5 — INVESTMENT SECURITIES
The amortized cost and fair value of investment securities as of March 31, 2020 and December 31, 2019 are summarized in the tables below:
March 31, 2020 (1) | |||||||||||||||||||||||
| (amounts in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||
| Available for sale debt securities: | |||||||||||||||||||||||
| Agency-guaranteed residential mortgage-backed securities | $ | 159,416 | $ | 13,398 | $ | — | $ | 172,814 | |||||||||||||||
| Agency-guaranteed collateralized mortgage obligations | 153,952 | — | — | 153,952 | |||||||||||||||||||
State and political subdivision debt securities (2) | 15,157 | — | — | 15,157 | |||||||||||||||||||
| Collateralized mortgage obligations | 5,566 | — | — | 5,566 | |||||||||||||||||||
Corporate notes (3) | 356,027 | 1,471 | (8,634) | 348,864 | |||||||||||||||||||
| Available for sale debt securities | $ | 690,118 | $ | 14,869 | $ | (8,634) | 696,353 | ||||||||||||||||
Interest-only GNMA securities (4) | 15,276 | ||||||||||||||||||||||
Equity securities (5) | 1,028 | ||||||||||||||||||||||
| Total investment securities, at fair value | $ | 712,657 | |||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||
| (amounts in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||||||||
| Available for sale debt securities: | |||||||||||||||||||||||
| Agency-guaranteed residential mortgage-backed securities | $ | 273,252 | $ | 5,069 | $ | — | $ | 278,321 | |||||||||||||||
Corporate notes (3) | 284,639 | 14,238 | — | 298,877 | |||||||||||||||||||
| Available for sale debt securities | $ | 557,891 | $ | 19,307 | $ | — | 577,198 | ||||||||||||||||
Interest-only GNMA securities (4) | 16,272 | ||||||||||||||||||||||
Equity securities (5) | 2,406 | ||||||||||||||||||||||
| Total investment securities, at fair value | $ | 595,876 | |||||||||||||||||||||
(1)Accrued interest on AFS debt securities totaled $4.7 million at March 31, 2020 and is included in accrued interest receivable on the consolidated balance sheet.
(2)Includes both taxable and non-taxable municipal securities.
(3)Includes corporate securities issued by domestic bank holding companies.
(4)Reported at fair value with fair value changes recorded in non-interest income based on a fair value option election.
(5)Includes equity securities issued by a foreign entity.
On June 28, 2019, Customers obtained ownership of certain interest-only GNMA securities that served as the primary collateral for loans made to one commercial mortgage warehouse customer through a Uniform Commercial Code private sale transaction. In connection with the acquisition of the interest-only GNMA securities, Customers recognized a pre-tax loss of $7.5 million for the three months ended June 30, 2019 for the shortfall in the fair value of the interest-only GNMA securities compared to its credit exposure to this commercial mortgage warehouse customer. Upon acquisition, Customers elected the fair value option for these interest-only GNMA securities. The fair value of these securities at March 31, 2020 was $15.3 million.
During the three months ended March 31, 2020 and 2019, Customers recognized unrealized losses of $1.4 million and unrealized gains of $2 thousand, respectively, on its equity securities. These unrealized gains and losses are reported as unrealized gain (loss) on investment securities within non-interest income on the consolidated statements of income.
20
For the three months ended March 31, 2020, realized gains from sales of available-for-sale securities were $4.0 million. Proceeds from these sales were received in April 2020. There were no sales during the three months ended March 31, 2019.
These gains (losses) were determined using the specific identification method and were reported as gain (loss) on sale of investment securities within non-interest income on the consolidated statements of income.
The following table shows debt securities by stated maturity. Debt securities backed by mortgages and interest-only GNMA securities have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay and, therefore, these debt securities are classified separately with no specific maturity date:
| March 31, 2020 | |||||||||||
| (amounts in thousands) | Amortized Cost | Fair Value | |||||||||
| Due in one year or less | $ | 11,885 | $ | 11,885 | |||||||
| Due after one year through five years | 57,611 | 57,723 | |||||||||
| Due after five years through ten years | 282,528 | 275,182 | |||||||||
| Due after ten years | 19,160 | 19,231 | |||||||||
| Agency-guaranteed residential mortgage-backed securities | 159,416 | 172,814 | |||||||||
| Agency-guaranteed collateralized mortgage obligations | 153,952 | 153,952 | |||||||||
| Collateralized mortgage obligations | 5,566 | 5,566 | |||||||||
| Interest-only classes of agency-guaranteed home equity conversion mortgage-backed securities | — | 15,276 | |||||||||
| Total debt securities | $ | 690,118 | $ | 711,629 | |||||||
Gross unrealized losses and fair value of Customers' available for sale debt securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2020 were as follows:
| March 31, 2020 | |||||||||||||||||||||||||||||||||||
| Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||||||||
| (amounts in thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | |||||||||||||||||||||||||||||
| Available for sale debt securities: | |||||||||||||||||||||||||||||||||||
| Corporate notes | 249,946 | 8,634 | — | — | 249,946 | 8,634 | |||||||||||||||||||||||||||||
| Total | $ | 249,946 | $ | 8,634 | $ | — | $ | — | $ | 249,946 | $ | 8,634 | |||||||||||||||||||||||
At March 31, 2020, there were 13 available for sale debt securities with unrealized losses in the less-than-twelve-month category and no available for sale debt securities with unrealized losses in the twelve-month-or-more category. The unrealized losses on the corporate notes relate to securities with no company specific concentration. The unrealized losses were principally due to changes in market interest rates that resulted in a negative impact on the respective notes' fair value. All amounts related to the corporate notes are expected to be recovered when market prices recover or at maturity. Customers does not intend to sell these securities, and it is not more likely than not that Customers will be required to sell the securities before recovery of the amortized cost basis. At December 31, 2019, there were no available for sale debt securities in an unrealized loss position.
At March 31, 2020 and December 31, 2019, Customers Bank had pledged investment securities aggregating $20.0 million and $20.4 million in fair value, respectively, as collateral against its borrowings primarily with an unused line of credit with another financial institution. These counterparties do not have the ability to sell or repledge these securities.
At March 31, 2020 and December 31, 2019, no securities holding of any one issuer, other than the U.S. Government and its agencies, amounted to greater than 10% of shareholders' equity.
21
NOTE 6 – LOANS HELD FOR SALE
The composition of loans held for sale as of March 31, 2020 and December 31, 2019 was as follows:
| (amounts in thousands) | March 31, 2020 | December 31, 2019 | |||||||||
| Commercial loans: | |||||||||||
| Multi-family loans, at lower of cost or fair value | $ | 447,444 | $ | 482,873 | |||||||
| Total commercial loans held for sale | 447,444 | 482,873 | |||||||||
| Consumer loans: | |||||||||||
| Home equity conversion mortgages, at lower of cost or fair value | 1,325 | 1,325 | |||||||||
| Residential mortgage loans, at fair value | 1,388 | 2,130 | |||||||||
| Total consumer loans held for sale | 2,713 | 3,455 | |||||||||
| Loans held for sale | $ | 450,157 | $ | 486,328 | |||||||
NOTE 7 — LOANS AND LEASES RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES
The following table presents loans and leases receivable as of March 31, 2020 and December 31, 2019.
| (amounts in thousands) | March 31, 2020 | December 31, 2019 | |||||||||
| Loans and leases receivable, mortgage warehouse, at fair value | $ | 2,518,012 | $ | 2,245,758 | |||||||
| Loans receivable: | |||||||||||
| Commercial: | |||||||||||
| Multi-family | 1,621,633 | 1,907,331 | |||||||||
Commercial and industrial (1) | 2,072,952 | 1,891,152 | |||||||||
| Commercial real estate owner occupied | 543,945 | 551,948 | |||||||||
| Commercial real estate non-owner occupied | 1,252,826 | 1,222,772 | |||||||||
| Construction | 115,448 | 117,617 | |||||||||
| Total commercial loans and leases receivable | 5,606,804 | 5,690,820 | |||||||||
| Consumer: | |||||||||||
| Residential real estate | 362,047 | 382,634 | |||||||||
| Manufactured housing | 69,240 | 71,359 | |||||||||
| Other consumer | 1,315,171 | 1,174,175 | |||||||||
| Total consumer loans receivable | 1,746,458 | 1,628,168 | |||||||||
Loans and leases receivable (2) | 7,353,262 | 7,318,988 | |||||||||
| Allowance for credit losses | (149,283) | (56,379) | |||||||||
| Total loans and leases receivable, net of allowance for credit losses | $ | 9,721,991 | $ | 9,508,367 | |||||||
(1)Includes direct finance equipment leases of $96.6 million and $89.2 million at March 31, 2020 and December 31, 2019, respectively.
(2)Includes deferred (fees) costs and unamortized (discounts) premiums, net of $3.2 million and $2.1 million at March 31, 2020 and December 31, 2019, respectively.
Customers' total loans and leases receivable portfolio includes loans receivable which are reported at fair value based on an election made to account for these loans at fair value and loans and leases receivable which are predominately reported at their outstanding unpaid principal balance, net of charge-offs and deferred costs and fees and unamortized premiums and discounts and are evaluated for impairment. The total amount of accrued interest recorded for total loans was $36.3 million and $34.8 million at March 31, 2020 and December 31, 2019, respectively, and is presented in accrued interest receivable in the consolidated balance sheet. At March 31, 2020, there were $56.5 million of individually evaluated loans that were collateral-dependent. Substantially all individually evaluated loans are collateral-dependent and consisted primarily of commercial and industrial, commercial real estate, and residential real estate loans. Collateral-dependent commercial and industrial loans were secured by accounts receivable, inventory and equipment; collateral-dependent commercial real estate loans were secured by commercial real estate assets; and residential real estate loans were secured by residential real estate assets. There were no significant changes in collateral values during the three months ended March 31, 2020.
22
Subsequent to March 31, 2020, Customers decided to sell a commercial real estate loan collateralized by a Class A office building in northern New Jersey. At March 31, 2020, this collateral dependent loan has been charged down to its estimated fair value of $19.1 million.
Loans receivable, mortgage warehouse, at fair value:
Mortgage warehouse loans consist of commercial loans to mortgage companies. These mortgage warehouse lending transactions are subject to master repurchase agreements. As a result of the contractual provisions, for accounting purposes control of the underlying mortgage loan has not transferred and the rewards and risks of the mortgage loans are not assumed by Customers. The mortgage warehouse loans are designated as loans held for investment and reported at fair value based on an election made to account for the loans at fair value. Pursuant to the agreements, Customers funds the pipelines for these mortgage lenders by sending payments directly to the closing agents for funded mortgage loans and receives proceeds directly from third party investors when the underlying mortgage loans are sold into the secondary market. The fair value of the mortgage warehouse loans is estimated as the amount of cash initially advanced to fund the mortgage, plus accrued interest and fees, as specified in the respective agreements. The interest rates on these loans are variable, and the lending transactions are short-term, with an average life under 30 days from purchase to sale. The primary goal of these lending transactions is to provide liquidity to mortgage companies.
At March 31, 2020 and December 31, 2019, all of Customers' commercial mortgage warehouse loans were current in terms of payment. As these loans are reported at their fair value, they do not have an ACL and are therefore excluded from ACL-related disclosures.
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Loans and leases receivable:
The following tables summarize loans and leases receivable by loan and lease type and performance status as of March 31, 2020 and December 31, 2019:
| March 31, 2020 | |||||||||||||||||||||||||||||||||||
| (amounts in thousands) | 30-59 Days past due | 60-89 Days past due | 90 Days or more past due | Total past due | Loans and leases not past due (2) | Total loans and leases (3) | |||||||||||||||||||||||||||||
| Multi-family | $ | 2,378 | $ | — | $ | 4,021 | $ | 6,399 | $ | 1,615,234 | $ | 1,621,633 | |||||||||||||||||||||||
| Commercial and industrial | 1,332 | 659 | 10,182 | 12,173 | 2,060,779 | 2,072,952 | |||||||||||||||||||||||||||||
| Commercial real estate owner occupied | 4,391 | 971 | 2,740 | 8,102 | 535,843 | 543,945 | |||||||||||||||||||||||||||||
| Commercial real estate non-owner occupied | 30,723 | — | 21,470 | 52,193 | 1,200,633 | 1,252,826 | |||||||||||||||||||||||||||||
| Construction | — | — | — | — | 115,448 | 115,448 | |||||||||||||||||||||||||||||
| Residential real estate | 5,253 | 68 | 6,248 | 11,569 | 350,478 | 362,047 | |||||||||||||||||||||||||||||
Manufactured housing (5) | 2,138 | 962 | 5,089 | 8,189 | 61,051 | 69,240 | |||||||||||||||||||||||||||||
| Other consumer | 6,502 | 3,725 | 2,527 | 12,754 | 1,302,417 | 1,315,171 | |||||||||||||||||||||||||||||
| Total | $ | 52,717 | $ | 6,385 | $ | 52,277 | $ | 111,379 | $ | 7,241,883 | $ | 7,353,262 | |||||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||
| (amounts in thousands) | 30-89 Days past due (1) | 90 Days or more past due (1) | Total past due (1) | Non-accrual | Current (2) | Purchased-credit-impaired loans (4) | Total loans and leases (5) | ||||||||||||||||||||||||||||||||||
| Multi-family | $ | 2,133 | — | $ | 2,133 | $ | 4,117 | $ | 1,901,336 | $ | 1,688 | $ | 1,909,274 | ||||||||||||||||||||||||||||
| Commercial and industrial | 2,395 | — | 2,395 | 4,531 | 1,882,700 | 354 | 1,889,980 | ||||||||||||||||||||||||||||||||||
| Commercial real estate owner occupied | 5,388 | — | 5,388 | 1,963 | 537,992 | 6,664 | 552,007 | ||||||||||||||||||||||||||||||||||
| Commercial real estate non-owner occupied | 8,034 | — | 8,034 | 76 | 1,211,892 | 3,527 | 1,223,529 | ||||||||||||||||||||||||||||||||||
| Construction | — | — | — | — | 118,418 | — | 118,418 | ||||||||||||||||||||||||||||||||||
| Residential real estate | 5,924 | — | 5,924 | 6,128 | 359,491 | 3,471 | 375,014 | ||||||||||||||||||||||||||||||||||
| Manufactured housing | 3,699 | 1,794 | 5,493 | 1,655 | 61,649 | 1,601 | 70,398 | ||||||||||||||||||||||||||||||||||
| Other consumer | 5,756 | $ | — | 5,756 | 1,551 | 1,170,793 | 183 | 1,178,283 | |||||||||||||||||||||||||||||||||
| Total | $ | 33,329 | $ | 1,794 | $ | 35,123 | $ | 20,021 | $ | 7,244,271 | $ | 17,488 | $ | 7,316,903 | |||||||||||||||||||||||||||
(1)Includes past due loans and leases that are accruing interest because collection is considered probable.
(2)Loans and leases where next payment due is less than 30 days from the report date.
(3)Includes purchased credit deteriorated loans of $16.6 million at March 31, 2020.
(4)Purchased-credit-impaired loans aggregated into a pool are accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, and the past due status of the pools, or that of the individual loans within the pools, is not meaningful. Due to the credit impaired nature of the loans, the loans are recorded at a discount reflecting estimated future cash flows and the Bank recognizes interest income on each pool of loans reflecting the estimated yield and passage of time. Such loans are considered to be performing. Purchased-credit-impaired loans that are not in pools accrete interest when the timing and amount of their expected cash flows are reasonably estimable, and are reported as performing loans.
(5)Amounts exclude deferred costs and fees and unamortized premiums and discounts.
As of both March 31, 2020 and December 31, 2019, the Bank had $0.1 million and $0.2 million, respectively, of residential real estate held in OREO. As of both March 31, 2020 and December 31, 2019, the Bank had initiated foreclosure proceedings on $0.9 million, respectively, in loans secured by residential real estate.
24
Nonaccrual Loans and Leases
The following table provides amortized cost of loans and leases on nonaccrual status.
March 31, 2020 (1) | December 31, 2020 (2) | ||||||||||||||||||||||||||||||||||
| (amounts in thousands) | Nonaccrual loans with no related allowance | Nonaccrual loans with related allowance | Total nonaccrual loans | Nonaccrual loans with no related allowance | Nonaccrual loans with related allowance | Total nonaccrual loans | |||||||||||||||||||||||||||||
| Multi-family | $ | 4,020 | $ | — | $ | 4,020 | $ | 4,117 | $ | — | $ | 4,117 | |||||||||||||||||||||||
| Commercial and industrial | 8,967 | 1,026 | 9,993 | 3,083 | 1,448 | 4,531 | |||||||||||||||||||||||||||||
| Commercial real estate owner occupied | 2,371 | 40 | 2,411 | 1,109 | 854 | 1,963 | |||||||||||||||||||||||||||||
| Commercial real estate non-owner occupied | 21,479 | — | 21,479 | 76 | — | 76 | |||||||||||||||||||||||||||||
| Construction | — | — | — | — | — | — | |||||||||||||||||||||||||||||
| Residential real estate | 4,730 | 1,324 | 6,054 | 4,559 | 1,569 | 6,128 | |||||||||||||||||||||||||||||
| Manufactured housing | — | 2,558 | 2,558 | — | 1,655 | 1,655 | |||||||||||||||||||||||||||||
| Other consumer | 270 | 2,249 | 2,519 | 140 | 1,411 | 1,551 | |||||||||||||||||||||||||||||
| Total | $ | 41,837 | $ | 7,197 | $ | 49,034 | $ | 13,084 | $ | 6,937 | $ | 20,021 | |||||||||||||||||||||||
(1) Presented at amortized cost basis.
(2) Amounts exclude deferred costs and fees and unamortized premiums and discounts.
Interest income of $0.2 million and $0.2 million was recognized on nonaccrual loans for the three months ended March 31, 2020 and 2019, respectively. PCD loans are considered to be performing and are not included in the table above.
Allowance for credit losses on loans and leases
The changes in the allowance for credit losses on loans and leases for the three months ended March 31, 2020 and 2019, is presented in the tables below.
| Three Months Ended March 31, 2020 | Multi-family | Commercial and industrial | Commercial real estate owner occupied | Commercial real estate non-owner occupied | Construction | Residential real estate | Manufactured housing | Other consumer | Total | ||||||||||||||||||||||||||||||||||||||||||||
| (amounts in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Beginning balance, at December 31, 2019 | $ | 6,157 | $ | 15,556 | $ | 2,235 | $ | 6,243 | $ | 1,262 | $ | 3,218 | $ | 1,060 | $ | 20,648 | $ | 56,379 | |||||||||||||||||||||||||||||||||||
| Cumulative effect of change in accounting principle | 2,171 | 759 | 5,773 | 7,918 | (98) | 1,518 | 3,802 | 57,986 | 79,829 | ||||||||||||||||||||||||||||||||||||||||||||
| Charge-offs | — | (97) | — | (12,797) | — | — | — | (6,246) | (19,140) | ||||||||||||||||||||||||||||||||||||||||||||
| Recoveries | — | 54 | 3 | — | 3 | 29 | — | 340 | 429 | ||||||||||||||||||||||||||||||||||||||||||||
| Provision for credit loss expense | 422 | 2,534 | 516 | 17,166 | 767 | (585) | 125 | 10,841 | 31,786 | ||||||||||||||||||||||||||||||||||||||||||||
| Total ending allowance balance | $ | 8,750 | $ | 18,806 | $ | 8,527 | $ | 18,530 | $ | 1,934 | $ | 4,180 | $ | 4,987 | $ | 83,569 | $ | 149,283 | |||||||||||||||||||||||||||||||||||
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| Three Months Ended March 31, 2019 | Multi-family | Commercial and industrial | Commercial real estate owner occupied | Commercial real estate non-owner occupied | Construction | Residential real estate | Manufactured housing | Other consumer | Total | ||||||||||||||||||||||||||||||||||||||||||||
| (amounts in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ending Balance, December 31, 2018 | $ | 11,462 | $ | 12,145 | $ | 3,320 | $ | 6,093 | $ | 624 | $ | 3,654 | $ | 145 | $ | 2,529 | $ | 39,972 | |||||||||||||||||||||||||||||||||||
| Charge-offs | (541) | — | (8) | — | — | (40) | — | (755) | (1,344) | ||||||||||||||||||||||||||||||||||||||||||||
| Recoveries | — | 119 | 128 | — | 6 | 7 | — | 24 | 284 | ||||||||||||||||||||||||||||||||||||||||||||
| Provision for loan and lease losses | (291) | 383 | (15) | (78) | (46) | 2,951 | (28) | 1,891 | 4,767 | ||||||||||||||||||||||||||||||||||||||||||||
| Ending Balance, March 31, 2019 | $ | 10,630 | $ | 12,647 | $ | 3,425 | $ | 6,015 | $ | 584 | $ | 6,572 | $ | 117 | $ | 3,689 | $ | 43,679 | |||||||||||||||||||||||||||||||||||
At March 31, 2020, the ACL was $149.3 million, an increase of $13.1 million from the January 1, 2020 balance of $136.2 million. The increase resulted primarily from the impact of reserve build for the COVID-19 pandemic, an increase in net charge-offs, mostly attributed to the commercial real estate non-owner occupied and other consumer portfolios, and portfolio growth. Commercial real estate non-owner occupied charge-offs is attributable to one collateral dependent loan. Other consumer charge-offs is attributable to delinquencies and defaults of originated and purchased unsecured consumer loans through arrangements with fintech companies and other market place lenders.
Troubled Debt Restructurings
At March 31, 2020 and December 31, 2019, there were $13.5 million and $13.3 million, respectively, in loans reported as TDRs. TDRs are reported as impaired loans in the calendar year of their restructuring and are evaluated to determine whether they should be placed on non-accrual status. In subsequent years, a TDR may be returned to accrual status if it satisfies a minimum performance requirement of six months, however, it will remain classified as impaired. Generally, the Bank requires sustained performance for nine months before returning a TDR to accrual status. Customers had no lease receivables that had been restructured as a TDR as of March 31, 2020 and December 31, 2019, respectively.
The CARES Act and certain regulatory agencies recently issued guidance stating certain loan modifications to borrowers experiencing financial distress as a result of the economic impacts created by COVID-19 may not be required to be treated as TDRs under U.S GAAP. For COVID-19 related loan modifications which occurred in March 2020, and met the loan modification criteria under either the CARES Act or the criteria specified by the regulatory agencies, Customers elected to suspend TDR accounting for such loan modifications.
The following table presents loans modified in a TDR by type of concession for the three months ended March 31, 2020 and 2019. There were no modifications that involved forgiveness of debt for the three months ended March 31, 2020 and 2019.
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| (dollars in thousands) | Number of loans | Recorded investment | Number of loans | Recorded investment | |||||||||||||||||||
| Extensions of maturity | 4 | $ | 245 | 2 | $ | 514 | |||||||||||||||||
| Interest-rate reductions | 12 | 530 | 10 | 385 | |||||||||||||||||||
| Total | 16 | $ | 775 | 12 | $ | 899 | |||||||||||||||||
26
As of March 31, 2020, there were no commitments to lend additional funds to debtors whose loans have been modified in TDRs. As of December 31, 2019, there were no commitments to lend additional funds to debtors whose loans have been modified in TDRs.
The following table presents, by loan type, the number of loans modified in TDRs and the related recorded investment, for which there was a payment default within twelve months following the modification:
| March 31, 2020 | March 31, 2019 | ||||||||||||||||||||||
| (dollars in thousands) | Number of loans | Recorded investment | Number of loans | Recorded investment | |||||||||||||||||||
| Manufactured housing | — | $ | — | 5 | $ | 137 | |||||||||||||||||
| Commercial and industrial | — | — | 1 | 431 | |||||||||||||||||||
| Commercial real estate owner occupied | 1 | 8 | — | — | |||||||||||||||||||
| Residential real estate | 5 | 684 | — | — | |||||||||||||||||||
| Total loans | 6 | $ | 692 | 6 | $ | 568 | |||||||||||||||||
Loans modified in TDRs are evaluated for impairment. The nature and extent of impairment of TDRs, including those which have experienced a subsequent default, is considered in the determination of an appropriate level of ACL.
Purchased Credit-Deteriorated Loans
Customers adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration that were previously classified as PCI and accounted for under ASC 310-30. In accordance with the standard, Customers did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $0.2 million of the allowance for credit losses on PCD loans and leases. The remaining noncredit discount of $0.3 million, based on the adjusted amortized cost basis, will be accreted into interest income at the effective interest rate as of January 1, 2020. As of March 31, 2020, the amortized cost basis of PCD assets amounted to $16.6 million.
Credit Quality Indicators
The ACL represents management's estimate of probable losses in Customers' loans and leases receivable portfolio, excluding commercial mortgage warehouse loans reported at fair value pursuant to a fair value option election. Multi-family, commercial and industrial, owner occupied commercial real estate, non-owner occupied commercial real estate, and construction loans are rated based on an internally assigned risk rating system which is assigned at the time of loan origination and reviewed on a periodic, or on an “as needed” basis. Residential real estate loans, manufactured housing and other consumer loans are evaluated based on the payment activity of the loan.
To facilitate the monitoring of credit quality within the multi-family, commercial and industrial, owner occupied commercial real estate, non-owner occupied commercial real estate, and construction loan portfolios, and as an input in the ACL lifetime loss rate model for the C&I portfolio, the Bank utilizes the following categories of risk ratings: pass/satisfactory (includes risk rating 1 through 6), special mention, substandard, doubtful, and loss. The risk rating categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter. Pass/satisfactory ratings, which are assigned to those borrowers who do not have identified potential or well-defined weaknesses and for whom there is a high likelihood of orderly repayment, are updated periodically based on the size and credit characteristics of the borrower. All other categories are updated on a quarterly basis during the month preceding the end of the calendar quarter. While assigning risk ratings involves judgment, the risk-rating process allows management to identify riskier credits in a timely manner and allocate the appropriate resources to manage those loans and leases. The 2019 Form 10-K describes Customers Bancorp’s risk rating grades.
27
Risk ratings are not established for certain consumer loans, including residential real estate, home equity, manufactured housing, and installment loans, mainly because these portfolios consist of a larger number of homogeneous loans with smaller balances. Instead, these portfolios are evaluated for risk mainly based upon aggregate payment history through the monitoring of delinquency levels and trends and are classified as performing and non-performing. The following tables present the credit ratings of loans and leases receivable as of March 31, 2020 and December 31, 2019.
| Term Loans Amortized Cost Basis by Origination Year | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving loans amortized cost basis | Revolving loans converted to term | Total | ||||||||||||||||||||||||||||||||||||||||||||
| As of March 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Multi-family: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk rating | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 26,646 | $ | 23,689 | $ | 172,088 | $ | 445,613 | $ | 329,586 | $ | 569,400 | $ | — | $ | — | $ | 1,567,022 | |||||||||||||||||||||||||||||||||||
| Special mention | — | — | — | 19,510 | 1,968 | — | — | — | 21,478 | ||||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | 12,028 | 13,904 | 7,201 | — | — | 33,133 | ||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Total multi-family loans | $ | 26,646 | $ | 23,689 | $ | 172,088 | $ | 477,151 | $ | 345,458 | $ | 576,601 | $ | — | $ | — | $ | 1,621,633 | |||||||||||||||||||||||||||||||||||
| Term Loans Amortized Cost Basis by Origination Year | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving loans amortized cost basis | Revolving loans converted to term | Total | ||||||||||||||||||||||||||||||||||||||||||||
| As of March 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial and industrial: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk rating | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 323,338 | $ | 491,492 | $ | 183,202 | $ | 120,795 | $ | 55,483 | $ | 101,805 | $ | 718,827 | $ | — | $ | 1,994,942 | |||||||||||||||||||||||||||||||||||
| Special mention | — | 7,788 | 2,403 | 17,652 | 120 | 26 | 20,800 | — | 48,789 | ||||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | 5,576 | 276 | 1,760 | 7,774 | 3,318 | 10,517 | — | 29,221 | ||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Total commercial and industrial loans and leases | $ | 323,338 | $ | 504,856 | $ | 185,881 | $ | 140,207 | $ | 63,377 | $ | 105,149 | $ | 750,144 | $ | — | $ | 2,072,952 | |||||||||||||||||||||||||||||||||||
28
| Term Loans Amortized Cost Basis by Origination Year | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving loans amortized cost basis | Revolving loans converted to term | Total | ||||||||||||||||||||||||||||||||||||||||||||
| As of March 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate owner occupied: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk rating | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 18,672 | $ | 184,756 | $ | 90,261 | $ | 82,509 | $ | 49,074 | $ | 102,449 | $ | 1,672 | $ | — | $ | 529,393 | |||||||||||||||||||||||||||||||||||
| Special mention | — | — | 483 | 114 | — | 399 | — | — | 996 | ||||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | 350 | 2,266 | 10,940 | — | — | 13,556 | ||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Total commercial real estate owner occupied loans | $ | 18,672 | $ | 184,756 | $ | 90,744 | $ | 82,973 | $ | 51,340 | $ | 113,788 | $ | 1,672 | $ | — | $ | 543,945 | |||||||||||||||||||||||||||||||||||
| Term Loans Amortized Cost Basis by Origination Year | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving loans amortized cost basis | Revolving loans converted to term | Total | ||||||||||||||||||||||||||||||||||||||||||||
| As of March 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate non-owner occupied: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk rating | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 74,905 | $ | 118,164 | $ | 118,424 | $ | 249,784 | $ | 201,214 | $ | 412,250 | $ | — | $ | — | $ | 1,174,741 | |||||||||||||||||||||||||||||||||||
| Special mention | — | — | — | — | 374 | 4,201 | — | — | 4,575 | ||||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | 30,772 | — | 2,080 | 21,608 | — | — | 54,460 | ||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | 19,050 | — | — | — | 19,050 | ||||||||||||||||||||||||||||||||||||||||||||
| Total commercial real estate non-owner occupied loans | $ | 74,905 | $ | 118,164 | $ | 149,196 | $ | 249,784 | $ | 222,718 | $ | 438,059 | $ | — | $ | — | $ | 1,252,826 | |||||||||||||||||||||||||||||||||||
| Term Loans Amortized Cost Basis by Origination Year | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving loans amortized cost basis | Revolving loans converted to term | Total | ||||||||||||||||||||||||||||||||||||||||||||
| As of March 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Construction: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Risk rating | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pass | $ | 451 | $ | 83,774 | $ | 20,241 | $ | — | $ | 9,886 | $ | — | $ | 1,096 | $ | — | $ | 115,448 | |||||||||||||||||||||||||||||||||||
| Special mention | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Substandard | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Doubtful | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||
| Total construction loans | $ | 451 | $ | 83,774 | $ | 20,241 | $ | — | $ | 9,886 | $ | — | $ | 1,096 | $ | — | $ | 115,448 | |||||||||||||||||||||||||||||||||||
29
| Term Loans Amortized Cost Basis by Origination Year | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving loans amortized cost basis | Revolving loans converted to term | Total | ||||||||||||||||||||||||||||||||||||||||||||
| As of March 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Residential real estate: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Payment performance | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | 1,527 | $ | 15,164 | $ | 8,103 | $ | 14,644 | $ | 47,557 | $ | 86,675 | $ | 182,652 | $ | — | $ | 356,322 | |||||||||||||||||||||||||||||||||||
| Non-performing | — | — | 161 | 160 | 860 | 4,117 | 427 | — | 5,725 | ||||||||||||||||||||||||||||||||||||||||||||
| Total residential real estate loans | $ | 1,527 | $ | 15,164 | $ | 8,264 | $ | 14,804 | $ | 48,417 | $ | 90,792 | $ | 183,079 | $ | — | $ | 362,047 | |||||||||||||||||||||||||||||||||||
| Term Loans Amortized Cost Basis by Origination Year | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving loans amortized cost basis | Revolving loans converted to term | Total | ||||||||||||||||||||||||||||||||||||||||||||
| As of March 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Manufactured housing: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Payment performance | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | — | $ | 312 | $ | 643 | $ | 81 | $ | 44 | $ | 64,782 | $ | — | $ | — | $ | 65,862 | |||||||||||||||||||||||||||||||||||
| Non-performing | — | — | — | — | — | 3,378 | — | — | 3,378 | ||||||||||||||||||||||||||||||||||||||||||||
| Total manufactured housing loans | $ | — | $ | 312 | $ | 643 | $ | 81 | $ | 44 | $ | 68,160 | $ | — | $ | — | $ | 69,240 | |||||||||||||||||||||||||||||||||||
| Term Loans Amortized Cost Basis by Origination Year | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | Prior | Revolving loans amortized cost basis | Revolving loans converted to term | Total | ||||||||||||||||||||||||||||||||||||||||||||
| As of March 31, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other consumer: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Payment performance | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Performing | $ | 122,726 | $ | 1,034,536 | $ | 147,669 | $ | 7,004 | $ | 762 | $ | 55 | $ | — | $ | — | $ | 1,312,752 | |||||||||||||||||||||||||||||||||||
| Non-performing | — | 1,785 | 618 | 16 | — | — | — | — | 2,419 | ||||||||||||||||||||||||||||||||||||||||||||
| Total other consumer loans | $ | 122,726 | $ | 1,036,321 | $ | 148,287 | $ | 7,020 | $ | 762 | $ | 55 | $ | — | $ | — | $ | 1,315,171 | |||||||||||||||||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| (amounts in thousands) | Multi-family | Commercial and industrial | Commercial real estate owner occupied | Commercial real estate non-owner occupied | Construction | Residential real estate | Manufactured housing | Other consumer | Total (3) | ||||||||||||||||||||||||||||||||||||||||||||
| Pass/Satisfactory | $ | 1,816,200 | $ | 1,841,074 | $ | 536,777 | $ | 1,129,838 | $ | 118,418 | $ | — | $ | — | $ | — | $ | 5,442,307 | |||||||||||||||||||||||||||||||||||
| Special Mention | 69,637 | 26,285 | 8,286 | 6,949 | — | — | — | — | 111,157 | ||||||||||||||||||||||||||||||||||||||||||||
| Substandard | 23,437 | 22,621 | 6,944 | 86,742 | — | — | — | — | 139,744 | ||||||||||||||||||||||||||||||||||||||||||||
Performing (1) | — | — | — | — | — | 362,962 | 63,250 | 1,170,976 | 1,597,188 | ||||||||||||||||||||||||||||||||||||||||||||
Non-performing (2) | — | — | — | — | — | 12,052 | 7,148 | 7,307 | 26,507 | ||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | 1,909,274 | $ | 1,889,980 | $ | 552,007 | $ | 1,223,529 | $ | 118,418 | $ | 375,014 | $ | 70,398 | $ | 1,178,283 | $ | 7,316,903 | |||||||||||||||||||||||||||||||||||
(1)Includes residential real estate, manufactured housing, and other consumer loans not assigned internal ratings.
(2)Includes residential real estate, manufactured housing, and other consumer loans that are past due and still accruing interest or on nonaccrual status.
(3)Excludes commercial mortgage warehouse loans reported at fair value.
30
Loan Purchases and Sales
Purchases and sales of loans were as follows for the three months ended March 31, 2020 and 2019:
| Three Months Ended March 31, | |||||||||||
| (amounts in thousands) | 2020 | 2019 | |||||||||
Purchases (1) | |||||||||||
| Residential real estate | $ | 495 | $ | 66,384 | |||||||
Other consumer (2) | 191,761 | 66,136 | |||||||||
| Total | $ | 192,256 | $ | 132,520 | |||||||
Sales (3) | |||||||||||
| Other consumer | 1,822 | — | |||||||||
| Total | $ | 1,822 | $ | — | |||||||
(1)Amounts reported in the above table are the unpaid principal balance at time of purchase. The purchase price was 100.6% and 97.6% of loans outstanding for the three months ended March 31, 2020 and 2019, respectively.
(2)Other consumer loan purchases for the three months ended March 31, 2020 consist of third-party originated unsecured consumer loans. None of the loans are considered sub-prime at the time of origination. Customers considers sub-prime borrowers to be those with FICO scores below 660.
(3)Amounts reported in the above table are the unpaid principal balance at time of sale. There were no loan sales in the three months ended March 31, 2019.
Loans Pledged as Collateral
Customers has pledged eligible real estate and commercial and industrial loans as collateral for borrowings from the FHLB and FRB in the amount of $4.1 billion and $4.6 billion at March 31, 2020 and December 31, 2019, respectively.
NOTE 8 — LEASES
Lessee
Customers has operating leases for its branches, LPOs, and administrative offices, with remaining lease terms ranging between 1 month and 7 years. These operating leases comprise substantially all of Customers' obligations in which Customers is the lessee. Most lease agreements consist of initial lease terms ranging between 1 and 5 years, with options to renew the leases or extend the term up to 15 years at Customers' sole discretion. Some operating leases include variable lease payments that are based on an index or rate, such as the CPI. Variable lease payments are not included in the liability or right of use asset and are recognized in the period in which the obligation for those payments are incurred. Customers' operating lease agreements do not contain any material residual value guarantees or material restrictive covenants. Pursuant to these agreements, Customers does not have any commitments that would meet the definition of a finance lease.
As most of Customers' operating leases do not provide an implicit rate, Customers utilized its incremental borrowing rate based on the information available at either the adoption of ASC 842 or the commencement date of the lease, whichever was later, when determining the present value of lease payments.
The following table summarizes operating lease ROU assets and operating lease liabilities and their corresponding balance sheet location:
| (amounts in thousands) | Classification | March 31, 2020 | December 31, 2019 | ||||||||||||||
| ASSETS | |||||||||||||||||
| Operating lease ROU assets | Other assets | $ | 19,323 | $ | 20,232 | ||||||||||||
| LIABILITIES | |||||||||||||||||
| Operating lease liabilities | Other liabilities | $ | 20,483 | $ | 21,358 | ||||||||||||
31
The following table summarizes operating lease cost and its corresponding income statement location for the periods presented:
| Three Months Ended March 31, | |||||||||||||||||
| (amounts in thousands) | Classification | 2020 | 2019 | ||||||||||||||
Operating lease cost (1) | Occupancy expenses | $ | 1,480 | $ | 1,469 | ||||||||||||
(1) There were no variable lease costs for the three months ended March 31, 2020 and 2019, and sublease income for operating leases is immaterial.
Maturities of non-cancelable operating lease liabilities were as follows at March 31, 2020:
| (amounts in thousands) | March 31, 2020 | ||||
| 2020 | $ | 4,164 | |||
| 2021 | 4,914 | ||||
| 2022 | 4,292 | ||||
| 2023 | 3,303 | ||||
| 2024 | 2,233 | ||||
| Thereafter | 2,840 | ||||
| Total minimum payments | 21,746 | ||||
| Less: interest | 1,263 | ||||
| Present value of lease liabilities | $ | 20,483 | |||
Customers does not have leases where it is involved with the construction or design of an underlying asset. Customers has legally binding minimum lease payments of $2.3 million for leases signed but not yet commenced as of March 31, 2020. Cash paid pursuant to operating lease liability was $1.5 million and $1.4 million for the three months ended March 31, 2020 and 2019, respectively, and is reported as cash flows used in operating activities in the statement of cash flows.
The following table summarizes the weighted average remaining lease term and discount rate for Customers' operating leases at March 31, 2020 and December 31, 2019:
| (amounts in thousands) | March 31, 2020 | December 31, 2019 | |||||||||
| Weighted average remaining lease term (years) | |||||||||||
| Operating leases | 4.9 years | 5.0 years | |||||||||
| Weighted average discount rate | |||||||||||
| Operating leases | 2.89 | % | 2.90 | % | |||||||
Equipment Lessor
CCF is a wholly-owned subsidiary of Customers Bank and is referred to as the Equipment Finance Group. CCF is primarily focused on originating equipment operating and direct finance equipment leases 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. Lease terms typically range from 24 months to 120 months. CCF offers the following lease products: Capital Lease, Purchase Upon Termination, TRAC, Split-TRAC, and FMV. Direct finance equipment leases are included in commercial and industrial loans and leases receivable.
The estimated residual values for direct finance and operating leases are established by utilizing internally developed analyses, external studies, and/or third-party appraisals to establish a residual position. For the direct finance leases, only for a Split-TRAC is there a residual risk and the unguaranteed portions are typically nominal. Expected credit losses on direct financing leases and the related estimated residual values are included in the allowance for credit losses on loans and leases.
Leased assets under operating leases are carried at amortized cost net of accumulated depreciation and any impairment charges and are presented in other assets. The depreciation expense of the leased assets is recognized on a straight-line basis over the contractual term of the leases up to the expected residual value. The expected residual value and, accordingly, the monthly depreciation expense, may change throughout the term of the lease. Operating lease rental income for leased assets is recognized in commercial lease income on a straight-line basis over the lease term. Customers periodically reviews its operating leased assets for impairment. An impairment loss is recognized if the carrying amount of the operating leased asset exceeds its fair value and is not recoverable. The carrying amount of operating leased assets is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the lease payments and the estimated residual value upon the eventual disposition of the equipment.
32
The following table summarizes lease receivables and investment in operating leases and their corresponding balance sheet location at March 31, 2020 and December 31, 2019:
| (amounts in thousands) | Classification | March 31, 2020 | December 31, 2019 | ||||||||||||||
| ASSETS | |||||||||||||||||
| Direct financing leases | |||||||||||||||||
| Lease receivables | Loans and leases receivable | $ | 98,031 | $ | 91,762 | ||||||||||||
| Guaranteed residual assets | Loans and leases receivable | 7,440 | 7,435 | ||||||||||||||
| Unguaranteed residual assets | Loans and leases receivable | 3,283 | 1,260 | ||||||||||||||
| Deferred initial direct costs | Loans and leases receivable | 664 | 721 | ||||||||||||||
| Unearned income | Loans and leases receivable | (12,164) | (11,300) | ||||||||||||||
| Net investment in direct financing leases | $ | 97,254 | $ | 89,878 | |||||||||||||
| Operating leases | |||||||||||||||||
| Investment in operating leases | Other assets | $ | 114,223 | $ | 107,850 | ||||||||||||
| Accumulated depreciation | Other assets | (17,667) | (14,251) | ||||||||||||||
| Deferred initial direct costs | Other assets | 1,088 | 1,052 | ||||||||||||||
| Net investment in operating leases | 97,644 | 94,651 | |||||||||||||||
| Total lease assets | $ | 194,898 | $ | 184,529 | |||||||||||||
COVID-19 Impact on Leases
The table below summarizes the concessions which Customers granted to lessees as a result of the business impact of the COVID-19 pandemic and their financial effect as of and for the three months ended March 31, 2020:
As of March 31, 2020 | |||||||||||
| (dollars in thousands) | Number of Contracts | Principal Balance | |||||||||
| Payment forgiveness | — | $ | — | ||||||||
| Payment deferral | 12 | 382 | |||||||||
| Total | 12 | $ | 382 | ||||||||
All of the above concessions were for direct finance leases. None of the lessees receiving concessions were in past due status prior to receiving the concessions. Accordingly, the concessions did not impact interest income from leases for the three months ended March 31, 2020. No concessions were processed for operating leases during the three months ended March 31, 2020. Additionally, Customers did not receive any concessions on its operating leases in which Customers is the lessee.
NOTE 9 — REGULATORY CAPITAL
The Bank and the Bancorp are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can result in certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on Customers' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank and the Bancorp must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items, as calculated under the regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
33
In first quarter 2020, U.S federal banking regulatory agencies permitted banking organizations to phase-in, for regulatory capital purposes, the day-one impact of the new CECL accounting rule on retained earnings over a period of three years. As part of its response to the impact of COVID-19, on March 31, 2020, the U.S. federal banking regulatory agencies issued an interim final rule that provided the option to temporarily delay certain effects of CECL on regulatory capital for two years, followed by a three-year transition period. The interim final rule allows banking organizations to delay for two years 100% of the day-one impact of adopting CECL and 25% of the cumulative change in the reported allowance for credit losses since adopting CECL. Customers has elected to adopt the interim final rule, which is reflected in the regulatory capital data presented below.
Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Bancorp to maintain minimum amounts and ratios (set forth in the following table) of common equity Tier 1, Tier 1, and total capital to risk-weighted assets, and Tier 1 capital to average assets (as defined in the regulations). At March 31, 2020 and December 31, 2019, the Bank and the Bancorp satisfied all capital requirements to which they were subject.
Generally, to comply with the regulatory definition of adequately capitalized, or well capitalized, respectively, 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 as 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 March 31, 2020: | |||||||||||||||||||||||||||||||||||||||||||||||
| Common equity Tier 1 capital (to risk-weighted assets) | |||||||||||||||||||||||||||||||||||||||||||||||
| Customers Bancorp, Inc. | $ | 827,884 | 7.560 | % | $ | 492,760 | 4.500 | % | N/A | N/A | $ | 766,515 | 7.000 | % | |||||||||||||||||||||||||||||||||
| Customers Bank | $ | 1,158,308 | 10.599 | % | $ | 491,793 | 4.500 | % | $ | 710,368 | 6.500 | % | $ | 765,011 | 7.000 | % | |||||||||||||||||||||||||||||||
| Tier 1 capital (to risk-weighted assets) | |||||||||||||||||||||||||||||||||||||||||||||||
| Customers Bancorp, Inc. | $ | 1,045,355 | 9.546 | % | $ | 657,013 | 6.000 | % | N/A | N/A | $ | 930,768 | 8.500 | % | |||||||||||||||||||||||||||||||||
| Customers Bank | $ | 1,158,308 | 10.599 | % | $ | 655,724 | 6.000 | % | $ | 874,298 | 8.000 | % | $ | 928,942 | 8.500 | % | |||||||||||||||||||||||||||||||
| Total capital (to risk-weighted assets) | |||||||||||||||||||||||||||||||||||||||||||||||
| Customers Bancorp, Inc. | $ | 1,277,340 | 11.665 | % | $ | 876,017 | 8.000 | % | N/A | N/A | $ | 1,149,773 | 10.500 | % | |||||||||||||||||||||||||||||||||
| Customers Bank | $ | 1,334,108 | 12.207 | % | $ | 874,298 | 8.000 | % | $ | 1,092,873 | 10.000 | % | $ | 1,147,517 | 10.500 | % | |||||||||||||||||||||||||||||||
| Tier 1 capital (to average assets) | |||||||||||||||||||||||||||||||||||||||||||||||
| Customers Bancorp, Inc. | $ | 1,045,355 | 9.011 | % | $ | 464,045 | 4.000 | % | N/A | N/A | $ | 464,045 | 4.000 | % | |||||||||||||||||||||||||||||||||
| Customers Bank | $ | 1,158,308 | 9.992 | % | $ | 463,680 | 4.000 | % | $ | 579,600 | 5.000 | % | $ | 463,680 | 4.000 | % | |||||||||||||||||||||||||||||||
| As of December 31, 2019: | |||||||||||||||||||||||||||||||||||||||||||||||
| Common equity Tier 1 capital (to risk-weighted assets) | |||||||||||||||||||||||||||||||||||||||||||||||
| Customers Bancorp, Inc. | $ | 821,810 | 7.984 | % | $ | 463,211 | 4.500 | % | N/A | N/A | $ | 720,551 | 7.000 | % | |||||||||||||||||||||||||||||||||
| Customers Bank | $ | 1,164,652 | 11.323 | % | $ | 462,842 | 4.500 | % | $ | 668,549 | 6.500 | % | $ | 719,976 | 7.000 | % | |||||||||||||||||||||||||||||||
| Tier 1 capital (to risk-weighted assets) | |||||||||||||||||||||||||||||||||||||||||||||||
| Customers Bancorp, Inc. | $ | 1,039,281 | 10.096 | % | $ | 617,615 | 6.000 | % | N/A | N/A | $ | 874,955 | 8.500 | % | |||||||||||||||||||||||||||||||||
| Customers Bank | $ | 1,164,652 | 11.323 | % | $ | 617,122 | 6.000 | % | $ | 822,829 | 8.000 | % | $ | 874,256 | 8.500 | % | |||||||||||||||||||||||||||||||
| Total capital (to risk-weighted assets) | |||||||||||||||||||||||||||||||||||||||||||||||
| Customers Bancorp, Inc. | $ | 1,256,309 | 12.205 | % | $ | 823,487 | 8.000 | % | N/A | N/A | $ | 1,080,827 | 10.500 | % | |||||||||||||||||||||||||||||||||
| Customers Bank | $ | 1,330,155 | 12.933 | % | $ | 822,829 | 8.000 | % | $ | 1,028,537 | 10.000 | % | $ | 1,079,964 | 10.500 | % | |||||||||||||||||||||||||||||||
| Tier 1 capital (to average assets) | |||||||||||||||||||||||||||||||||||||||||||||||
| Customers Bancorp, Inc. | $ | 1,039,281 | 9.258 | % | $ | 449,026 | 4.000 | % | N/A | N/A | $ | 449,026 | 4.000 | % | |||||||||||||||||||||||||||||||||
| Customers Bank | $ | 1,164,652 | 10.379 | % | $ | 448,851 | 4.000 | % | $ | 561,064 | 5.000 | % | $ | 448,851 | 4.000 | % | |||||||||||||||||||||||||||||||
The Basel III Capital Rules require that we maintain a 2.500% capital conservation buffer with respect to each of CET1, Tier 1 and total capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers.
34
NOTE 10 — DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Customers uses fair value measurements to record fair value adjustments to certain assets and liabilities and to disclose the fair value of its financial instruments. ASC Topic 825, Financial Instruments, requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments. For Customers, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments. Many of these instruments lack an available trading market as characterized by a willing buyer and a willing seller engaging in an exchange transaction. For fair value disclosure purposes, Customers utilized certain fair value measurement criteria under ASC 820, Fair Value Measurements and Disclosures, as explained below.
In accordance with ASC 820, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for Customers' various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The fair value guidance provides a consistent definition of fair value, focusing on an exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
The fair value guidance also establishes a fair value hierarchy and describes the following three levels used to classify fair value measurements.
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require adjustments to inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The following methods and assumptions were used to estimate the fair values of Customers' financial instruments as of March 31, 2020 and December 31, 2019:
Financial Instruments Recorded at Fair Value on a Recurring Basis
Investment securities:
The fair values of equity securities, available for sale debt securities and debt securities reported at fair value based on a fair value option election are determined by obtaining quoted market prices on nationally recognized and foreign securities exchanges (Level 1), quoted prices in markets that are not active (Level 2), matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices, or internally and externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3). These assets are classified as Level 1, 2 or 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Loans held for sale - Residential mortgage loans (fair value option):
Customers generally estimates the fair values of residential mortgage loans held for sale based on commitments on hand from investors within the secondary market for loans with similar characteristics. These assets are classified as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
35
Loans receivable - Commercial mortgage warehouse loans (fair value option):
The fair value of commercial mortgage warehouse loans is the amount of cash initially advanced to fund the mortgage, plus accrued interest and fees, as specified in the respective agreements. The loan is used by mortgage companies as short-term bridge financing between the funding of the mortgage loans and the finalization of the sale of the loans to an investor. Changes in fair value are not generally expected to be recognized because at inception of the transaction the underlying mortgage loans have already been sold to an approved investor. Additionally, the interest rate is variable, and the transaction is short-term, with an average life of under 30 days from purchase to sale. These assets are classified as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Derivatives (assets and liabilities):
The fair values of interest rate swaps, interest rate caps and credit derivatives are determined using models that incorporate readily observable market data into a market standard methodology. This methodology nets the discounted future cash receipts and the discounted expected cash payments. The discounted variable cash receipts and payments are based on expectations of future interest rates derived from observable market interest rate curves. In addition, fair value is adjusted for the effect of nonperformance risk by incorporating credit valuation adjustments for Customers and its counterparties. These assets and liabilities are classified as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
The fair values of the residential mortgage loan commitments are derived from the estimated fair values that can be generated when the underlying mortgage loan is sold in the secondary market. Customers generally uses commitments on hand from third party investors to estimate an exit price and adjusts for the probability of the commitment being exercised based on Customers' internal experience (i.e., pull-through rate). These assets and liabilities are classified as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Derivative assets and liabilities are presented in "Other assets" and "Accrued interest payable and other liabilities" on the consolidated balance sheet.
The following information should not be interpreted as an estimate of Customers' fair value in its entirety because fair value calculations are only provided for a limited portion of Customers' assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making these estimates, comparisons between Customers' disclosures and those of other companies may not be meaningful.
Financial Instruments Recorded at Fair Value on a Nonrecurring Basis
Collateral-dependent loans:
Collateral-dependent loans are those loans that are accounted for under ASC 326, Financial Instruments - Credit Losses, in which the Bank has measured impairment generally based on the fair value of the loan’s collateral or discounted cash flow analysis. Fair value is generally determined based upon independent third-party appraisals of the properties that collateralize the loans, discounted cash flows based upon the expected proceeds, sales agreements or letters of intent with third parties. These assets are generally classified as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Other real estate owned:
The fair value of OREO is determined by using appraisals, which may be discounted based on management’s review and changes in market conditions or sales agreements with third parties. All appraisals must be performed in accordance with the Uniform Standards of Professional Appraisal Practice. Appraisals are certified to the Bank and performed by appraisers on the Bank’s approved list of appraisers. Evaluations are completed by a person independent of management. The content of the appraisal depends on the complexity of the property. Appraisals are completed on a “retail value” and an “as is value”. These assets are classified as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
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The estimated fair values of Customers' financial instruments at March 31, 2020 and December 31, 2019 were as follows.
| Fair Value Measurements at March 31, 2020 | |||||||||||||||||||||||||||||
| (amounts in thousands) | Carrying Amount | Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 256,232 | $ | 256,232 | $ | 256,232 | $ | — | $ | — | |||||||||||||||||||
| Debt securities, available for sale | 696,353 | 696,353 | — | 696,353 | — | ||||||||||||||||||||||||
| Interest-only GNMA securities | 15,276 | 15,276 | — | — | 15,276 | ||||||||||||||||||||||||
| Equity securities | 1,028 | 1,028 | 1,028 | — | — | ||||||||||||||||||||||||
| Loans held for sale | 450,157 | 450,157 | — | 1,388 | 448,769 | ||||||||||||||||||||||||
| Total loans and leases receivable, net of allowance for credit losses on loans and leases | 9,721,991 | 10,198,615 | — | 2,518,012 | 7,680,603 | ||||||||||||||||||||||||
| FHLB, Federal Reserve Bank and other restricted stock | 87,140 | 87,140 | — | 87,140 | — | ||||||||||||||||||||||||
| Derivatives | 66,449 | 66,449 | — | 66,234 | 215 | ||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||
| Deposits | $ | 8,413,643 | $ | 8,425,067 | $ | 7,014,296 | $ | 1,410,771 | $ | — | |||||||||||||||||||
| FRB advances | 175,000 | 175,000 | 175,000 | — | — | ||||||||||||||||||||||||
| Federal funds purchased | 705,000 | 705,000 | 705,000 | — | — | ||||||||||||||||||||||||
| FHLB advances | 1,260,000 | 1,266,251 | 410,000 | 856,251 | — | ||||||||||||||||||||||||
| Other borrowings | 123,732 | 97,517 | — | 97,517 | — | ||||||||||||||||||||||||
| Subordinated debt | 181,185 | 154,304 | — | 154,304 | — | ||||||||||||||||||||||||
| Derivatives | 118,189 | 118,189 | — | 118,189 | — | ||||||||||||||||||||||||
| Fair Value Measurements at December 31, 2019 | |||||||||||||||||||||||||||||
| (amounts in thousands) | Carrying Amount | Estimated Fair Value | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | ||||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 212,505 | $ | 212,505 | $ | 212,505 | $ | — | $ | — | |||||||||||||||||||
| Debt securities, available for sale | 577,198 | 577,198 | — | 577,198 | — | ||||||||||||||||||||||||
| Interest-only GNMA securities | 16,272 | 16,272 | — | — | 16,272 | ||||||||||||||||||||||||
| Equity securities | 2,406 | 2,406 | 2,406 | — | — | ||||||||||||||||||||||||
| Loans held for sale | 486,328 | 486,328 | — | 2,130 | 484,198 | ||||||||||||||||||||||||
| Total loans and leases receivable, net of allowance for credit losses on loans and leases | 9,508,367 | 9,853,037 | — | 2,245,758 | 7,607,279 | ||||||||||||||||||||||||
| FHLB, Federal Reserve Bank and other restricted stock | 84,214 | 84,214 | — | 84,214 | — | ||||||||||||||||||||||||
| Derivatives | 23,608 | 23,608 | — | 23,529 | 79 | ||||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||
| Deposits | $ | 8,648,936 | $ | 8,652,340 | $ | 6,980,402 | $ | 1,671,938 | $ | — | |||||||||||||||||||
| Federal funds purchased | 538,000 | 538,000 | 538,000 | — | — | ||||||||||||||||||||||||
| FHLB advances | 850,000 | 852,162 | — | 852,162 | — | ||||||||||||||||||||||||
| Other borrowings | 123,630 | 127,603 | — | 127,603 | — | ||||||||||||||||||||||||
| Subordinated debt | 181,115 | 192,217 | — | 192,217 | — | ||||||||||||||||||||||||
| Derivatives | 45,939 | 45,939 | — | 45,939 | — | ||||||||||||||||||||||||
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For financial assets and liabilities measured at fair value on a recurring and nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at March 31, 2020 and December 31, 2019 were as follows:
| March 31, 2020 | |||||||||||||||||||||||
| Fair Value Measurements at the End of the Reporting Period Using | |||||||||||||||||||||||
| (amounts in thousands) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||||||
| Measured at Fair Value on a Recurring Basis: | |||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Available for sale debt securities: | |||||||||||||||||||||||
| Agency-guaranteed residential mortgage-backed securities | $ | — | $ | 172,814 | $ | — | $ | 172,814 | |||||||||||||||
| Agency-guaranteed collateralized mortgage obligations | — | 153,952 | — | 153,952 | |||||||||||||||||||
| State and political subdivision debt securities | — | 15,157 | — | 15,157 | |||||||||||||||||||
| Collateralized mortgage obligations | — | 5,566 | — | 5,566 | |||||||||||||||||||
| Corporate notes | — | 348,864 | — | 348,864 | |||||||||||||||||||
| Interest-only GNMA securities | — | — | 15,276 | 15,276 | |||||||||||||||||||
| Equity securities | 1,028 | — | — | 1,028 | |||||||||||||||||||
| Derivatives | — | 66,234 | 215 | 66,449 | |||||||||||||||||||
| Loans held for sale – fair value option | — | 1,388 | — | 1,388 | |||||||||||||||||||
| Loans receivable, mortgage warehouse – fair value option | — | 2,518,012 | — | 2,518,012 | |||||||||||||||||||
| Total assets – recurring fair value measurements | $ | 1,028 | $ | 3,281,987 | $ | 15,491 | $ | 3,298,506 | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivatives | $ | — | $ | 118,189 | $ | — | $ | 118,189 | |||||||||||||||
| Measured at Fair Value on a Nonrecurring Basis: | |||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
Collateral-dependent loans, net of specific reserves of $854 | $ | — | $ | — | $ | 28,923 | $ | 28,923 | |||||||||||||||
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| December 31, 2019 | |||||||||||||||||||||||
| Fair Value Measurements at the End of the Reporting Period Using | |||||||||||||||||||||||
| (amounts in thousands) | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | |||||||||||||||||||
| Measured at Fair Value on a Recurring Basis: | |||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Available for sale debt securities: | |||||||||||||||||||||||
| Agency-guaranteed residential mortgage–backed securities | $ | — | $ | 278,321 | $ | — | $ | 278,321 | |||||||||||||||
| Corporate notes | — | 298,877 | — | 298,877 | |||||||||||||||||||
| Interest-only GNMA securities | — | — | 16,272 | 16,272 | |||||||||||||||||||
| Equity securities | 2,406 | — | — | 2,406 | |||||||||||||||||||
| Derivatives | — | 23,529 | 79 | 23,608 | |||||||||||||||||||
| Loans held for sale – fair value option | — | 2,130 | — | 2,130 | |||||||||||||||||||
| Loans receivable, mortgage warehouse – fair value option | — | 2,245,758 | — | 2,245,758 | |||||||||||||||||||
| Total assets – recurring fair value measurements | $ | 2,406 | $ | 2,848,615 | $ | 16,351 | $ | 2,867,372 | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Derivatives | $ | — | $ | 45,939 | $ | — | $ | 45,939 | |||||||||||||||
| Measured at Fair Value on a Nonrecurring Basis: | |||||||||||||||||||||||
| Assets | |||||||||||||||||||||||
Impaired loans, net of specific reserves of $852 | $ | — | $ | — | $ | 14,272 | $ | 14,272 | |||||||||||||||
| Other real estate owned | — | — | 78 | 78 | |||||||||||||||||||
| Total assets – nonrecurring fair value measurements | $ | — | $ | — | $ | 14,350 | $ | 14,350 | |||||||||||||||
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The changes in residential mortgage loan commitments (Level 3 assets) measured at fair value on a recurring basis for the three months ended March 31, 2020 and 2019 are summarized in the tables below. Additional information about residential mortgage loan commitments can be found in NOTE 11 - DERIVATIVES INSTRUMENTS AND HEDGING ACTIVITIES.
| Residential Mortgage Loan Commitments | |||||||||||
| Three Months Ended March 31, | |||||||||||
| (amounts in thousands) | 2020 | 2019 | |||||||||
| Balance at December 31 | $ | 79 | $ | 69 | |||||||
| Issuances | 215 | 77 | |||||||||
| Settlements | (79) | (69) | |||||||||
| Balance at March 31 | $ | 215 | $ | 77 | |||||||
There were no transfers between levels during the three months ended March 31, 2020 and 2019.
The following table summarizes financial assets and financial liabilities measured at fair value as of March 31, 2020 and December 31, 2019 on a recurring and nonrecurring basis for which Customers utilized Level 3 inputs to measure fair value. The unobservable Level 3 inputs noted below contain a level of uncertainty that may differ from what is realized in an immediate settlement of the assets. Therefore, Customers may realize a value higher or lower than the current estimated fair value of the assets. The interest-only GNMA securities are Level 3 assets measured at fair value on a recurring basis under a fair value option election. For the three months ended March 31, 2020, cash settlements of $1.0 million were applied to the carrying value of the interest-only GNMA securities, net of premium amortization expense. At March 31, 2020, Customers used an internally developed discounted cash flow model to value the interest-only GNMA securities. The significant unobservable input used in the discounted cash flow model included prepayment speed. Significant increases (decreases) in this input would result in a significantly lower (higher) fair value measurement.
| Quantitative Information about Level 3 Fair Value Measurements | |||||||||||||||||||||||
| March 31, 2020 | Fair Value Estimate | Valuation Technique | Unobservable Input | Range (Weighted Average) (4) | |||||||||||||||||||
| (amounts in thousands) | |||||||||||||||||||||||
| Collateral-dependent – real estate | $ | 27,735 | Collateral appraisal (1) Business asset valuation (3) | Liquidation expenses (2) Business asset valuation (4) | 8% - 10% (8%) 11% - 45% (20%) | ||||||||||||||||||
| Collateral-dependent loans – commercial & industrial | 1,188 | Collateral appraisal (1) Business asset valuation (3) | Liquidation expenses (2) Business asset valuation adjustments (4) | 8% - 8% (8%) 8% - 8% (8%) | |||||||||||||||||||
| Interest-only GNMA securities | 15,276 | Discounted cash flow | Constant prepayment rate | 5% - 13% (12%) | |||||||||||||||||||
| Residential mortgage loan commitments | 215 | Adjusted market bid | Pull-through rate | 80% - 80% (80%) | |||||||||||||||||||
(1)Obtained from approved independent appraisers. Appraisals are current and in compliance with credit policy. Customers does not generally discount appraisals.
Fair value is also estimated based on sale agreements or letters of intent with third parties.
(2)Appraisals are adjusted by management for liquidation expenses. The range and weighted average of liquidation expense adjustments are presented as a percentage of the appraisal.
(3)Business asset valuation obtained from independent party.
(4)Business asset valuations may be adjusted by management for qualitative factors including economic conditions and the condition of the business assets. The range and weighted average of the business asset adjustments are presented as a percent of the business asset valuation.
40
| Quantitative Information about Level 3 Fair Value Measurements | |||||||||||||||||||||||
| December 31, 2019 | Fair Value Estimate | Valuation Technique | Unobservable Input | Range (Weighted Average) (4) | |||||||||||||||||||
| (amounts in thousands) | |||||||||||||||||||||||
| Impaired loans – real estate | $ | 12,767 | Collateral appraisal (1) Business asset valuation (3) | Liquidation expenses (2) Business asset valuation (4) | 8% - 10% (8%) 34% - 45% (37%) | ||||||||||||||||||
| Impaired loans – commercial & industrial | 1,505 | Collateral appraisal (1) Business asset valuation (3) | Liquidation expenses (2) Business asset valuation adjustments (4) | 8% - 8% (8%) 8% - 50% (22%) | |||||||||||||||||||
| Interest-only GNMA securities | 16,272 | Discounted cash flow | Constant prepayment rate | 9% - 14% 12% | |||||||||||||||||||
| Other real estate owned | 78 | Collateral appraisal (1) | Liquidation expenses (2) | 8% - 9% (9%) | |||||||||||||||||||
| Residential mortgage loan commitments | 79 | Adjusted market bid | Pull-through rate | 85% - 85% (85%) | |||||||||||||||||||
(1)Obtained from approved independent appraisers. Appraisals are current and in compliance with credit policy. Customers does not generally discount appraisals.
(2)Appraisals are adjusted by management for liquidation expenses. The range and weighted average of liquidation expense adjustments are presented as a percentage of the appraisal.
(3)Business asset valuation obtained from independent party.
(4)Business asset valuations may be adjusted by management for qualitative factors including economic conditions and the condition of the business assets. The range and weighted average of the business asset adjustments are presented as a percent of the business asset valuation.
NOTE 11 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Risk Management Objectives of Using Derivatives
Customers is exposed to certain risks arising from both its business operations and economic conditions. Customers manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources, and durations of its assets and liabilities. Specifically, Customers enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the values of which are determined by interest rates. Customers’ derivative financial instruments are used to manage differences in the amount, timing, and duration of Customers’ known or expected cash receipts and its known or expected cash payments principally related to certain borrowings and deposits. Customers also has interest-rate derivatives resulting from a service provided to certain qualifying customers, and therefore, they are not used to manage Customers’ interest-rate risk in assets or liabilities. Customers manages a matched book with respect to its derivative instruments used in this customer service in order to minimize its net risk exposure resulting from such transactions.
Cash Flow Hedges of Interest-Rate Risk
Customers’ objectives in using interest-rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish this objective, Customers primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for Customers making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The changes in the fair value of derivatives designated and qualifying as cash flow hedges are recorded in accumulated other comprehensive income (loss) and subsequently reclassified into earnings in the period that the hedged item affects earnings. To date, such derivatives were used to hedge the variable cash flows associated with the forecasted issuances of debt and a certain variable-rate deposit relationship.
Customers discontinues cash flow hedge accounting if it is probable the forecasted hedged transactions will not occur in the initially identified time period. At such time, the associated gains and losses deferred in accumulated other comprehensive income (loss) are reclassified immediately into earnings and any subsequent changes in the fair value of such derivatives are recognized directly in earnings.
41
Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on Customers' variable-rate debt and a variable-rate deposit relationship. Customers expects to reclassify $14.6 million of losses from accumulated other comprehensive income (loss) to interest expense during the next 12 months.
Customers is hedging its exposure to the variability in future cash flows for forecasted transactions (3-month FHLB advances and Fed fund purchases) and a variable-rate deposit relationship over a maximum period of 73 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).
At March 31, 2020, Customers had five outstanding interest rate derivatives with notional amounts totaling $1.1 billion that were designated as cash flow hedges of interest-rate risk. At December 31, 2019, Customers had four outstanding interest rate derivatives with notional amounts totaling $725.0 million that were designated as cash flow hedges of interest rate-risk. The outstanding cash flow hedges at March 31, 2020 expire between June 2021 and May 2026.
Derivatives Not Designated as Hedging Instruments
Customers executes interest rate swaps (typically the loan customers will swap a floating-rate loan for a fixed-rate loan) and interest rate caps with commercial banking customers to facilitate their respective risk management strategies. The customer interest rate swaps and interest rate caps are simultaneously offset by interest rate swaps and interest rate caps that Customers executes with a third party in order to minimize interest-rate risk exposure resulting from such transactions. As the interest rate swaps and interest rate caps associated with this program do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and caps and the offsetting third-party market swaps and caps are recognized directly in earnings. At March 31, 2020, Customers had 152 interest rate swaps with an aggregate notional amount of $1.5 billion and four interest rate caps with an aggregated notional amount of $77.6 million related to this program. At December 31, 2019, Customers had 140 interest rate swaps with an aggregate notional amount of $1.4 billion and four interest rate caps with an aggregate notional amount of $78.6 million related to this program.
Customers enters into residential mortgage loan commitments in connection with its consumer mortgage banking activities to fund mortgage loans at specified rates and times in the future. These commitments are short-term in nature and generally expire in 30 to 60 days. The residential mortgage loan commitments that relate to the origination of mortgage loans that will be held for sale are considered derivative instruments under applicable accounting guidance and are reported at fair value, with changes in fair value recorded directly in earnings. At March 31, 2020 and December 31, 2019, Customers had an outstanding notional balance of residential mortgage loan commitments of $12.5 million and $4.5 million, respectively.
Customers has also purchased and sold credit derivatives to either hedge or participate in the performance risk associated with some of its counterparties. These derivatives are not designated as hedging instruments and are reported at fair value, with changes in fair value reported directly in earnings. At March 31, 2020 and December 31, 2019, Customers had outstanding notional balances of credit derivatives of $172.4 million and $167.1 million, respectively.
Fair Value of Derivative Instruments on the Balance Sheet
The following tables present the fair value of Customers' derivative financial instruments as well as their presentation on the balance sheet as of March 31, 2020 and December 31, 2019.
| March 31, 2020 | ||||||||||||||||||||||||||
| Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||||
| (amounts in thousands) | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||||||||||||||||||
| Derivatives designated as cash flow hedges: | ||||||||||||||||||||||||||
| Interest rate swaps | Other assets | $ | 578 | Other liabilities | $ | 48,344 | ||||||||||||||||||||
| Total | $ | 578 | $ | 48,344 | ||||||||||||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||
| Interest rate swaps | Other assets | $ | 65,207 | Other liabilities | $ | 69,259 | ||||||||||||||||||||
| Interest rate caps | Other assets | 18 | Other liabilities | 18 | ||||||||||||||||||||||
| Credit contracts | Other assets | 431 | Other liabilities | 568 | ||||||||||||||||||||||
| Residential mortgage loan commitments | Other assets | 215 | Other liabilities | — | ||||||||||||||||||||||
| Total | $ | 65,871 | $ | 69,845 | ||||||||||||||||||||||
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| December 31, 2019 | ||||||||||||||||||||||||||
| Derivative Assets | Derivative Liabilities | |||||||||||||||||||||||||
| (amounts in thousands) | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||||||||||||||||||
| Derivatives designated as cash flow hedges: | ||||||||||||||||||||||||||
| Interest rate swaps | Other assets | $ | — | Other liabilities | $ | 21,374 | ||||||||||||||||||||
| Total | $ | — | $ | 21,374 | ||||||||||||||||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||||
| Interest rate swaps | Other assets | $ | 23,301 | Other liabilities | $ | 24,797 | ||||||||||||||||||||
| Interest rate caps | Other assets | 9 | Other liabilities | 9 | ||||||||||||||||||||||
| Credit contracts | Other assets | 219 | Other liabilities | (241) | ||||||||||||||||||||||
| Residential mortgage loan commitments | Other assets | 79 | Other liabilities | — | ||||||||||||||||||||||
| Total | $ | 23,608 | $ | 24,565 | ||||||||||||||||||||||
Effect of Derivative Instruments on Net Income
The following tables present amounts included in the consolidated statements of income related to derivatives not designated as hedges for the three months ended March 31, 2020 and 2019.
| Amount of Income (Loss) Recognized in Earnings | |||||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||
| (amounts in thousands) | Income Statement Location | 2020 | 2019 | ||||||||||||||
| Derivatives not designated as hedging instruments: | |||||||||||||||||
| Interest rate swaps | Other non-interest income | $ | (1,015) | $ | (287) | ||||||||||||
| Interest rate caps | Other non-interest income | — | — | ||||||||||||||
| Credit contracts | Other non-interest income | (132) | 102 | ||||||||||||||
| Residential mortgage loan commitments | Mortgage banking income | 137 | 8 | ||||||||||||||
| Total | $ | (1,010) | $ | (177) | |||||||||||||
Effect of Derivative Instruments on Comprehensive Income
The following table presents the effect of Customers' derivative financial instruments on comprehensive income for the three months ended March 31, 2020 and 2019.
Three months ended March 31, | Three months ended March 31, | ||||||||||||||||||||||||||||
Amount of Gain (Loss) Recognized in OCI on Derivatives (1) | Location of Gain (Loss) Reclassified from Accumulated OCI into Income | Amount of Gain (Loss) Reclassified from Accumulated OCI into Income | |||||||||||||||||||||||||||
| (amounts in thousands) | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
| Derivatives in cash flow hedging relationships: | |||||||||||||||||||||||||||||
| Interest rate swaps | $ | (20,346) | $ | (5,135) | Interest expense | $ | (1,478) | $ | 413 | ||||||||||||||||||||
(1) Amounts presented are net of taxes. See NOTE 4 - CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) for the total effect on other comprehensive income (loss) from derivatives designated as cash flow hedges for the periods presented.
Credit-risk-related Contingent Features
By entering into derivative contracts, Customers is exposed to credit risk. The credit risk associated with derivatives executed with customers is the same as that involved in extending the related loans and is subject to the same standard credit policies. To mitigate the credit-risk exposure to major derivative dealer counterparties, Customers only enters into agreements with those counterparties that maintain credit ratings of high quality.
Agreements with major derivative dealer counterparties contain provisions whereby default on any of Customers' indebtedness would be considered a default on its derivative obligations. Customers also has entered into agreements that contain provisions under which the counterparty could require Customers to settle its obligations if Customers fails to maintain its status as a well/adequately capitalized
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institution. As of March 31, 2020, the fair value of derivatives in a net liability position (which includes accrued interest but excludes any adjustment for nonperformance-risk) related to these agreements was $118.5 million. In addition, Customers, which has collateral posting thresholds with certain of these counterparties, had posted $117.6 million of cash as collateral at March 31, 2020. Customers records cash posted as collateral as a reduction in the outstanding balance of cash and cash equivalents and an increase in the balance of other assets.
Disclosures about Offsetting Assets and Liabilities
The following tables present derivative instruments that are subject to enforceable master netting arrangements. Customers' interest rate swaps and interest rate caps with institutional counterparties are subject to master netting arrangements and are included in the table below. Interest rate swaps and interest rate caps with commercial banking customers and residential mortgage loan commitments are not subject to master netting arrangements and are excluded from the table below. Customers has not made a policy election to offset its derivative positions.
| Gross Amounts Recognized on the Consolidated Balance Sheets | Gross Amounts Not Offset in the Consolidated Balance Sheet | ||||||||||||||||||||||
| (amounts in thousands) | Financial Instruments | Cash Collateral Received/(Posted) | Net Amount | ||||||||||||||||||||
| March 31, 2020 | |||||||||||||||||||||||
| Interest rate derivative assets with institutional counterparties | $ | 578 | $ | — | $ | — | $ | 578 | |||||||||||||||
| Interest rate derivative liabilities with institutional counterparties | $ | 117,602 | $ | — | $ | (117,602) | $ | — | |||||||||||||||
| Gross Amounts Recognized on the Consolidated Balance Sheets | Gross Amounts Not Offset in the Consolidated Balance Sheet | ||||||||||||||||||||||
| (amounts in thousands) | Financial Instruments | Cash Collateral Received/(Posted) | Net Amount | ||||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||
| Interest rate derivative assets with institutional counterparties | $ | 432 | $ | — | $ | — | $ | 432 | |||||||||||||||
| Interest rate derivative liabilities with institutional counterparties | $ | 45,727 | $ | — | $ | (45,727) | $ | — | |||||||||||||||
NOTE 12 — BUSINESS SEGMENTS
Customers’ segment financial reporting reflects the manner in which its chief operating decision makers allocate resources and assess performance. Management has determined that Customers’ operations consist of two reportable segments - Customers Bank Business Banking and BankMobile. Each segment generates revenues, manages risk, and offers distinct products and services to targeted customers through different delivery channels. The strategy, marketing and analysis of these segments vary considerably.
The Customers Bank Business Banking segment is delivered predominately to commercial customers in Southeastern Pennsylvania, New York, New Jersey, Massachusetts, Rhode Island, New Hampshire, Washington, D.C., and Illinois through a single-point-of-contact business model and provides liquidity to residential mortgage originators nationwide through commercial loans to mortgage companies. Lending and deposit gathering activities are focused primarily on privately held businesses, high-net-worth families, selected commercial real estate lending, commercial mortgage companies, and equipment finance. Revenues are generated primarily through net interest income (the difference between interest earned on loans and leases, investments, and other interest earning assets and interest paid on deposits and other borrowed funds) and other non-interest income, such as mortgage warehouse transactional fees and BOLI.
The BankMobile segment provides state-of-the-art high-tech digital banking and disbursement services to consumers, students, and the "under banked" nationwide, along with "Banking as a Service" offerings with white label partners. BankMobile is a full-service fintech banking platform that is accessible to customers anywhere and anytime through the customer's smartphone or other web-enabled device. Revenues are currently being generated primarily through interest income on other consumer loans, interchange and card revenue, deposit and wire transfer fees and university fees. The majority of expenses for BankMobile are related to the segment's operation of the
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ongoing business acquired through the Disbursement business acquisition and costs associated with the development of white label products for its partner.
The following tables present the operating results for Customers' reportable business segments for the three months ended March 31, 2020 and 2019. The segment financial results include directly attributable revenues and expenses. Consistent with the presentation of segment results to Customers' chief operating decision makers, overhead costs and preferred stock dividends are assigned to the Customers Bank Business Banking segment. The tax benefit assigned to BankMobile was based on an estimated effective tax rate of 20.35% for 2020 and 23.15% for 2019, respectively.
| Three Months Ended March 31, 2020 | |||||||||||||||||
| (amounts in thousands) | Customers Bank Business Banking | BankMobile | Consolidated | ||||||||||||||
Interest income (1) | $ | 112,717 | $ | 12,626 | $ | 125,343 | |||||||||||
| Interest expense | 43,678 | 344 | 44,022 | ||||||||||||||
| Net interest income | 69,039 | 12,282 | 81,321 | ||||||||||||||
| Provision for credit losses on loans and leases | 27,298 | 4,488 | 31,786 | ||||||||||||||
| Non-interest income | 11,136 | 10,794 | 21,930 | ||||||||||||||
| Non-interest expense | 43,860 | 22,599 | 66,459 | ||||||||||||||
| Income (loss) before income tax expense (benefit) | 9,017 | (4,011) | 5,006 | ||||||||||||||
| Income tax expense (benefit) | 2,722 | (816) | 1,906 | ||||||||||||||
| Net income (loss) | 6,295 | (3,195) | 3,100 | ||||||||||||||
| Preferred stock dividends | 3,615 | — | 3,615 | ||||||||||||||
| Net income (loss) available to common shareholders | $ | 2,680 | $ | (3,195) | $ | (515) | |||||||||||
| As of March 31, 2020 | |||||||||||||||||
| Goodwill and other intangibles | $ | 3,629 | $ | 11,241 | $ | 14,870 | |||||||||||
Total assets (2) | $ | 11,418,000 | $ | 600,799 | $ | 12,018,799 | |||||||||||
| Total deposits | $ | 7,803,878 | $ | 609,765 | $ | 8,413,643 | |||||||||||
Total non-deposit liabilities (2) | $ | 2,611,684 | $ | 28,836 | $ | 2,640,520 | |||||||||||
| Three Months Ended March 31, 2019 | |||||||||||||||||
| (amounts in thousands) | Customers Bank Business Banking | BankMobile | Consolidated | ||||||||||||||
Interest income (1) | $ | 92,871 | $ | 8,204 | $ | 101,075 | |||||||||||
| Interest expense | 41,605 | 166 | 41,771 | ||||||||||||||
| Net interest income | 51,266 | 8,038 | 59,304 | ||||||||||||||
| Provision for credit losses on loans and leases | 2,976 | 1,791 | 4,767 | ||||||||||||||
| Non-interest income | 7,577 | 12,141 | 19,718 | ||||||||||||||
| Non-interest expense | 35,384 | 18,600 | 53,984 | ||||||||||||||
| Income (loss) before income tax expense (benefit) | 20,483 | (212) | 20,271 | ||||||||||||||
| Income tax expense (benefit) | 4,880 | (49) | 4,831 | ||||||||||||||
| Net income (loss) | 15,603 | (163) | 15,440 | ||||||||||||||
| Preferred stock dividends | 3,615 | — | 3,615 | ||||||||||||||
| Net income (loss) available to common shareholders | $ | 11,988 | $ | (163) | $ | 11,825 | |||||||||||
| As of March 31, 2019 | |||||||||||||||||
| Goodwill and other intangibles | $ | 3,629 | $ | 12,544 | $ | 16,173 | |||||||||||
Total assets (2) | $ | 9,916,308 | $ | 227,586 | $ | 10,143,894 | |||||||||||
| Total deposits | $ | 6,798,562 | $ | 626,756 | $ | 7,425,318 | |||||||||||
Total non-deposit liabilities (2) | $ | 1,719,469 | $ | 20,734 | $ | 1,740,203 | |||||||||||
(1) Amounts reported include funds transfer pricing of $1.4 million and $5.6 million, for the three months ended March 31, 2020 and 2019, respectively, credited to BankMobile for the value provided to the Customers Bank Business Banking segment for the use of excess low/no cost deposits.
(2) Amounts reported exclude inter-segment receivables/payables.
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NOTE 13 - NON-INTEREST REVENUES
Customers' revenue from contracts with customers in scope of ASC 606 is recognized within non-interest income.
The following table presents Customers' non-interest revenues affected by ASC 606 by business segment for the three months ended March 31, 2020 and 2019:
| Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | ||||||||||||||||||||||||||||||||||
| (amounts in thousands) | Customers Bank Business Banking | BankMobile | Consolidated | Customers Bank Business Banking | BankMobile | Consolidated | |||||||||||||||||||||||||||||
| Revenue from contracts with customers: | |||||||||||||||||||||||||||||||||||
| Revenue recognized at point in time: | |||||||||||||||||||||||||||||||||||
| Interchange and card revenue | $ | 270 | $ | 6,539 | $ | 6,809 | $ | 180 | $ | 8,626 | $ | 8,806 | |||||||||||||||||||||||
| Deposit fees | 552 | 2,908 | 3,460 | 300 | 1,909 | 2,209 | |||||||||||||||||||||||||||||
| University fees - card and disbursement fees | — | 292 | 292 | — | 355 | 355 | |||||||||||||||||||||||||||||
| Total revenue recognized at point in time | 822 | 9,739 | 10,561 | 480 | 10,890 | 11,370 | |||||||||||||||||||||||||||||
| Revenue recognized over time: | |||||||||||||||||||||||||||||||||||
| University fees - subscription revenue | — | 992 | 992 | — | 979 | 979 | |||||||||||||||||||||||||||||
| Total revenue recognized over time | — | 992 | 992 | — | 979 | 979 | |||||||||||||||||||||||||||||
| Total revenue from contracts with customers | $ | 822 | $ | 10,731 | $ | 11,553 | $ | 480 | $ | 11,869 | $ | 12,349 | |||||||||||||||||||||||
NOTE 14 — LOSS CONTINGENCIES
Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such matters that will have a material effect on the consolidated financial statements that are not currently accrued for. However, in light of the uncertainties inherent in these matters, it is possible that the ultimate resolution may have a material adverse effect on Customers’ results of operations for a particular period, and future changes in circumstances or additional information could result in accruals or resolution in excess of established accruals, which could adversely affect Customers’ results of operations, potentially materially.
Lifestyle Healthcare Group, Inc. Matter
On January 9, 2017, Lifestyle Healthcare Group, Inc., et al (“Plaintiffs”) filed a Complaint captioned Lifestyle Healthcare Group, Inc.; Fred Rappaport; Victoria Rappaport; Lifestyle Management Group, LLC Trading as Lifestyle Real Estate I, LP; Lifestyle Real Estate I GP, LLC; Daniel Muck; Lifestyle Management Group, LLC; Lifestyle Management Group, LLC Trading as Lifestyle I, LP D/B/A Lifestyle Medspa, Plaintiffs v. Customers Bank, Robert White; Saldutti Law, LLC a/k/a Saldutti Law Group; Robert L. Saldutti, Esquire; and Michael Fuoco, Civil Action No. 01206, in the First Judicial District of Pennsylvania, Court of Common Pleas of Philadelphia. In this Complaint, the Plaintiffs generally allege wrongful use of civil proceedings and abuse of process in connection with a case filed and later dismissed in federal court, titled, Customers Bank v. Fred Rappaport, et al., U.S.D.C.E.D. Pa., No. 15-6145. On January 30, 2017, Customers Bank filed Preliminary Objections to the Complaint seeking dismissal of Plaintiff’s claims against Customers Bank and Robert White, named as co-defendants. In response to the Preliminary Objections, Lifestyle filed an Amended Complaint against Customers Bank and Robert White. Customers Bank has filed Preliminary Objections to the Second Amended Complaint seeking dismissal of Plaintiff's claim against Customers Bank and Robert White, named as co-defendants. The Court has dismissed certain counts and determined to allow certain other counts to proceed. Customers Bank intends to vigorously defend itself against these allegations but is currently unable to predict the outcome of this lawsuit and therefore cannot determine the likelihood of loss nor estimate a range of possible loss.
United States Department of Education Matter
In third quarter 2018, Customers received a Final Program Review Determination ("FPRD") letter dated September 5, 2018 from the DOE regarding a focused program review of Higher One's/Customers Bank's administration, as a third party servicer, of the programs
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authorized pursuant to Title IV of the Higher Education Act of 1965. The DOE program review covered the award years beginning in 2013 through the FPRD issuance date, including the time period when Higher One was acting as the third party servicer prior to Customers' acquisition of the Disbursement business on June 15, 2016. The FPRD determined that, with respect to students enrolled at specified partner institutions, Higher One/Customers did not provide convenient fee-free access to ATMs or bank branch offices in such locations as required by the DOE’s cash management regulations. Those regulations, which were in effect during the period covered by the program review and were revised during that period, seek, among other purposes, to ensure that students can make fee-free cash withdrawals. The FPRD determined that students incurred prohibited costs in accessing Title IV credit balance funds, and the FPRD classifies those costs as financial liabilities of Customers. The FPRD also requires Customers to take prospective action to increase ATM access for students at certain of its partner institutions. Customers disagreed with the FPRD and appealed the asserted financial liabilities of $6.5 million, and a request for review has been submitted to trigger an administrative process before the DOE’s Office of Hearing and Appeals.
On March 26, 2020, the DOE and Customers filed a Joint Motion to Dismiss with Prejudice (the "Joint Motion") with the United States Department of Education. The Joint Motion states that the DOE and Customers reached an agreement that resolves the liabilities at issue in the appeal. The Joint Motion was granted on April 27, 2020. As part of the settlement, the liabilities assessed in the FPRD were reduced to $3.0 million (the "settlement amount"). Customers had previously recorded a liability in the amount of $1.0 million during third quarter 2019 and increased its liability by an additional $1.0 million in first quarter 2020. The remaining $1.0 million is expected to be funded from funds in an escrow account set-up at the time of Customers' acquisition of the Disbursement business from Higher One in 2016.
Bureau of the Fiscal Service Notice of Direct Debit (U.S. Treasury Check Reclamation)
On June 21, 2019, Customers received a Notice of Direct Debit (U.S. Treasury Check Reclamation) from the Bureau of the Fiscal Service (“Reclamation Notice”). The Reclamation Notice represented a demand to Customers for the return of funds on a U.S. Treasury check for approximately $5.4 million. Customers filed a written protest pursuant to Code of Federal Regulations, Title 31, Chapter II, Part 240, which resulted in a suspension of the direct debit by the Bureau of the Fiscal Service. On January 31, 2020, Customers received an Abandonment Notice from the Bureau of Fiscal Service instructing Customers to disregard the Notice of Direct Debit as the Bureau of Fiscal Service would not be seeking reclamation of these funds.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Note Regarding Forward-Looking Statements
This report and all attachments hereto, as well as other written or oral communications made from time to time by us, may contain forward-looking information within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to Customers Bancorp, Inc.’s strategies, goals, beliefs, expectations, estimates, intentions, capital raising efforts, financial condition and results of operations, future performance and business. Statements preceded by, followed by, or that include the words ”may,” ”could,” ”should,” ”pro forma,” ”looking forward,” ”would,” ”believe,” ”expect,” ”anticipate,” ”estimate,” ”intend,” ”plan,” or similar expressions generally indicate a forward-looking statement. These forward-looking statements involve risks and uncertainties that are subject to change based on various important factors (some of which, in whole or in part, are beyond Customers Bancorp, Inc.’s control). Numerous competitive, economic, regulatory, legal and technological events and factors, among others, could cause Customers Bancorp, Inc.’s financial performance to differ materially from the goals, plans, objectives, intentions and expectations expressed in such forward-looking statements, including: the adverse impact on the U.S. economy, including the markets in which we operate, of the coronavirus outbreak, and the impact of a slowing U.S. economy and increased unemployment on the performance of our loan and lease portfolio, the market value of our investment securities, the demand for our products and services and the availability of sources of funding; the effects of actions by the federal government, including the Board of Governors of the Federal Reserve System and other government agencies, that affect market interest rates and the money supply; actions that we and our customers take in response to these developments and the effects such actions have on our operations, products, services and customer relationships; the effects of changes in accounting standards or policies, including Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (CECL); and, our ability to divest BankMobile on terms and conditions acceptable to us, in the timeframe we currently intend, and the possible effects on our business and results of operations of a divestiture of BankMobile or if we are unable to divest BankMobile for an extended period of time. Customers Bancorp, Inc. cautions that the foregoing factors are not exclusive, and neither such factors nor any such forward-looking statement takes into account the impact of any future events. All forward-looking statements and information set forth herein are based on management’s current beliefs and assumptions as of the date hereof and speak only as of the date they are made. For a more complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review Customers Bancorp, Inc.’s filings with the Securities and Exchange Commission, including its most recent annual report on Form 10-K for the year ended December 31, 2019, subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K, including any amendments thereto, that update or provide information in addition to the information included in the Form 10-K and Form 10-Q filings, if any. Customers Bancorp, Inc.
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does not undertake to update any forward-looking statement whether written or oral, that may be made from time to time by Customers Bancorp, Inc. or by or on behalf of Customers Bank, except as may be required under applicable law.
Management’s discussion and analysis represents an overview of the financial condition and results of operations, and highlights the significant changes in the financial condition and results of operations, as presented in the accompanying consolidated financial statements for Customers Bancorp, Inc. (the "Bancorp" or "Customers Bancorp"), a financial holding company, and its wholly owned subsidiaries, including Customers Bank (the "Bank"), collectively referred to as "Customers" herein. This information is intended to facilitate your understanding and assessment of significant changes and trends related to Customers' financial condition and results of operations as of and for the three months ended March 31, 2020. 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' 2019 Form 10-K.
Overview
Like most financial institutions, Customers derives the majority of its income from interest it receives on its interest-earning assets, such as loans, leases and investments. Customers' primary source of funds for making these loans, leases and investments are its deposits and borrowings, on which it pays interest. Consequently, one of the key measures of Customers' success is the amount of its net interest income, or the difference between the income on its interest-earning assets and the expense on its interest-bearing liabilities, such as deposits and borrowings. Another key measure is the difference between the interest income generated by interest earning assets and the interest expense on interest-bearing liabilities, relative to the amount of average interest earning assets, which is referred to as net interest margin.
BankMobile, a division of Customers Bank, derives a majority of its revenue from interest income on other consumer loans, interchange and card revenue and deposit fees.
There is credit risk inherent in all loans and leases requiring Customers to maintain an ACL to absorb credit losses on existing loans and leases that may become uncollectible. Customers maintains this allowance by charging a provision for credit losses on loan and lease losses against its operating earnings. Customers has included a detailed discussion of this process, as well as several tables describing its ACL, in NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION and NOTE 7 - LOANS AND LEASES RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES ON LOAN AND LEASE LOSSES to Customers' unaudited quarterly financial statements.
Impact of COVID-19
In March 2020, the outbreak of the novel Coronavirus Disease 2019 ("COVID-19") was recognized as a pandemic by the World Health Organization. The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that Customers serves. Governmental responses to the pandemic have included orders closing businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future.
Customers has taken deliberate actions to ensure that it has the necessary balance sheet strength to serve its clients and communities, including increases in liquidity and reserves supported by a strong capital position. Customers' business and consumer customers are experiencing varying degrees of financial distress, which is expected to increase in coming months. In order to protect the health of its customers and team members, and to comply with applicable government directives, Customers has modified its business practices, including restricting team member travel, directing team members to work from home insofar as is possible and implementing its business continuity plans and protocols to the extent necessary. Customers also has made donations that have resulted in more than $1 million, either directly or indirectly, to communities in its footprint for urgent basic needs and has been re-targeting existing sponsorship and grants to non-profit organizations to support COVID-19 related activities.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act includes the SBA Paycheck Protection Program ("PPP"), a nearly $350 billion program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks. These loans are intended to guarantee eight weeks of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills. On April 16, 2020, the SBA announced that all available funds had
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been exhausted and applications were no longer being accepted. As of that date, Customers had obtained approvals for approximately 1,267 clients totaling approximately $385 million in approved PPP loans. On April 22, 2020, an additional $310 billion of funds for the PPP was signed into law. As of May 2, 2020, Customers has helped thousands of small businesses by originating about $5 billion in SBA PPP loans directly or through fintech partnerships.
In response to the COVID-19 pandemic, Customers has also implemented a short-term loan modification program to provide temporary payment relief to certain of its borrowers who meet the program's qualifications. This program allows for a deferral of payments for a maximum of 90 days at a time. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan. As of March 31, 2020, Customers had granted temporary modifications on approximately 1,800 loans and leases with outstanding balances of $64 million. Through April 24, 2020, Customers had granted approximately 2,000 additional temporary modifications with outstanding balances of $490 million.
Significant uncertainties as to future economic conditions exist, and Customers has taken deliberate actions in response, including higher levels of on-balance sheet liquidity and maintaining strong capital ratios. Additionally, the economic pressures, coupled with the implementation of an expected lifetime loss methodology for determining our provision for credit losses as required by CECL have contributed to an increased provision for credit losses on loans and leases and off-balance sheet credit exposures in first quarter 2020. Customers continues to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act; however, the extent to which the COVID-19 pandemic will impact Customers' operations and financial results during the remainder of 2020 is highly uncertain.
New Accounting Pronouncements
For information about the impact that recently adopted, including CECL, or issued accounting guidance will have on us, please refer to NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION to Customers' interim unaudited financial statements.
Critical Accounting Policies
Customers has adopted various accounting policies that govern the application of U.S. GAAP and that are consistent with general practices within the banking industry in the preparation of its consolidated financial statements. Customers' significant accounting policies are described in “NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION” in Customers' audited financial statements included in its 2019 Form 10-K and updated in this Form 10-Q for the quarterly period ended March 31, 2020 in “NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION."
Certain accounting policies involve significant judgments and assumptions by Customers that have a material impact on the carrying value of certain assets. 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.
The critical accounting policies that are both important to the portrayal of Customers' financial condition and results of operations and require complex, subjective judgments are the accounting policies for the following: ACL and the Valuation of Interest-Only GNMA Securities. These critical accounting policies and material estimates, along with the related disclosures, are reviewed by Customers' Audit Committee of the Board of Directors.
Allowance for Credit Losses
Customers' ACL at March 31, 2020 represents Customers' current estimate of the lifetime credit losses expected from its loan
and lease portfolio and its unfunded lending-related commitments that are not unconditionally cancellable. Management estimates the ACL by projecting a lifetime loss rate conditional on a forecast of economic parameters and other qualitative adjustments, for the loans and leases' expected remaining term.
Customers uses external sources in the creation of its forecasts, including current economic conditions and forecasts for macroeconomic variables over its reasonable and supportable forecast period (e.g., GDP growth rate, unemployment rate, BBB spread, commercial real estate and home price index). After the reasonable and supportable forecast period, which ranges from two to five years, the models revert the forecasted macroeconomic variables to their historical long-term trends, without specific predictions for the economy, over the expected life of the pool, while also incorporating prepayment assumptions into its lifetime loss rates. Internal factors that impact the quarterly allowance estimate include the level of outstanding balances, portfolio performance and assigned risk ratings. Significant loan/
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borrower attributes utilized in the models include property type, initial loan to value, assigned risk ratings, delinquency status, origination date, maturity date, initial FICO scores, and borrower state.
The ACL may be affected materially by a variety of qualitative factors that Customers considers to reflect its current judgement of various events and risks that are not measured in our statistical procedures, including uncertainty related to the economic forecasts used in the modeled credit loss estimates, nature and volume, credit underwriting policy exceptions, peer comparison, industry data, and model and data limitations. The qualitative allowance for economic forecast risk is further informed by multiple alternative scenarios to arrive at a composite scenario supporting the period-end ACL balance. The evaluation process is inherently imprecise and subjective as it requires significant management judgment based on underlying factors that are susceptible to changes, sometimes materially and rapidly. Customers recognizes that this approach may not be suitable in certain economic environments such that additional analysis may be performed at management's discretion. Due in part to its subjectivity, the qualitative evaluation may be materially impacted during periods of economic uncertainty and late breaking events that could lead to revision of reserves to reflect management's best estimate of expected credit losses.
The ACL is established in accordance with our ACL policy. The ACL Committee, which includes the Chief Financial Officer, Chief Risk Officer, and Chief Credit Officer, among others, reviews the adequacy of the ACL each quarter, together with Customers' risk management team. The ACL policy, significant judgements and the related disclosures are reviewed by Customers' Audit Committee of the Board of Directors.
The significant increase in our estimated ACL as of March 31, 2020 as compared to our January 1, 2020 estimate was primarily attributable to the significant economic impact of COVID-19, along with loan growth in Customers' commercial and consumer loan portfolios. The total reserve build for the ACL for the three months ended March 31, 2020 was $31.8 million, with an ending balance of $153.5 million ($149.3 million for loans and leases and $4.2 million for unfunded lending-related commitments) as of March 31, 2020.
To determine the ACL as of March 31, 2020, Customers utilized the Moody's March 27, 2020 Baseline forecast to integrate the effects of COVID-19 in its loss estimates. The Baseline forecast assumed a deep recession in second quarter 2020 with significantly declining GDP and elevated unemployment followed by a strong recovery in the second half of 2020. Customers continues to monitor the impact of the COVID-19 pandemic and related policy measures on the economy and, if the depth of the recession or pace of the expected recovery is worse than expected, further meaningful provisions for credit losses could be required.
There is no certainty that Customers' ACL will be appropriate over time to cover losses in our portfolio as economic and market conditions may ultimately differ from our reasonable and supportable forecast. Additionally, events adversely affecting specific customers, industries, or Customers' markets, such as the current COVID-19 pandemic, could severely impact our current expectations. If the credit quality of Customers' customer base materially deteriorates or the risk profile of a market, industry, or group of customers changes materially, Customers' net income and capital could be materially adversely affected which, in turn could have a material adverse effect on Customers' financial condition and results of operations. The extent to which the current COVID-19 pandemic has and will continue to negatively impact Customers' businesses, financial condition, liquidity and results will depend on future developments, which are highly uncertain and cannot be forecasted with precision at this time.
For more information, see NOTE 7 LOANS AND LEASES RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES of the notes to the Unaudited Condensed Consolidated Financial Statements.
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Results of Operations
The following table sets forth the condensed statements of income (loss) for the three months ended March 31, 2020 and 2019:
| Three Months Ended March 31, | |||||||||||||||||||||||
| (dollars in thousands) | 2020 | 2019 | Change | % Change | |||||||||||||||||||
| Net interest income | $ | 81,321 | $ | 59,304 | $ | 22,017 | 37.1 | % | |||||||||||||||
| Provision for credit losses | 31,786 | 4,767 | 27,019 | 566.8 | % | ||||||||||||||||||
| Total non-interest income | 21,930 | 19,718 | 2,212 | 11.2 | % | ||||||||||||||||||
| Total non-interest expense | 66,459 | 53,984 | 12,475 | 23.1 | % | ||||||||||||||||||
| Income before income tax expense | 5,006 | 20,271 | (15,265) | (75.3) | % | ||||||||||||||||||
| Income tax expense | 1,906 | 4,831 | (2,925) | NM | |||||||||||||||||||
| Net income | 3,100 | 15,440 | (12,340) | (79.9) | % | ||||||||||||||||||
| Preferred stock dividends | 3,615 | 3,615 | — | — | % | ||||||||||||||||||
| Net income (loss) available to common shareholders | $ | (515) | $ | 11,825 | $ | (12,340) | (104.4) | % | |||||||||||||||
Customers reported a net loss available to common shareholders of $0.5 million for the three months ended March 31, 2020, compared to net income available to common shareholders of $11.8 million for the three months ended March 31, 2019. Factors contributing to the change in net income available to common shareholders for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 were as follows:
Net interest income
Net interest income increased $22.0 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 as average interest-earning assets increased by $1.7 billion and NIM expanded by 40 basis points to 2.99% for the three months ended March 31, 2020 from 2.59% for the three months ended March 31, 2019 as the shift in the mix of interest-earning assets drove an 18 basis point increase in the yield on interest-earnings assets for the three months ended March 31, 2020 and funding costs declined as the cost of interest-bearing liabilities decreased by 30 basis points for the three months ended March 31, 2020 due to Federal Reserve interest rate cuts in 2019 and 2020. Customers' total cost of funds, including non-interest bearing deposits was 1.70% and 1.95% for the three months ended March 31, 2020 and 2019, respectively.
Provision for credit losses
The $27.0 million increase in the provision for credit losses for the three months ended March 31, 2020 compared to the three months ended March 31, 2019, reflects Customers' adoption of CECL and the impact of COVID-19. Upon adoption of the CECL standard on January 1, 2020, the allowance for credit losses for loans and leases and off-balance sheet credit exposures increased by $79.8 million and $3.4 million, respectively. The allowance for credit losses on off-balance sheet credit exposures is presented within accrued interest payable and other liabilities in the consolidated balance sheet and the related provision is presented as part of other non-interest expense on the consolidated income statement. The allowance for credit losses on loans and leases held for investment represented 2.0% of total loans and leases receivable at March 31, 2020, compared to 0.6% at March 31, 2019. Net charge-offs for the three months ended March 31, 2020 were $18.7 million, or 79 basis points of average loans and leases on an annualized basis, compared to net charge-offs of $1.1 million, or 5 basis points on an annualized basis for the three months ended March 31, 2019. The increase in net charge-offs for the three months ended March 31, 2020, compared to the three months ended March 31, 2019, was primarily due to a partial charge off of $12.8 million for one commercial real estate collateral dependent loan during the three months ended March 31, 2020, which Customers decided to sell subsequent to March 31, 2020. This commercial real estate loan, which is collateralized by Class A office space in northern New Jersey, differs from Customers' other commercial real estate loans in that it had a single tenant leasing a significant amount of square footage. As a result, Customers does not believe that this loss is indicative of the credit losses inherent in its overall commercial real estate loan portfolio.
Non-interest income
The $2.2 million increase in non-interest income for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily resulted from $4.0 million of gains realized from the sale of $100.5 million of agency-guaranteed residential mortgage-backed securities during the three months ended March 31, 2020 and increases of $1.9 million in commercial lease income, $1.3 million in deposit fees, and $0.6 million in mortgage warehouse transactions fees. These increases were offset in part by decreases
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of $2.2 million in other non-interest income, $2.0 million in interchange and card revenue, and $1.3 million in unrealized losses on investment securities for the three months ended March 31, 2020 compared to the three months ended March 31, 2019.
Non-interest expense
The $12.5 million increase in non-interest expense for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily resulted from increases of $3.3 million in other non-interest expense, $3.1 million in professional services, $2.5 million in salaries and employee benefits, $1.5 million in commercial lease depreciation, $1.1 million in technology, communications, and bank operations, $0.9 million in FDIC assessments, non-income taxes and regulatory fees, and $0.8 million in advertising and promotion. These increases were offset in part by a decrease of $0.9 million in provision for operating losses for the three months ended March 31, 2020 compared to the three months ended March 31, 2019.
Income tax expense
Customers' effective tax rate was 38.1% for the three months ended March 31, 2020 compared to 23.8% for the three months ended March 31, 2019. The increase in the effective tax rate primarily resulted from discrete provision items, which increased income tax expense for the three months ended March 31, 2020.
Preferred stock dividends
Preferred stock dividends were $3.6 million for both the three months ended March 31, 2020 and 2019. There were no changes to the amount of preferred stock outstanding or the dividends paid during the three months ended March 31, 2020 and 2019.
NET INTEREST INCOME
Net interest income (the difference between the interest earned on loans and leases, investments and interest-earning deposits with banks, and interest paid on deposits, borrowed funds and subordinated debt) is the primary source of Customers' earnings. The following tables summarize Customers' net interest income, related interest spread, net interest margin and the dollar amount of changes in interest income and interest expense for the major categories of interest-earning assets and interest-bearing liabilities for the three months ended March 31, 2020 and 2019. 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 March 31, | Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 vs. 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Average balance | Interest income or expense | Average yield or cost | Average balance | Interest income or expense | Average yield or cost | Due to rate | Due to volume | Total | ||||||||||||||||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-earning deposits | $ | 772,249 | $ | 2,860 | 1.49 | % | $ | 85,263 | $ | 530 | 2.52 | % | $ | (303) | $ | 2,633 | $ | 2,330 | |||||||||||||||||||||||||||||||||||
Investment securities (1) | 566,287 | 4,977 | 3.52 | % | 691,823 | 6,241 | 3.61 | % | (153) | (1,111) | (1,264) | ||||||||||||||||||||||||||||||||||||||||||
| Loans and leases: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commercial loans to mortgage companies | 1,841,659 | 17,514 | 3.82 | % | 1,264,478 | 15,753 | 5.05 | % | (4,430) | 6,191 | 1,761 | ||||||||||||||||||||||||||||||||||||||||||
| Multi-family loans | 2,213,858 | 22,367 | 4.06 | % | 3,253,792 | 30,376 | 3.79 | % | 2,112 | (10,121) | (8,009) | ||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial loans and leases (2) | 2,460,811 | 28,738 | 4.70 | % | 1,921,139 | 24,332 | 5.14 | % | (2,193) | 6,599 | 4,406 | ||||||||||||||||||||||||||||||||||||||||||
| Non-owner occupied commercial real estate loans | 1,335,459 | 14,437 | 4.35 | % | 1,169,333 | 12,896 | 4.47 | % | (342) | 1,883 | 1,541 | ||||||||||||||||||||||||||||||||||||||||||
| Residential mortgages | 445,953 | 4,401 | 3.97 | % | 695,748 | 7,136 | 4.16 | % | (309) | (2,426) | (2,735) | ||||||||||||||||||||||||||||||||||||||||||
| Other consumer loans | 1,259,051 | 28,623 | 9.14 | % | 116,295 | 2,623 | 9.15 | % | (3) | 26,003 | 26,000 | ||||||||||||||||||||||||||||||||||||||||||
Total loans and leases (3) | 9,556,791 | 116,080 | 4.89 | % | 8,420,785 | 93,116 | 4.48 | % | 9,281 | 13,683 | 22,964 | ||||||||||||||||||||||||||||||||||||||||||
| Other interest-earning assets | 81,404 | 1,426 | 7.04 | % | 80,542 | 1,188 | 5.98 | % | 224 | 14 | 238 | ||||||||||||||||||||||||||||||||||||||||||
| Total interest-earning assets | 10,976,731 | 125,343 | 4.59 | % | 9,278,413 | 101,075 | 4.41 | % | 4,424 | 19,844 | 24,268 | ||||||||||||||||||||||||||||||||||||||||||
| Non-interest-earning assets | 596,675 | 481,116 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 11,573,406 | $ | 9,759,529 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest checking accounts | $ | 1,294,098 | 4,616 | 1.43 | % | $ | 815,072 | 3,815 | 1.90 | % | (1,103) | 1,904 | 801 | ||||||||||||||||||||||||||||||||||||||||
| Money market deposit accounts | 3,635,554 | 16,214 | 1.79 | % | 3,144,888 | 17,338 | 2.24 | % | (3,709) | 2,585 | (1,124) | ||||||||||||||||||||||||||||||||||||||||||
| Other savings accounts | 1,141,406 | 5,806 | 2.05 | % | 380,911 | 1,900 | 2.02 | % | 28 | 3,878 | 3,906 | ||||||||||||||||||||||||||||||||||||||||||
| Certificates of deposit | 1,524,770 | 7,717 | 2.04 | % | 1,552,153 | 8,172 | 2.14 | % | (330) | (125) | (455) | ||||||||||||||||||||||||||||||||||||||||||
Total interest-bearing deposits (4) | 7,595,828 | 34,353 | 1.82 | % | 5,893,024 | 31,225 | 2.15 | % | (5,230) | 8,358 | 3,128 | ||||||||||||||||||||||||||||||||||||||||||
| Borrowings | 1,229,399 | 9,669 | 3.16 | % | 1,432,685 | 10,546 | 2.98 | % | 637 | (1,514) | (877) | ||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 8,825,227 | 44,022 | 2.01 | % | 7,325,709 | 41,771 | 2.31 | % | (5,812) | 8,063 | 2,251 | ||||||||||||||||||||||||||||||||||||||||||
Non-interest-bearing deposits (4) | 1,573,371 | 1,360,815 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Total deposits and borrowings | 10,398,598 | 1.70 | % | 8,686,524 | 1.95 | % | |||||||||||||||||||||||||||||||||||||||||||||||
| Other non-interest-bearing liabilities | 149,453 | 104,401 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities | 10,548,051 | 8,790,925 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Shareholders' equity | 1,025,355 | 968,604 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Total liabilities and shareholders' equity | $ | 11,573,406 | $ | 9,759,529 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income | 81,321 | 59,304 | $ | 10,236 | $ | 11,781 | $ | 22,017 | |||||||||||||||||||||||||||||||||||||||||||||
Tax-equivalent adjustment (5) | 205 | 181 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest earnings | $ | 81,526 | $ | 59,485 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Interest spread | 2.89 | % | 2.46 | % | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest margin | 2.98 | % | 2.59 | % | |||||||||||||||||||||||||||||||||||||||||||||||||
Net interest margin tax equivalent (5) | 2.99 | % | 2.59 | % | |||||||||||||||||||||||||||||||||||||||||||||||||
(1)For presentation in this table, average balances and the corresponding average yields for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.
(2)Includes owner occupied commercial real estate loans.
(3)Includes non-accrual loans, the effect of which is to reduce the yield earned on loans and leases, and deferred loan fees.
(4)Total costs of deposits (including interest bearing and non-interest-bearing) were 1.51% and 1.75% for the three months ended March 31, 2020 and 2019, respectively.
(5)Non-GAAP tax-equivalent basis, using an estimated marginal tax rate of 26% for both the three months ended March 31, 2020 and 2019, 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.
Net interest income increased $22.0 million for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 as average interest-earning assets increased by $1.7 billion and NIM expanded by 40 basis points to 2.99% for the three months ended March 31, 2020 from 2.59% for the three months ended March 31, 2019, as the shift in the mix of interest-earning assets drove an 18 basis point increase in the yield on interest-earnings assets for the three months ended March 31, 2020. In addition, funding costs declined as the cost of interest-bearing liabilities decreased by 30 basis points for the three months ended March 31, 2020 due to Federal
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Reserve interest rate cuts in 2019 and 2020. Compared to the three months ended March 31, 2019, total loan and lease yields increased 41 basis points to 4.89% primarily as a result of the remix in the loan portfolio in 2019 and 2020. Given the Federal Reserve interest rate cuts in 2019 and 2020 and the associated decreases in market interest rates, the cost of interest-bearing deposits decreased 33 basis points to 1.82%. Borrowing costs increased 18 basis points to 3.16% for the three months ended March 31, 2020 due to the issuance of $25.0 million of senior notes in September 2019 and $74.8 million in subordinated notes in December 2019. Customers' total costs of deposits (including interest-bearing and non-interest-bearing) were 1.51% and 1.75% for the three months ended March 31, 2020 and 2019, respectively, a decrease of 24 basis points.
PROVISION FOR LOAN AND LEASE LOSSES
The provision for credit losses is a charge to earnings to maintain the allowance for credit losses at a level consistent with management’s assessment of expected lifetime losses in the loan and lease portfolio at the balance sheet date. During first quarter 2020, Customers adopted ASU 2016-13. Upon adoption, the allowance for credit losses for loans and leases and lending-related unfunded commitments increased by $79.8 million and $3.4 million, respectively, with the after-tax cumulative effect recorded to retained earnings. Customers recorded a $31.8 million and $0.8 million of provision for credit losses for loans and leases and lending-related commitments, respectively, for first quarter 2020 utilizing the CECL methodology, a significant increase from prior quarters. The increase resulted primarily from the impact of reserve build for the COVID-19 pandemic, an increase in net charge-offs, and portfolio growth.
For more information about the provision and ACL 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 March 31, 2020 and 2019.
| Three Months Ended March 31, | QTD | ||||||||||||||||||||||
| (dollars in thousands) | 2020 | 2019 | Change | % Change | |||||||||||||||||||
| Interchange and card revenue | $ | 6,809 | $ | 8,806 | $ | (1,997) | (22.7) | % | |||||||||||||||
| Deposit fees | 3,460 | 2,209 | 1,251 | 56.6 | % | ||||||||||||||||||
| Commercial lease income | 4,268 | 2,401 | 1,867 | 77.8 | % | ||||||||||||||||||
| Bank-owned life insurance | 1,762 | 1,816 | (54) | (3.0) | % | ||||||||||||||||||
| Mortgage warehouse transactional fees | 1,952 | 1,314 | 638 | 48.6 | % | ||||||||||||||||||
| Gain (loss) on sale of SBA and other loans | 11 | — | 11 | NM | |||||||||||||||||||
| Mortgage banking income | 296 | 167 | 129 | 77.2 | % | ||||||||||||||||||
| Gain (loss) on sale of investment securities | 3,974 | — | 3,974 | NM | |||||||||||||||||||
| Unrealized gain (loss) on investment securities | (1,378) | 2 | (1,380) | NM | |||||||||||||||||||
| Other | 776 | 3,003 | (2,227) | (74.2) | % | ||||||||||||||||||
| Total non-interest income | $ | 21,930 | $ | 19,718 | $ | 2,212 | 11.2 | % | |||||||||||||||
Interchange and card revenue
The $2.0 million decrease in interchange and card revenue for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily resulted from lower activity volumes at the BankMobile segment.
Deposit fees
The $1.3 million increase in deposit fees for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily resulted from higher activity volumes and an increase in service charges on certain deposit accounts relating to a change in the fee structure at the BankMobile segment.
Commercial lease income
Commercial lease income represents income earned on commercial operating leases originated by Customers' Equipment Finance Group in which Customers is the lessor. The $1.9 million increase in commercial lease income for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily resulted from the continued growth of Customers' equipment finance business.
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Mortgage warehouse transactional fees
The $0.6 million increase in mortgage warehouse transactional fees for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily resulted from an increase in refinancing activity driven by the decline in market interest rates during the three months ended March 31, 2020 compared to the three months ended March 31, 2019.
Gain (loss) on sale of investment securities
The $4.0 million increase in gain (loss) on sale of investment securities for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 reflects $4.0 million of gains realized from the sale of $100.5 million of agency-guaranteed residential mortgage-backed securities during the three months ended March 31, 2020.
Unrealized gain (loss) on investment securities
The $1.4 million decrease in unrealized gain (loss) on investment securities for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 reflects a decline in the fair value of equity securities issued by a foreign entity for the three months ended March 31, 2020.
Other non-interest income
The $2.2 million decrease in other non-interest income for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily resulted from a negative mark-to-market derivative credit valuation adjustment of $2.2 million for the three months ended March 31, 2020 due to changes in market interest rates.
NON-INTEREST EXPENSE
The table below presents the components of non-interest expense for the three months ended March 31, 2020 and 2019.
| Three Months Ended March 31, | QTD | ||||||||||||||||||||||
| (dollars in thousands) | 2020 | 2019 | Change | % Change | |||||||||||||||||||
| Salaries and employee benefits | $ | 28,310 | $ | 25,823 | $ | 2,487 | 9.6 | % | |||||||||||||||
| Technology, communication and bank operations | 13,050 | 11,953 | 1,097 | 9.2 | % | ||||||||||||||||||
| Professional services | 7,670 | 4,573 | 3,097 | 67.7 | % | ||||||||||||||||||
| Occupancy | 3,032 | 2,903 | 129 | 4.4 | % | ||||||||||||||||||
| Commercial lease depreciation | 3,427 | 1,923 | 1,504 | 78.2 | % | ||||||||||||||||||
| FDIC assessments, non-income taxes and regulatory fees | 2,867 | 1,988 | 879 | 30.7 | % | ||||||||||||||||||
| Provision for operating losses | 912 | 1,779 | (867) | (48.7) | % | ||||||||||||||||||
| Advertising and promotion | 1,641 | 809 | 832 | 102.8 | % | ||||||||||||||||||
| Merger and acquisition related expenses | 50 | — | 50 | NM | |||||||||||||||||||
| Loan workout | 366 | 320 | 46 | 14.4 | % | ||||||||||||||||||
| Other real estate owned | 8 | 57 | (49) | (86.0) | % | ||||||||||||||||||
| Other | 5,126 | 1,856 | 3,270 | 176.2 | % | ||||||||||||||||||
| Total non-interest expense | $ | 66,459 | $ | 53,984 | $ | 12,475 | 23.1 | % | |||||||||||||||
Salaries and employee benefits
The $2.5 million increase in salaries and employee benefits for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily resulted from an increase in average full-time equivalent team members and annual merit increases.
Technology, communication, and bank operations
The $1.1 million increase in technology, communication, and bank operations expense for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily resulted from the continued investment in Customers' digital transformation initiatives.
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Professional services
The $3.1 million increase in professional services for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily resulted from consulting services associated with supporting our white label partnership and digital transformation efforts.
Commercial lease depreciation
The $1.5 million increase in commercial lease depreciation for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily resulted from the continued growth of the operating lease arrangements originated by Customers' Equipment Finance Group in which Customers is the lessor.
FDIC assessments, non-income taxes, and regulatory fees
The $0.9 million increase in FDIC assessments, non-income taxes, and regulatory fees for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily resulted from higher fees resulting from management's decision to grow the balance sheet beyond $10 billion in assets, as higher premiums become applicable.
Provision for operating losses
The provision for operating losses primarily consists of losses resulting from fraud or theft-based transactions that have generally been disputed by deposit account holders. The $0.9 million decrease in provision for operating losses for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily resulted from initiatives implemented by management to reduce fraud and theft-based losses during the three months ended March 30, 2020.
Advertising and promotion expenses
The $0.8 million increase in advertising and promotion expenses for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily resulted from the promotion of Customers' digital banking products and service offerings available through BankMobile and its White Label partnership.
Other non-interest expense
The $3.3 million increase in other non-interest expense for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 primarily resulted from a legal contingency accrual of $1.0 million related to the settlement of the previously disclosed DOE matter, certain product development costs related to our white label partnership, and an increase in the provision for credit losses on off-balance sheet credit exposures of $0.8 million coinciding with the adoption of CECL and the impact of COVID-19.
INCOME TAXES
The table below presents income tax expense and the effective tax rate for the three months ended March 31, 2020 and 2019.
| Three Months Ended March 31, | QTD | ||||||||||||||||||||||
| (dollars in thousands) | 2020 | 2019 | Change | % Change | |||||||||||||||||||
| Income before income tax expense | $ | 5,006 | $ | 20,271 | $ | (15,265) | (75.3) | % | |||||||||||||||
| Income tax expense | $ | 1,906 | $ | 4,831 | $ | (2,925) | (60.5) | % | |||||||||||||||
| Effective tax rate | 38.07 | % | 23.83 | % | |||||||||||||||||||
The $2.9 million decrease in income tax expense for the three months ended March 31, 2020, when compared to the same period in the prior year, primarily resulted from a decline in pre-tax income, partially offset by discrete provision items which increased income tax expense for the three months ended March 31, 2020. The increase in the effective tax for the three months ended March 31, 2020, when compared to the same period in the prior year, primary resulted from the discrete provision items, which increased income tax expense for the three months ended March 31, 2020.
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PREFERRED STOCK DIVIDENDS
Preferred stock dividends were $3.6 million for both the three months ended March 31, 2020 and 2019. There were no changes to the amount of preferred stock outstanding or the dividend rates from first quarter 2019 to first quarter 2020.
Financial Condition
General
Customers' total assets were $12.0 billion at March 31, 2020. This represented a $0.5 billion increase from total assets of $11.5 billion at December 31, 2019. The increase in total assets was primarily driven by increases of $272.3 million in loans receivable, mortgage warehouse, at fair value, $154.5 million in other assets, and $116.8 million in investment securities, partially offset by an increase in allowance for loan and lease losses of $92.9 million.
Total liabilities were $11.1 billion at March 31, 2020. This represented a $0.6 billion increase from $10.5 billion at December 31, 2019. The increase in total liabilities primarily resulted from increases in FHLB advances of $410.0 million, FRB advances of $175.0 million, federal funds purchased of $167.0 million, and accrued interest payable and other liabilities of $69.4 million, partially offset in part by a reduction in total deposits of $235.3 million.
The following table presents certain key condensed balance sheet data as of March 31, 2020 and December 31, 2019:
| (dollars in thousands) | March 31, 2020 | December 31, 2019 | Change | % Change | |||||||||||||||||||
| Cash and cash equivalents | $ | 256,232 | $ | 212,505 | $ | 43,727 | 20.6 | % | |||||||||||||||
| Investment securities, at fair value | 712,657 | 595,876 | 116,781 | 19.6 | % | ||||||||||||||||||
| Loans held for sale | 450,157 | 486,328 | (36,171) | (7.4) | % | ||||||||||||||||||
| Loans receivable, mortgage warehouse, at fair value | 2,518,012 | 2,245,758 | 272,254 | 12.1 | % | ||||||||||||||||||
| Loans and leases receivable | 7,353,262 | 7,318,988 | 34,274 | 0.5 | % | ||||||||||||||||||
| Allowance for credit losses on loan and lease losses | (149,283) | (56,379) | (92,904) | 164.8 | % | ||||||||||||||||||
| Total assets | 12,018,799 | 11,520,717 | 498,082 | 4.3 | % | ||||||||||||||||||
| Total deposits | 8,413,643 | 8,648,936 | (235,293) | (2.7) | % | ||||||||||||||||||
| FRB advances | 175,000 | — | 175,000 | NM | |||||||||||||||||||
| Federal funds purchased | 705,000 | 538,000 | 167,000 | 31.0 | % | ||||||||||||||||||
| FHLB advances | 1,260,000 | 850,000 | 410,000 | 48.2 | % | ||||||||||||||||||
| Other borrowings | 123,732 | 123,630 | 102 | 0.1 | % | ||||||||||||||||||
| Subordinated debt | 181,185 | 181,115 | 70 | — | % | ||||||||||||||||||
| Total liabilities | 11,054,163 | 10,467,922 | 586,241 | 5.6 | % | ||||||||||||||||||
| Total shareholders’ equity | 964,636 | 1,052,795 | (88,159) | (8.4) | % | ||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 12,018,799 | $ | 11,520,717 | $ | 498,082 | 4.3 | % | |||||||||||||||
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. Cash and due from banks were $18.8 million and $33.1 million at March 31, 2020 and December 31, 2019, respectively. Cash and due from banks balances vary from day to day, primarily due to variations in customers’ deposit activities with the Bank.
Interest-earning deposits consist of cash deposited at other banks, primarily the FRB. Interest-earning deposits were $237.4 million and $179.4 million at March 31, 2020 and December 31, 2019, respectively. The balance of interest-earning deposits varies from day to day, depending on several factors, such as fluctuations in customers' deposits with Customers, payment of checks drawn on customers' accounts and strategic investment decisions made to maximize Customers' net interest income, while effectively managing interest-rate risk and liquidity.
Investment Securities
The investment securities portfolio is an important source of interest income and liquidity. It consists primarily of mortgage-backed
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securities (guaranteed by an agency of the United States government), state and political subdivision debt securities, corporate securities, interest-only GNMA securities, and marketable equity securities. In addition to generating revenue, the investment portfolio is maintained to manage interest-rate risk, provide liquidity, serve as 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 March 31, 2020, investment securities totaled $712.7 million compared to $595.9 million at December 31, 2019. The increase in investment securities primarily resulted from the purchases of agency-guaranteed mortgage-backed securities, state and political subdivision debt securities, and corporate securities totaling $256.1 million, partially offset by the sale of $100.5 million of agency-guaranteed mortgage-backed securities, maturities, calls and principal repayments totaling $24.1 million, and unrealized losses of $13.1 million for three month ended March 31, 2020.
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 (loss) and reported as a separate component of shareholders’ equity, net of the related tax effect. Changes in the fair value of marketable equity securities and securities reported at fair value based on a fair value option election are recorded in non-interest income in the period in which they occur.
LOANS AND LEASES
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; 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 and lease portfolio and its specialty mortgage lending business. Customers also focuses its lending efforts on local-market mortgage and home equity lending and the origination and purchase of unsecured consumer loans (other consumer loans), including personal, student loan refinancing, and home improvement loans through arrangements with fintech companies and other market place lenders for both the Customers Bank Business Banking and BankMobile segments nationwide.
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.
As of March 31, 2020, Customers had $8.6 billion in commercial loans outstanding, totaling approximately 83.1% of its total loan and lease portfolio, which includes loans held for sale and loans receivable, mortgage warehouse, at fair value, compared to commercial loans outstanding of $8.4 billion, comprising approximately 83.8% of its total loan and lease portfolio, at December 31, 2019.
The small and middle market business banking platform originates loans, including SBA 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.
Customers' lending to mortgage banking businesses 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, generate fee income and attract escrow deposits. The underlying residential loans are taken as collateral for Customers' commercial loans to the mortgage companies. As of March 31, 2020 and December 31, 2019, commercial loans to mortgage banking businesses totaled $2.5 billion and $2.2 billion, respectively, and are reported as loans receivable, mortgage warehouse, at fair value on the consolidated balance sheet.
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Customers intends to continue to deemphasize its lower-yielding multi-family loan portfolio, and invest in high credit quality higher-yielding commercial and industrial loans with the multi-family run-off. Customers' multi-family lending group continues to focus on retaining 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 March 31, 2020, Customers had multi-family loans of $2.1 billion outstanding, comprising approximately 20.0% of the total loan and lease portfolio, compared to $2.4 billion, or approximately 23.8% of the total loan and lease portfolio, at December 31, 2019.
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 March 31, 2020 and December 31, 2019, Customers had $263.9 million and $257.9 million, respectively, of equipment finance loans outstanding. As of March 31, 2020 and December 31, 2019, Customers had $96.6 million and $89.2 million of equipment finance leases, respectively. As of March 31, 2020 and December 31, 2019, Customers had $96.6 million and $93.6 million, respectively, of operating leases entered into under this program, net of accumulated depreciation of $17.7 million and $14.3 million, respectively.
Consumer Lending
Customers provides unsecured consumer loans, residential mortgage, and home equity loans to customers. The other consumer loan portfolio consists largely of originated and purchased personal, student loan refinancing and home improvement loans. None of the loans are considered sub-prime at the time of origination. Customers considers sub-prime borrowers to be those with FICO scores below 660. Customers has been selective in the consumer loans it has been purchasing. Home equity lending is offered to solidify customer relationships and grow relationship revenues in the long term. This lending is important in Customers' efforts to grow total relationship revenues for its consumer households. As of March 31, 2020, Customers had $1.7 billion in consumer loans outstanding, or 16.9% of the total loan and lease portfolio, compared to $1.6 billion, or 16.2% of the total loan and lease portfolio, as of December 31, 2019. Customers purchased $191.8 million and $66.1 million of other consumer loans through arrangements with third-party fintech companies during the three months ended March 31, 2020 and March 31, 2019, respectively. Customers purchased $0.5 million and $66.4 million of residential mortgage loans from third-party financial institutions during the three months ended March 31, 2020 and 2019, respectively. Customers intends to temper its growth in consumer loans for the remainder of 2020.
Loans Held for Sale
The composition of loans held for sale as of March 31, 2020 and December 31, 2019 was as follows:
| (amounts in thousands) | March 31, 2020 | December 31, 2019 | |||||||||
| Commercial loans: | |||||||||||
| Multi-family loans at lower of cost or fair value | $ | 447,444 | $ | 482,873 | |||||||
| Total commercial loans held for sale | 447,444 | 482,873 | |||||||||
| Consumer loans: | |||||||||||
| Home equity conversion mortgages, at lower of cost or fair value | 1,325 | 1,325 | |||||||||
| Residential mortgage loans, at fair value | 1,388 | 2,130 | |||||||||
| Total consumer loans held for sale | 2,713 | 3,455 | |||||||||
| Loans held for sale | $ | 450,157 | $ | 486,328 | |||||||
At March 31, 2020, loans held for sale totaled $450.2 million, or 4.36% of the total loan and lease portfolio, and $486.3 million, or 4.84% of the total loan and lease portfolio, at December 31, 2019. 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 ACL is not recorded on loans that are classified as held for sale.
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Total Loans and Leases Receivable
The composition of total loans and leases receivable (excluding loans held for sale) was as follows:
| (amounts in thousands) | March 31, 2020 | December 31, 2019 | |||||||||
| Loans and leases receivable, mortgage warehouse, at fair value | $ | 2,518,012 | $ | 2,245,758 | |||||||
| Loans receivable: | |||||||||||
| Commercial: | |||||||||||
| Multi-family | 1,621,633 | 1,907,331 | |||||||||
Commercial and industrial (1) | 2,072,952 | 1,891,152 | |||||||||
| Commercial real estate owner occupied | 543,945 | 551,948 | |||||||||
| Commercial real estate non-owner occupied | 1,252,826 | 1,222,772 | |||||||||
| Construction | 115,448 | 117,617 | |||||||||
| Total commercial loans and leases receivable | 5,606,804 | 5,690,820 | |||||||||
| Consumer: | |||||||||||
| Residential real estate | 362,047 | 382,634 | |||||||||
| Manufactured housing | 69,240 | 71,359 | |||||||||
| Other consumer | 1,315,171 | 1,174,175 | |||||||||
| Total consumer loans receivable | 1,746,458 | 1,628,168 | |||||||||
Loans and leases receivable (2) | 7,353,262 | 7,318,988 | |||||||||
| Allowance for credit losses | (149,283) | (56,379) | |||||||||
| Total loans and leases receivable, net of allowance for credit losses | $ | 9,721,991 | $ | 9,508,367 | |||||||
(1)Includes direct finance equipment leases of $96.6 million and $89.2 million at March 31, 2020 and December 31, 2019, respectively.
(2)Includes deferred (fees) costs and unamortized (discounts) premiums, net of $3.2 million and $2.1 million at March 31, 2020 and December 31, 2019, respectively.
Loans receivable, mortgage warehouse, at fair value
The mortgage warehouse product line primarily provides financing to mortgage companies nationwide from the time of origination of the underlying mortgage loans until the mortgage loans are sold into the secondary market. As a mortgage warehouse lender, Customers provides a form of financing to mortgage bankers by purchasing for resale the underlying residential mortgages on a short-term basis under a master repurchase agreement. These loans are reported as loans receivable, mortgage warehouse, at fair value on the consolidated balance sheets. Because these loans are reported at their fair value, they do not have an ACL and are therefore excluded from ACL-related disclosures. At March 31, 2020, all of Customers' commercial mortgage warehouse loans were current in terms of payment.
Customers is subject to the risks associated with such lending, including, but not limited to, the risks of fraud, bankruptcy and default of the mortgage banker or of the underlying residential borrower, any of which could result in credit losses. Customers' mortgage warehouse lending team members monitor these mortgage originators by obtaining financial and other relevant information to reduce these risks during the lending period. Loans receivable, mortgage warehouse, at fair value totaled $2.5 billion and $2.2 billion at March 31, 2020 and December 31, 2019, respectively.
Credit Risk
Customers manages credit risk by maintaining diversification in its loan and lease portfolio, establishing and enforcing prudent underwriting standards and collection efforts, and continuous and periodic loan and lease classification reviews. Management also considers the effect of credit risk on financial performance by reviewing quarterly and maintaining an adequate ACL. Credit losses are charged-off when they are identified, and provisions are added when it is estimated that a loss has occurred, to the ACL at least quarterly. The ACL is estimated at least quarterly.
The provision for credit losses on loans and leases was $31.8 million and $4.8 million for the three months ended March 31, 2020 and 2019, respectively. The ACL maintained for loans and leases receivable (excluding loans held for sale and loans receivable, mortgage warehouse, at fair value) was $149.3 million, or 2.03% of loans and leases receivable, at March 31, 2020 and $56.4 million, or 0.77% of loans and leases receivable, at December 31, 2019. Net charge-offs were $18.7 million for the three months ended March 31, 2020, an increase of $17.7 million compared to the same period in 2019. The increase in the ACL resulted primarily from the impact of reserve build for the COVID-19 pandemic, an increase in net charge-offs, mostly attributable to the commercial real estate non-owner occupied and other consumer portfolios, and portfolio growth. Commercial real estate non-owner occupied charge-offs were attributable to the
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partial charge-off of one collateral dependent loan, which is not indicative of the overall commercial real estate portfolio. Other consumer charge-offs were attributable to originated and purchased unsecured consumer loans through arrangements with fintech companies and other market place lenders.
The table below presents changes in the Bank’s ACL for the periods indicated.
Analysis of the Allowance for Credit Losses on Loan and Lease Losses
| Three Months Ended March 31, | ||||||||||||||
| (amounts in thousands) | 2020 | 2019 | ||||||||||||
| Balance at beginning of the period | $ | 56,379 | $ | 39,972 | ||||||||||
| Cumulative effect of change in accounting principle | 79,829 | — | ||||||||||||
Loan and lease charge-offs (1) | ||||||||||||||
| Multi-family | — | 541 | ||||||||||||
| Commercial and industrial | 97 | — | ||||||||||||
| Commercial real estate owner occupied | — | 8 | ||||||||||||
| Commercial real estate non-owner occupied | 12,797 | — | ||||||||||||
| Residential real estate | — | 40 | ||||||||||||
| Other consumer | 6,246 | 755 | ||||||||||||
| Total Charge-offs | 19,140 | 1,344 | ||||||||||||
Loan and lease recoveries (1) | ||||||||||||||
| Commercial and industrial | 54 | 119 | ||||||||||||
| Commercial real estate owner occupied | 3 | 128 | ||||||||||||
| Construction | 3 | 6 | ||||||||||||
| Residential real estate | 29 | 7 | ||||||||||||
| Other consumer | 340 | 24 | ||||||||||||
| Total Recoveries | 429 | 284 | ||||||||||||
| Total net charge-offs | 18,711 | 1,060 | ||||||||||||
| Provision for loan and lease losses | 31,786 | 4,767 | ||||||||||||
| Balance at the end of the period | $ | 149,283 | $ | 43,679 | ||||||||||
(1)Charge-offs and recoveries on PCD loans that are accounted for in pools are recognized on a net basis when the pool matures.
The ACL is based on a quarterly evaluation of the loan and lease portfolio and is maintained at a level that management considers adequate to absorb expected lifetime credit losses as of the balance sheet date. All commercial loans, with the exception of commercial mortgage warehouse loans, which are reported at fair value, are assigned internal credit-risk ratings, based upon an assessment of the borrower, the structure of the transaction and the available collateral and/or guarantees. All loans and leases are monitored regularly by the responsible officer, and the risk ratings are adjusted when considered appropriate. The risk assessment allows management to identify problem loans and leases timely. Management considers a variety of factors and recognizes the inherent risk of loss that always exists in the lending process. Management uses a disciplined methodology to estimate an appropriate level of ACL. Refer to Critical Accounting Policies herein and NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION to Customers' interim unaudited financial statements for Customers' adoption of CECL, also, refer to NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION to Customers' audited financial statements in its 2019 Form 10-K for further discussion on management's prior incurred loss methodology for estimating the ALLL.
Approximately 75% 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”), primarily in the form of a first lien position. 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
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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 326, individually assessed loans, consisting primarily of non-accrual and restructured loans, are considered in the methodology for determining the ACL. Individually assessed loans are generally evaluated based on the expected future cash flows or the fair value of the underlying collateral (less estimated costs to sell) if principal repayment is expected to come from the operation or sale of such collateral.
Asset Quality
Customers segments the loan and lease receivables by loan product or other characteristic generally defining a shared characteristic with other loans in the same group. Charge-offs from originated loans and leases are absorbed by the ACL. Charge-offs from acquired loans are absorbed by the ACL. The schedule that follows includes both loans held for sale and loans held for investment.
Asset Quality at March 31, 2020
| (dollars in thousands) | Total Loans and Leases | Current | 30-89 Days Past Due | 90 Days or More Past Due and Accruing | Non-accrual/NPL (a) | OREO (b) | NPA (a)+(b) | NPL to Loan and Lease Type (%) | NPA to Loans and Leases + OREO (%) | ||||||||||||||||||||||||||||||||||||||||||||
| Loan and Lease Type | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Multi-family | $ | 1,623,155 | $ | 1,616,757 | $ | 2,378 | $ | — | $ | 4,020 | $ | — | $ | 4,020 | 0.25 | % | 0.25 | % | |||||||||||||||||||||||||||||||||||
Commercial & industrial (1) | 2,071,913 | 2,059,964 | 1,956 | — | 9,993 | — | 9,993 | 0.48 | % | 0.48 | % | ||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate owner occupied | 543,961 | 535,869 | 5,358 | 323 | 2,411 | — | 2,411 | 0.44 | % | 0.44 | % | ||||||||||||||||||||||||||||||||||||||||||
| Commercial real estate non-owner occupied | 1,253,608 | 1,201,328 | 30,801 | — | 21,479 | — | 21,479 | 1.71 | % | 1.71 | % | ||||||||||||||||||||||||||||||||||||||||||
| Construction | 116,068 | 116,068 | — | — | — | — | — | — | % | — | % | ||||||||||||||||||||||||||||||||||||||||||
| Total commercial loans and leases receivable | 5,608,705 | 5,529,986 | 40,493 | 323 | 37,903 | — | 37,903 | 0.68 | % | 0.68 | % | ||||||||||||||||||||||||||||||||||||||||||
| Residential | 355,306 | 343,849 | 5,286 | 117 | 6,054 | 35 | 6,089 | 1.70 | % | 1.71 | % | ||||||||||||||||||||||||||||||||||||||||||
| Manufactured housing | 68,314 | 60,124 | 3,100 | 2,532 | 2,558 | 96 | 2,654 | 3.74 | % | 3.88 | % | ||||||||||||||||||||||||||||||||||||||||||
| Other consumer | 1,317,737 | 1,304,972 | 10,227 | 19 | 2,519 | — | 2,519 | 0.19 | % | 0.19 | % | ||||||||||||||||||||||||||||||||||||||||||
| Total consumer loans receivable | 1,741,357 | 1,708,945 | 18,613 | 2,668 | 11,131 | 131 | 11,262 | 0.64 | % | 0.65 | % | ||||||||||||||||||||||||||||||||||||||||||
| Deferred (fees) costs and unamortized (discounts) premiums, net | 3,199 | 3,199 | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Loans and Leases Receivable | 7,353,261 | 7,242,130 | 59,106 | 2,991 | 49,034 | 131 | 49,165 | 0.67 | % | 0.67 | % | ||||||||||||||||||||||||||||||||||||||||||
| Loans Receivable, Mortgage Warehouse, at Fair Value | 2,518,012 | 2,518,012 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Total Loans Held for Sale | 450,157 | 448,832 | — | — | 1,325 | — | 1,325 | 0.29 | % | 0.29 | % | ||||||||||||||||||||||||||||||||||||||||||
| Total Portfolio | $ | 10,321,430 | $ | 10,208,974 | $ | 59,106 | $ | 2,991 | $ | 50,359 | $ | 131 | $ | 50,490 | 0.49 | % | 0.49 | % | |||||||||||||||||||||||||||||||||||
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Asset Quality at March 31, 2020 (continued)
| (dollars in thousands) | Total Loans and Leases | Non-accrual / NPL | ACL | Reserves to Loans and Leases (%) | Reserves to NPLs (%) | ||||||||||||||||||||||||
| Loan and Lease Type | |||||||||||||||||||||||||||||
| Multi-family | $ | 1,623,155 | $ | 4,020 | $ | 8,750 | 0.54 | % | 217.66 | % | |||||||||||||||||||
Commercial & industrial (1) | 2,071,913 | 9,993 | 18,806 | 0.91 | % | 188.19 | % | ||||||||||||||||||||||
| Commercial real estate owner occupied | 543,961 | 2,411 | 8,527 | 1.57 | % | 353.67 | % | ||||||||||||||||||||||
| Commercial real estate non-owner occupied | 1,253,608 | 21,479 | 18,530 | 1.48 | % | 86.27 | % | ||||||||||||||||||||||
| Construction | 116,068 | — | 1,934 | 1.67 | % | — | % | ||||||||||||||||||||||
| Total commercial loans and leases receivable | 5,608,705 | 37,903 | 56,547 | 1.01 | % | 149.19 | % | ||||||||||||||||||||||
| Residential | 355,306 | 6,054 | 4,180 | 1.18 | % | 69.05 | % | ||||||||||||||||||||||
| Manufactured housing | 68,314 | 2,558 | 4,987 | 7.30 | % | 194.96 | % | ||||||||||||||||||||||
| Other consumer | 1,317,737 | 2,519 | 83,569 | 6.34 | % | 3317.55 | % | ||||||||||||||||||||||
| Total consumer loans receivable | 1,741,357 | 11,131 | 92,736 | 5.33 | % | 833.13 | % | ||||||||||||||||||||||
| Deferred (fees) costs and unamortized (discounts) premiums, net | 3,199 | — | — | ||||||||||||||||||||||||||
| Loans and Leases Receivable | 7,353,261 | 49,034 | 149,283 | 2.03 | % | 304.45 | % | ||||||||||||||||||||||
| Loans Receivable, Mortgage Warehouse, at Fair Value | 2,518,012 | — | — | ||||||||||||||||||||||||||
| Total Loans Held for Sale | 450,157 | 1,325 | — | — | % | — | % | ||||||||||||||||||||||
| Total Portfolio | $ | 10,321,430 | $ | 50,359 | $ | 149,283 | 1.45 | % | 296.44 | % | |||||||||||||||||||
The total loan and lease portfolio was $10.3 billion at March 31, 2020 compared to $10.1 billion at December 31, 2019 and $50.4 million, or 0.49% of loans and leases, were non-performing at March 31, 2020 compared to $21.3 million, or 0.21% of loans and leases, at December 31, 2019. The loan and lease portfolio was supported by an ACL of $149.3 million (296.44% of NPLs and 1.45% of total loans and leases) and $56.5 million (264.67% of NPLs and 0.56% of total loans and leases), at March 31, 2020 and December 31, 2019, respectively.
DEPOSITS
Customers offers a variety of deposit accounts, including checking, savings, MMDA, and time deposits. Deposits are primarily obtained from Customers' geographic service area and nationwide through branchless digital banking, our white label relationship, deposit brokers, listing services and other relationships.
The components of deposits were as follows at the dates indicated:
| (dollars in thousands) | March 31, 2020 | December 31, 2019 | Change | % Change | |||||||||||||||||||
| Demand, non-interest bearing | $ | 1,435,151 | $ | 1,343,391 | $ | 91,760 | 6.8 | % | |||||||||||||||
| Demand, interest bearing | 1,577,034 | 1,235,292 | 341,742 | 27.7 | % | ||||||||||||||||||
| Savings, including MMDA | 4,002,110 | 4,401,719 | (399,609) | (9.1) | % | ||||||||||||||||||
| Non-time deposits | 7,014,295 | 6,980,402 | 33,893 | 0.5 | % | ||||||||||||||||||
| Time, $100,000 and over | 444,253 | 402,161 | 42,092 | 10.5 | % | ||||||||||||||||||
| Time, other | 955,095 | 1,266,373 | (311,278) | (24.6) | % | ||||||||||||||||||
| Time deposits | 1,399,348 | 1,668,534 | $ | (269,186) | (16.1) | % | |||||||||||||||||
| Total deposits | $ | 8,413,643 | $ | 8,648,936 | $ | (235,293) | (2.7) | % | |||||||||||||||
Total deposits were $8.4 billion at March 31, 2020, a decrease of $0.2 billion, or 2.7%, from $8.6 billion at December 31, 2019. Non-time deposits increased by $33.9 million, or 0.5%, to $7.0 billion at March 31, 2020, from $7.0 billion at December 31, 2019. This increase primarily resulted from Customers' initiative to improve its net interest margin by expanding its sources of lower-cost funding. These efforts led to increases in non-interest bearing demand deposits of $0.1 billion, and interest bearing demand deposits of $0.3 billion. Savings, including MMDA decreased $0.4 billion, or 9.1%, to $4.0 billion at March 31, 2020, from $4.4 billion at December 31, 2019. Time deposits decreased $0.3 billion, or 16.1%, to $1.4 billion at March 31, 2020, from $1.7 billion at December 31, 2019.
At March 31, 2020, the Bank had $1.0 billion in state and municipal deposits to which it had pledged $1.0 billion of available borrowing capacity through the FHLB to the depositor through a letter of credit arrangement.
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BORROWINGS
Borrowed funds from various sources are generally used to supplement deposit growth and meet other operating needs. Customers' borrowings include short-term and long-term advances from the FHLB, FRB, federal funds purchased, senior unsecured notes and subordinated debt. Subordinated debt is also considered as Tier 2 capital for certain regulatory calculations. As of March 31, 2020 and December 31, 2019, total outstanding borrowings were $2.4 billion and $1.7 billion, respectively, which represented an increase of $0.8 billion, or 44.4%.
SHAREHOLDERS' EQUITY
The components of shareholder's equity were as follows at the dates indicated:
| (dollars in thousands) | March 31, 2020 | December 31, 2019 | Change | % Change | |||||||||||||||||||
| Preferred stock | $ | 217,471 | $ | 217,471 | $ | — | — | % | |||||||||||||||
| Common stock | 32,751 | 32,617 | 134 | 0.4 | % | ||||||||||||||||||
| Additional paid in capital | 446,840 | 444,218 | 2,622 | 0.6 | % | ||||||||||||||||||
| Retained earnings | 319,529 | 381,519 | (61,990) | (16.2) | % | ||||||||||||||||||
| Accumulated other comprehensive loss, net | (30,175) | (1,250) | (28,925) | 2,314.0 | % | ||||||||||||||||||
| Treasury stock | (21,780) | (21,780) | — | — | % | ||||||||||||||||||
| Total shareholders' equity | $ | 964,636 | $ | 1,052,795 | $ | (88,159) | (8.4) | % | |||||||||||||||
Shareholders’ equity decreased $88.2 million, or 8.4%, to $1.0 billion at March 31, 2020 when compared to shareholders' equity of $1.1 billion at December 31, 2019. The decrease primarily resulted from a decrease in retained earnings of $62.0 million and an increase in accumulated other comprehensive loss, net of $28.9 million, partially offset by an increase of $2.6 million in additional paid in capital. The decrease in retained earnings primarily resulted from the adoption of CECL on January 1, 2020, which reduced retained earnings by $61.5 million, and $3.6 million in preferred stock dividends, partially offset by net income of $3.1 million. The increase in accumulated other comprehensive loss, net primarily resulted from a decline in the fair value of available for sale debt securities and in the fair value of cash flow hedges, both due to changes in market interest rates during the three months ended March 31, 2020. The increase in additional paid in capital resulted primarily from the issuance of common stock under share-based compensation arrangements for the three months ended March 31, 2020.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity for a financial institution is a measure of that institution’s ability to meet depositors’ needs for funds, to satisfy or fund loan and lease commitments, and for other operating purposes. Ensuring adequate liquidity is an objective of the asset/liability management process. Customers coordinates its management of liquidity with its interest rate sensitivity and capital position, and strives to maintain a strong liquidity position.
Customers' investment portfolio provides periodic cash flows through regular maturities and amortization and can be used as collateral to secure additional funding. Customers' principal sources of funds are deposits, borrowings, principal and interest payments on loans and leases, other funds from operations, and proceeds from common and preferred stock issuances. Borrowing arrangements are maintained with the FHLB and the FRB to meet short-term liquidity needs. Longer-term borrowing arrangements are also maintained with the FHLB. As of March 31, 2020, Customers' borrowing capacity with the FHLB was $3.1 billion, of which $1.3 billion was utilized in borrowings and $1.0 billion of available capacity was utilized to collateralize state and municipal deposits. As of December 31, 2019, Customers' borrowing capacity with the FHLB was $3.4 billion, of which $0.9 billion was utilized in borrowings and $1.4 billion of available capacity was utilized to collateralize state and municipal deposits. As of March 31, 2020 and December 31, 2019, Customers' borrowing capacity with the FRB was $184.9 million and $136.8 million, respectively.
The table below summarizes Customers' cash flows for the three months ended March 31, 2020 and 2019:
| Three Months Ended March 31, | |||||||||||||||||||||||
| (amounts in thousands) | 2020 | 2019 | Change | % Change | |||||||||||||||||||
| Net cash provided by (used in) operating activities | $ | (35,141) | $ | (6,012) | $ | (29,129) | 484.5 | % | |||||||||||||||
| Net cash provided by (used in) investing activities | (433,517) | (196,297) | (237,220) | 120.8 | % | ||||||||||||||||||
| Net cash provided by (used in) financing activities | 512,385 | 257,836 | 254,549 | 98.7 | % | ||||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | $ | 43,727 | $ | 55,527 | $ | (11,800) | (21.3) | % | |||||||||||||||
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Cash flows provided by (used in) operating activities
Cash used in operating activities of $35.1 million for the three months ended March 31, 2020 primarily resulted from an increase of $93.9 million in accrued interest receivable and other assets, partially offset by an increase in accrued interest payable and other liabilities of $39.0 million, net non-cash operating adjustments of $16.6 million, and net income of $3.1 million.
Cash used in operating activities of $6.0 million for the three months ended March 31, 2019 primarily resulted from an increase of $28.1 million in accrued interest receivable and other assets, and a decrease of $5.1 million in accrued interest payable and other liabilities, offset in part by net income of $15.4 million, and non-cash operating adjustments of $11.8 million.
Cash flows provided by (used in) investing activities
Cash used in investing activities of $433.5 million for the three months ended March 31, 2020 primarily resulted from net originations of mortgage warehouse loans of $271.1 million, purchases of loans of $193.4 million, and purchases of investment securities available for sale of $158.8 million, partially offset by a decrease in loans and leases, excluding mortgage warehouse loans of $175.0 million.
Cash used in investing activities of $196.3 million for the three months ended March 31, 2019 resulted from purchases of loans of $129.3 million, net originations of mortgage warehouse loans of $74.8 million, and purchases of leased assets under operating leases of $7.8 million. These uses of cash were offset in part by cash provided by net proceeds from FHLB, FRB, and other restricted stock of $9.3 million.
Cash flows provided by (used in) financing activities
Cash provided by financing activities of $512.4 million for the three months ended March 31, 2020 primarily resulted from net increase in short-term borrowed funds from the FHLB of $410.0 million, net increase in short-term borrowed funds from the FRB of $175.0 million, and federal funds purchased of $167.0 million, partially offset by a decrease in deposits of $235.3 million, and preferred stock dividends paid of $3.6 million.
Cash provided by financing activities of $257.8 million for the three months ended March 31, 2019 primarily resulted from increases in deposits of $283.1 million and federal funds purchased of $201.0 million, partially offset by repayments of short-term borrowed funds from the FHLB of $222.2 million and preferred stock dividends paid of $3.6 million.
CAPITAL ADEQUACY
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.
In first quarter 2020, U.S federal banking regulatory agencies permitted banking organizations to phase-in, for regulatory capital purposes, the day-one impact of the new CECL accounting rule on retained earnings over a period of three years. As part of its response to the impact of COVID-19, on March 31, 2020, the U.S. federal banking regulatory agencies issued an interim final rule that provided the option to temporarily delay certain effects of CECL on regulatory capital for two years, followed by a three-year transition period. The interim final rule allows banking organizations to delay for two years 100% of the day-one impact of adopting CECL and 25% of the cumulative change in the reported allowance for credit losses since adopting CECL. Customers has elected to adopt the interim final rule, which is reflected in the regulatory capital data presented below.
Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Bancorp to maintain minimum amounts and ratios (set forth in the following table) of common equity Tier 1, Tier 1, and total capital to risk-weighted assets, and Tier 1 capital to average assets (as defined in the regulations). At March 31, 2020 and December 31, 2019, the Bank and the Bancorp met all capital adequacy requirements to which they were subject.
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Generally, to comply with the regulatory definition of adequately capitalized, or well capitalized, respectively, or to comply with the Basel III capital requirements, an institution must at least maintain the common equity Tier 1, Tier 1, and total risk-based capital ratios and the Tier 1 leverage ratio in excess of the related minimum ratios set forth in the following table:
| Minimum Capital Levels to be Classified as: | |||||||||||||||||||||||||||||||||||||||||||||||
| Actual | Adequately Capitalized | Well Capitalized | Basel III Compliant | ||||||||||||||||||||||||||||||||||||||||||||
| (dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||||||||||||||||||||||
| As of March 31, 2020: | |||||||||||||||||||||||||||||||||||||||||||||||
| Common equity Tier 1 capital (to risk-weighted assets) | |||||||||||||||||||||||||||||||||||||||||||||||
| Customers Bancorp, Inc. | $ | 827,884 | 7.560 | % | $ | 492,760 | 4.500 | % | N/A | N/A | $ | 766,515 | 7.000 | % | |||||||||||||||||||||||||||||||||
| Customers Bank | $ | 1,158,308 | 10.599 | % | $ | 491,793 | 4.500 | % | $ | 710,368 | 6.500 | % | $ | 765,011 | 7.000 | % | |||||||||||||||||||||||||||||||
| Tier 1 capital (to risk-weighted assets) | |||||||||||||||||||||||||||||||||||||||||||||||
| Customers Bancorp, Inc. | $ | 1,045,355 | 9.546 | % | $ | 657,013 | 6.000 | % | N/A | N/A | $ | 930,768 | 8.500 | % | |||||||||||||||||||||||||||||||||
| Customers Bank | $ | 1,158,308 | 10.599 | % | $ | 655,724 | 6.000 | % | $ | 874,298 | 8.000 | % | $ | 928,942 | 8.500 | % | |||||||||||||||||||||||||||||||
| Total capital (to risk-weighted assets) | |||||||||||||||||||||||||||||||||||||||||||||||
| Customers Bancorp, Inc. | $ | 1,277,340 | 11.665 | % | $ | 876,017 | 8.000 | % | N/A | N/A | $ | 1,149,773 | 10.500 | % | |||||||||||||||||||||||||||||||||
| Customers Bank | $ | 1,334,108 | 12.207 | % | $ | 874,298 | 8.000 | % | $ | 1,092,873 | 10.000 | % | $ | 1,147,517 | 10.500 | % | |||||||||||||||||||||||||||||||
| Tier 1 capital (to average assets) | |||||||||||||||||||||||||||||||||||||||||||||||
| Customers Bancorp, Inc. | $ | 1,045,355 | 9.011 | % | $ | 464,045 | 4.000 | % | N/A | N/A | $ | 464,045 | 4.000 | % | |||||||||||||||||||||||||||||||||
| Customers Bank | $ | 1,158,308 | 9.992 | % | $ | 463,680 | 4.000 | % | $ | 579,600 | 5.000 | % | $ | 463,680 | 4.000 | % | |||||||||||||||||||||||||||||||
| As of December 31, 2019: | |||||||||||||||||||||||||||||||||||||||||||||||
| Common equity Tier 1 capital (to risk-weighted assets) | |||||||||||||||||||||||||||||||||||||||||||||||
| Customers Bancorp, Inc. | $ | 821,810 | 7.984 | % | $ | 463,211 | 4.500 | % | N/A | N/A | $ | 720,551 | 7.000 | % | |||||||||||||||||||||||||||||||||
| Customers Bank | $ | 1,164,652 | 11.323 | % | $ | 462,842 | 4.500 | % | $ | 668,549 | 6.500 | % | $ | 719,976 | 7.000 | % | |||||||||||||||||||||||||||||||
| Tier 1 capital (to risk-weighted assets) | |||||||||||||||||||||||||||||||||||||||||||||||
| Customers Bancorp, Inc. | $ | 1,039,281 | 10.096 | % | $ | 617,615 | 6.000 | % | N/A | N/A | $ | 874,955 | 8.500 | % | |||||||||||||||||||||||||||||||||
| Customers Bank | $ | 1,164,652 | 11.323 | % | $ | 617,122 | 6.000 | % | $ | 822,829 | 8.000 | % | $ | 874,256 | 8.500 | % | |||||||||||||||||||||||||||||||
| Total capital (to risk-weighted assets) | |||||||||||||||||||||||||||||||||||||||||||||||
| Customers Bancorp, Inc. | $ | 1,256,309 | 12.205 | % | $ | 823,487 | 8.000 | % | N/A | N/A | $ | 1,080,827 | 10.500 | % | |||||||||||||||||||||||||||||||||
| Customers Bank | $ | 1,330,155 | 12.933 | % | $ | 822,829 | 8.000 | % | $ | 1,028,537 | 10.000 | % | $ | 1,079,964 | 10.500 | % | |||||||||||||||||||||||||||||||
| Tier 1 capital (to average assets) | |||||||||||||||||||||||||||||||||||||||||||||||
| Customers Bancorp, Inc. | $ | 1,039,281 | 9.258 | % | $ | 449,026 | 4.000 | % | N/A | N/A | $ | 449,026 | 4.000 | % | |||||||||||||||||||||||||||||||||
| Customers Bank | $ | 1,164,652 | 10.379 | % | $ | 448,851 | 4.000 | % | $ | 561,064 | 5.000 | % | $ | 448,851 | 4.000 | % | |||||||||||||||||||||||||||||||
The capital ratios above reflect the capital requirements under "Basel III" adopted effective first quarter 2015 and the capital conservation buffer phased in beginning January 1, 2016. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers. As of March 31, 2020, 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 sheet.
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With commitments to extend credit, exposure to credit loss in the event of non-performance by the other party to the financial instrument is represented by the contractual amount of those instruments. The same credit policies are used in making commitments and conditional obligations as for on-balance sheet instruments. Because they involve credit risk similar to extending a loan and lease, these financial instruments are subject to the Bank’s credit policy and other underwriting standards.
As of March 31, 2020 and December 31, 2019, the following off-balance sheet commitments, financial instruments and other arrangements were outstanding:
| (amounts in thousands) | March 31, 2020 | December 31, 2019 | |||||||||
| Commitments to fund loans and leases | $ | 259,134 | $ | 261,902 | |||||||
| Unfunded commitments to fund mortgage warehouse loans | 1,321,818 | 1,378,364 | |||||||||
| Unfunded commitments under lines of credit and credit cards | 977,048 | 1,065,474 | |||||||||
| Letters of credit | 39,789 | 48,856 | |||||||||
| Other unused commitments | 2,466 | 2,736 | |||||||||
Commitments to fund loans and leases, unfunded commitments to fund mortgage warehouse loans, unfunded commitments under lines of credit, letters of credit, and credit cards are agreements to extend credit to or for the benefit of a customer in the ordinary course of the Bank's business.
Commitments to fund loans and leases and unfunded commitments under lines of credit may be obligations of the Bank as long as there is no violation of any condition established in the contract. Because many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if the Bank deems it necessary upon extension of credit, is based upon management’s credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.
Mortgage warehouse loan commitments are agreements to fund the pipelines of mortgage banking businesses from closing of individual mortgage loans until their sale into the secondary market. Most of the individual mortgage loans are insured or guaranteed by the U.S. government through one of its programs such as FHA, VA, or are conventional loans eligible for sale to Fannie Mae and Freddie Mac. These commitments generally fluctuate monthly based on changes in interest rates, refinance activity, new home sales and laws and regulation.
Outstanding letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Letters of credit may obligate the Bank to fund draws under those letters of credit whether or not a customer continues to meet the conditions of the extension of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan and lease facilities to customers.
Effect of Government Monetary Policies
Our earnings are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. An important function of the Federal Reserve Board is to regulate the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities and changes in reserve requirements against member bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans and leases, investments, and deposits, and their use may also affect rates charged on loans and leases or paid for deposits.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity
The largest component of Customers' net income is net interest income, and the majority of its financial instruments are interest rate sensitive assets and liabilities with various term structures and maturities. One of the primary objectives of management is to optimize net interest income while minimizing interest rate risk. Interest rate risk is derived from timing differences in the repricing of assets and liabilities, loan prepayments, deposit withdrawals and differences in lending and funding rates. Customers' asset/liability committee actively seeks to monitor and control the mix of interest rate sensitive assets and interest rate sensitive liabilities.
Customers uses two complementary methods to analyze and measure interest rate sensitivity as part of the overall management of interest rate risk; they are income simulation modeling and estimates of EVE. The combination of these two methods provides a
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reasonably comprehensive summary of the levels of interest rate risk of Customers' exposure to time factors and changes in interest rate environments.
Income simulation modeling is used to measure interest rate sensitivity and manage interest rate risk. Income simulation considers not only the impact of changing market interest rates upon forecasted net interest income but also other factors such as yield-curve relationships, the volume and mix of assets and liabilities, customer preferences and general market conditions.
Through the use of income simulation modeling, Customers has estimated the net interest income for the periods ending March 31, 2021 and December 31, 2020, based upon the assets, liabilities and off-balance sheet financial instruments in existence at March 31, 2020 and December 31, 2019. Customers has also estimated changes to that estimated net interest income based upon interest rates rising or falling immediately (“rate shocks”). For upward rate shocks modeling a rising rate environment at March 31, 2020, current market interest rates were only increased immediately by 100 and 200 basis points due to the unlikely nature that interest rates would increase by 300 basis points in the current interest rate environment. For downward rate shocks modeling a falling rate environment, current market rates were only decreased immediately by 100 basis points due to the limitations of the current low interest rate environment that renders the Down 200 and Down 300 rate shocks impractical. The downward rate shocks modeled will be revisited in the future if necessary and will be contingent upon additional Federal Reserve interest rate hikes. The following table reflects the estimated percentage change in estimated net interest income for the periods ending March 31, 2020 and December 31, 2019, resulting from changes in interest rates.
Net change in net interest income
| % Change | |||||||||||
| Rate Shocks | March 31, 2020 | December 31, 2019 | |||||||||
| Up 3% | N/A | 3.3% | |||||||||
| Up 2% | 1.3% | 2.7% | |||||||||
| Up 1% | 0.9% | 1.6% | |||||||||
| Down 1% | (0.5)% | (1.9)% | |||||||||
The net changes in net interest income in all scenarios are within Customers Bank's interest rate risk policy guidelines.
EVE estimates the discounted present value of asset and liability cash flows. Discount rates are based upon market prices for comparable assets and liabilities. Upward and downward rate shocks are used to measure volatility of EVE in relation to a constant rate environment. For upward rate shocks modeling a rising rate environment at March 31, 2020, current market interest rates were were only increased immediately by 100 and 200 basis points due to the unlikely nature that interest rates would increase by 300 basis points in the current interest rate environment. For downward rate shocks modeling a falling rate environment, current market rates were decreased immediately by 100 basis points due to the limitations of the current low interest rate environment that renders the Down 200 and Down 300 rate shocks impractical. The downward rate shocks modeled will be revisited in the future if necessary and will be contingent upon additional Federal Reserve interest rate hikes. This method of measurement primarily evaluates the longer term repricing risks and options in Customers Bank’s balance sheet. The following table reflects the estimated EVE at risk and the ratio of EVE to EVE adjusted assets at March 31, 2020 and December 31, 2019, resulting from shocks to interest rates.
| From base | |||||||||||
| Rate Shocks | March 31, 2020 | December 31, 2019 | |||||||||
| Up 3% | N/A | (5.6)% | |||||||||
| Up 2% | (6.1)% | (2.0)% | |||||||||
| Up 1% | 2.8% | (1.0)% | |||||||||
| Down 1% | 4.0% | (1.1)% | |||||||||
The net changes in EVE in all scenarios are within Customers Bank's interest rate risk policy guidelines.
Management believes that the assumptions and combination of methods utilized in evaluating estimated net interest income are reasonable. However, the interest rate sensitivity of our assets, liabilities and off-balance sheet financial instruments, as well as the estimated effect of changes in interest rates on estimated net interest income, could vary substantially if different assumptions are used or actual experience differs from the assumptions used in the model.
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Item 4. Controls and Procedures
(a) Management's Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, Customers Bancorp carried out an evaluation, under the supervision and with the participation of Customers Bancorp’s management, including Customers Bancorp’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Customers Bancorp’s disclosure controls and procedures as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Customers Bancorp’s disclosure controls and procedures were effective as of March 31, 2020.
(b) Changes in Internal Control Over Financial Reporting. During the quarter ended March 31, 2020, Customers Bancorp adopted a new accounting standard that significantly changed its process for calculating the allowance for credit losses and, as a result, materially modified its control activities associated with the determination of this critical accounting estimate. The revised processes and controls reflect the incorporation of lifetime loss rate models and macro-economic forecasts for purposes of estimating expected loss amounts over a reasonable and supportable forecast period. There were no other changes in Customers Bancorp’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Customers Bancorp’s internal control over financial reporting.
The emergence of the COVID-19 pandemic during first quarter 2020 necessitated the execution of several Customers Bancorp contingency plans. Beginning in March 2020 and continuing through this filing date, Customers Bancorp had a substantial number of its team members working remotely under such contingency plans.
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings
For information on Customers' legal proceedings, refer to “NOTE 14 – LOSS CONTINGENCIES” to the unaudited consolidated financial statements.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in “Risk Factors” included within the 2019 Form 10-K. There are no material changes from the risk factors included within the 2019 Form 10-K, other than the risk described below. The risks described within the 2019 Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial also may materially adversely affect our business, financial condition and/or operating results. See “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Note Regarding Forward-Looking Statements.”
The COVID-19 pandemic has impacted our business, and the ultimate impact on our business and financial results will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.
The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. As a result, the demand for our products and services may be significantly impacted. Furthermore, the pandemic has influenced and could further influence the recognition of credit losses in our loan and lease portfolios and has increased and could further increase our allowance for credit losses, particularly as businesses remain closed and as more customers may draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, the securities we hold may lose value. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. In response to the pandemic, we have also enacted hardship relief assistance for customers experiencing financial difficulty as a result of COVID-19, including fee and penalty waivers, loan deferrals or other scenarios that may help our customers. In addition, we are a lender for the Small Business Administration's Paycheck Protection Program ("PPP") and other SBA, Federal Reserve or United States Treasury programs that have been or may be created in the future in response to the pandemic. These programs are new and their effects on Customers' business are uncertain. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
To the extent the COVID-19 pandemic continues to adversely affect the economy, and/or adversely affects our business, results of operations or financial condition, it may also have the effect of increasing the likelihood and/or magnitude of other risks described in the section captioned "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2019, including those risks related to business operations, industry/market, our securities and credit, or risks described in our other filings with the SEC.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On November 26, 2013, the Bancorp's board of directors authorized a stock repurchase plan in which the Bancorp could acquire up to 5% of its current outstanding shares not to exceed a 20% premium over the then current book value. On December 11, 2018, the Bancorp's board of directors amended the terms of the 2013 stock repurchase plan to adjust the repurchase terms and book value measurement date such that Customers was authorized to purchase shares of common stock at prices not to exceed the book value per share of Customers' common stock measured as of September 30, 2018. Customers repurchased all remaining authorized shares pursuant to this program in January 2019. Accordingly, there were no common shares repurchased during first quarter 2020.
Dividends on Common Stock
Customers Bancorp historically has not paid any cash dividends on its shares of common stock and does not expect to do so in the foreseeable future.
Any future determination relating to our dividend policy will be made at the discretion of Customers Bancorp’s board of directors and will depend on a number of factors, including earnings and financial condition, liquidity and capital requirements, the general economic
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and regulatory climate, ability to service any equity or debt obligations senior to our common stock, including obligations to pay dividends to the holders of Customers Bancorp's issued and outstanding shares of preferred stock and other factors deemed relevant by the Board of Directors.
In addition, as a bank holding company, Customers Bancorp is subject to general regulatory restrictions on the payment of cash dividends. Federal bank regulatory agencies have the authority to prohibit bank holding companies from engaging in unsafe or unsound practices in conducting their business, which, depending on the financial condition and liquidity of the holding company at the time, could include the payment of dividends. Further, various federal and state statutory provisions limit the amount of dividends that bank subsidiaries can pay to their parent holding company without regulatory approval. Generally, subsidiaries are prohibited from paying dividends when doing so would cause them to fall below the regulatory minimum capital levels, and limits exist on paying dividends in excess of net income for specified periods.
Beginning January 1, 2015, the ability to pay dividends and the amounts that can be paid will be limited to the extent the Bank's capital ratios do not exceed the minimum required levels plus 250 basis points, as these requirements were phased in through January 1, 2019.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Subsequent to March 31, 2020, Customers decided to sell a commercial real estate loan collateralized by a Class A office building in northern New Jersey. After careful review and consideration of the rapidly changing COVID-19 environment, management decided to pursue the sale of the note during second quarter 2020. Management received two separate agreements to purchase the note during second quarter 2020. The second agreement, executed after May 4, 2020, includes a sales price of $19.1 million and is subject to certain closing conditions. Management believes it is prudent to sell the note given the current COVID-19 uncertainty and expects the sale to occur late in the second quarter 2020 or third quarter 2020. Based on the expected sales price of $19.1 million, Customers recognized $9.6 million of additional provision for credit losses on loans and leases during the three months ended March 31, 2020 and charged-off the loan to its estimated fair value of $19.1 million. In its May 4, 2020 Form 8-K, Customers furnished certain unaudited financial information pursuant to Item 2.02, which information was included in Exhibit 99.1 thereto. The unaudited consolidated statements of operations for the three months ended March 31, 2020, the unaudited consolidated balance sheet as of March 31, 2020 and the unaudited net charge-offs/(recoveries) schedule for the three months ended March 31, 2020 furnished in Exhibit 99.1 did not reflect the additional provision for credit losses and the charge-off given the timing of this new information. The unaudited consolidated financial statements and the accompanying disclosures presented in this quarterly report on Form 10-Q reflect this adjustment.
The following tables present Customers' unaudited condensed consolidated statements of operations for the three months ended March 31, 2020, the unaudited condensed consolidated balance sheet as of March 31, 2020 and the unaudited net charge-offs/(recoveries) schedule for the three months ended March 31, 2020 adjusted for the additional provision for credit losses on loans and leases, the increase in the allowance for credit losses on loans and leases, and the charge-off of the commercial real estate collateral dependent loan to its fair value.
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CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS) — UNAUDITED
(amounts in thousands, except per share data)
| Three Months Ended March 31, 2020 | |||||||||||
| As Adjusted | Previously Reported | ||||||||||
| Total interest income | 125,343 | 125,343 | |||||||||
| Total interest expense | 44,022 | 44,022 | |||||||||
| Net interest income | 81,321 | 81,321 | |||||||||
| Provision for credit losses on loans and leases | 31,786 | 22,316 | |||||||||
| Net interest income after provision for credit losses on loans and leases | 49,535 | 59,005 | |||||||||
| Total non-interest income | 21,930 | 21,930 | |||||||||
| Total non-interest expense | 66,459 | 66,459 | |||||||||
| Income before income tax expense | 5,006 | 14,476 | |||||||||
| Income tax expense | 1,906 | 3,834 | |||||||||
| Net income | 3,100 | 10,642 | |||||||||
| Preferred stock dividends | 3,615 | 3,615 | |||||||||
| Net income (loss) available to common shareholders | $ | (515) | $ | 7,027 | |||||||
| Basic earnings (loss) per common share | $ | (0.02) | $ | 0.22 | |||||||
| Diluted earnings (loss) per common share | $ | (0.02) | $ | 0.22 | |||||||
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CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET — UNAUDITED
(amounts in thousands, except share and per share data)
| March 31, 2020 As Adjusted | March 31, 2020 As Previously Reported | ||||||||||
| ASSETS | |||||||||||
| Cash and cash equivalents | 256,232 | 256,232 | |||||||||
| Investment securities available for sale, at fair value | 712,657 | 712,657 | |||||||||
Loans held for sale (includes $1,388 and $2,130, respectively, at fair value) | 450,157 | 450,157 | |||||||||
| Loans receivable, mortgage warehouse, at fair value | 2,518,012 | 2,518,012 | |||||||||
| Loans and leases receivable | 7,353,262 | 7,366,058 | |||||||||
| Allowance for credit losses on loans and leases | (149,283) | (152,610) | |||||||||
| Total loans and leases receivable, net of allowance for credit losses on loans and leases | 9,721,991 | 9,731,460 | |||||||||
| FHLB, Federal Reserve Bank, and other restricted stock | 87,140 | 87,140 | |||||||||
| Accrued interest receivable | 40,570 | 40,570 | |||||||||
| Bank premises and equipment, net | 8,890 | 8,890 | |||||||||
| Bank-owned life insurance | 273,576 | 273,576 | |||||||||
| Other real estate owned | 131 | 131 | |||||||||
| Goodwill and other intangibles | 14,870 | 14,870 | |||||||||
| Other assets | 452,585 | 450,659 | |||||||||
| Total assets | $ | 12,018,799 | $ | 12,026,342 | |||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Total liabilities | 11,054,163 | 11,054,163 | |||||||||
| Shareholders’ equity: | |||||||||||
Preferred stock, par value $1.00 per share; liquidation preference $25.00 per share; 100,000,000 shares authorized, 9,000,000 shares issued and outstanding as of March 31, 2020 and December 31, 2019 | 217,471 | 217,471 | |||||||||
Common stock, par value $1.00 per share; 200,000,000 shares authorized; 32,750,645 and 32,614,410 shares issued as of March 31, 2020 and December 31, 2019; 31,470,026 and 31,336,791 shares outstanding as of March 31, 2020 and December 31, 2019 | 32,751 | 32,751 | |||||||||
| Additional paid in capital | 446,840 | 446,840 | |||||||||
| Retained earnings | 319,529 | 327,072 | |||||||||
| Accumulated other comprehensive loss, net | (30,175) | (30,175) | |||||||||
Treasury stock, at cost (1,280,619 shares as of March 31, 2020 and December 31, 2019) | (21,780) | (21,780) | |||||||||
| Total shareholders’ equity | 964,636 | 972,179 | |||||||||
| Total liabilities and shareholders’ equity | $ | 12,018,799 | $ | 12,026,342 | |||||||
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CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
NET CHARGE-OFF/(RECOVERIES) — UNAUDITED
(amounts in thousands)
| March 31, 2020 As Adjusted | March 31, 2020 As Previously Reported | ||||||||||
| Loan type | |||||||||||
| Multi-family | $ | — | $ | — | |||||||
| Commercial & industrial | 43 | 43 | |||||||||
| Commercial real estate owner occupied | (3) | (3) | |||||||||
| Commercial real estate non-owner occupied | 12,797 | — | |||||||||
| Construction | (3) | (3) | |||||||||
| Residential | (29) | (29) | |||||||||
| Other consumer | 5,906 | 5,906 | |||||||||
| Total net charge-offs (recoveries) from loans held for investment | $ | 18,711 | $ | 5,914 | |||||||
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Item 6. Exhibits
| Exhibit No. | Description | |||||||
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| 101 | The following financial statements from the Customers’ Annual Report on Form 10-Q as of and for the year ended March 31, 2020, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements. | |||||||
| 104 | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document | |||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.DEF | XBRL Taxonomy Extension Definitions Linkbase Document. | |||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Customers Bancorp, Inc. | |||||||||||
| May 11, 2020 | By: | /s/ Jay S. Sidhu | |||||||||
| Name: | Jay S. Sidhu | ||||||||||
| Title: | Chairman and Chief Executive Officer (Principal Executive Officer) | ||||||||||
| May 11, 2020 | By: | /s/ Carla A. Leibold | |||||||||
| Name: | Carla A. Leibold | ||||||||||
| Title: | Chief Financial Officer (Principal Financial Officer) | ||||||||||
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Exhibit Index
| Exhibit No. | Description | |||||||
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| 101 | The following financial statements from the Customers’ Annual Report on Form 10-Q as of and for the year ended March 31, 2020, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements. | |||||||
| 104 | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document | |||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document. | |||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| 101.DEF | XBRL Taxonomy Extension Definitions Linkbase Document. | |||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | |||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
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