ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Note Regarding Forward-Looking Statements
This report and all attachments hereto, as well as other written or oral communications made from time to time by us, may contain forward-looking information within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These statements relate to future events or future predictions, including events or predictions relating to future financial performance, and are generally identifiable by the use of forward-looking terminology such as “believe,” “expect,” “may,” “will,” “should,” “plan,” “intend,” or “anticipate” or the negative thereof or comparable terminology. Forward-looking statements reflect numerous assumptions, estimates and forecasts as to future events. No assurance can be given that the assumptions, estimates and forecasts underlying such forward-looking statements will accurately reflect future conditions, or that any guidance, goals, targets or projected results will be realized. The assumptions, estimates and forecasts underlying such forward-looking statements involve judgments with respect to, among other things, future economic, competitive, regulatory and financial market conditions and future business decisions, which may not be realized and which are inherently subject to significant business, economic, competitive and regulatory uncertainties and known and unknown risks, including the risks described under “Risk Factors” in 2015 Form 10-K, as such factors may be updated from time to time in our filings with the SEC, including our Quarterly Reports on Form 10-Q. Our actual results may differ materially from those reflected in the forward-looking statements. You are cautioned not to place undue reliance on any forward-looking statements we make, which speak only as of the date they are made. We do not undertake any obligation to release publicly or otherwise provide any revisions to any forward-looking statements we may make, including any forward-looking financial information, to reflect events or circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events, except as may be required under applicable law.
Management’s discussion and analysis represents an overview of the financial condition and results of operations, and highlights the significant changes in the financial condition and results of operations, as presented in the accompanying consolidated financial statements for Customers Bancorp, a financial holding company, and its wholly owned subsidiaries, including Customers Bank. This information is intended to facilitate your understanding and assessment of significant changes and trends related to Customers' financial condition and results of operations as of and for the three
and nine
months ended
September 30, 2016
. 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' Annual Report on Form 10-K for the fiscal year ended
December 31, 2015
(“
2015
Form 10-K”).
Critical Accounting Policies
We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States of America and that are consistent with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in “NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION” to our audited financial statements included in our
2015
Form 10-K and updated in this report on Form 10-Q for the quarterly period ended
September 30, 2016
.
Certain accounting policies involve significant judgments and assumptions by Customers that have a material impact on the carrying value of certain assets and liabilities. We consider 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 our assets and liabilities and our results of operations.
Third
Quarter Events of Note
Customers Bancorp continued its strong financial performance through
third
quarter
2016
, with earnings of
$18.6 million
or
$0.64
per fully diluted share. Total assets were
$9.6 billion
at
September 30, 2016
, an increase of
$1.2 billion
from
December 31, 2015
and a decrease of $0.1 billion from June 30, 2016 as Customers moderated its balance sheet growth during third quarter 2016 as planned while continuing to organically grow deposits. Total deposits increased $0.6 billion during third quarter 2016 to $7.4 billion largely due to increased non-interest bearing demand deposits at BankMobile. Asset quality remained exceptional with non-performing loans only
0.16%
of total loans and total non-performing assets (non-performing loans and other real estate owned) only 0.18% of total assets at
September 30, 2016
, reflecting Customers' conservative lending practices and continued focus on positive operating leverage and risk management. Capital levels improved significantly (in excess of $100 million) during third quarter 2016 as Customers issued $85.0 million of non-cumulative perpetual preferred stock in a public offering, which qualifies as Tier 1 capital under regulatory capital guidelines, $5.7 million of common equity through an at-the-market ("ATM") offering and generated strong earnings. As a result of the increased capital levels, Customer's regulatory capital ratios for Total, Tier 1 Risk Based Capital and Leverage ratios increased by more than 100 basis points. Customers' capital ratios at the holding company and its bank subsidiary continue to exceed the “well-capitalized” threshold established by regulation at the Bank and exceed the applicable Basel III regulatory threshold ratios for the Bancorp and the Bank at
September 30, 2016
. The return on average common equity was 13.20% for
third
quarter
2016
, and the return on average assets was 0.89% for Customers Bancorp, Inc.
Beginning in the third quarter of 2016, Customers revised its segment financial reporting to reflect the manner in which its chief operating decision makers (our Chief Executive Officer and Board of Directors) have begun allocating resources and assessing performance subsequent to the acquisition of the Disbursement business from Higher One and the combination of that business with the BankMobile technology platform late in second quarter 2016. Management has determined that Customers' operations consist of
two
reportable segments - Community Business Banking and BankMobile. Customers' Community Business Banking segment generated net income available to common shareholders of $19.8 million in third quarter 2016 and Customers' BankMobile segment generated a third quarter 2016 net loss of $1.2 million. BankMobile-related deposits were $533.2 million at September 30, 2016, and were predominately non-interest bearing.
Customers' consolidated third quarter 2016 results included the first full quarter financial results of the Disbursement business. The discussion that follows describes the Disbursement business, the combination of that business with the BankMobile business, and Customers' strategic plans for operating the BankMobile segment over the next two years.
Customers Bank acquired the Disbursement business of Higher One effective with the close of business on June 15, 2016 and the third quarter of 2016 was the first full quarter of Customers' management of this business. The Disbursement business consists primarily of assets, liabilities, technology and patents used to assist higher educational institutions in their distributions of Title IV monies to students. Specifically, many college students upon admission to a college will apply for Federal student loans and grants. The students make their applications through a college, university or other qualifying educational institution. Upon enrollment at the educational institution, the institution will submit the financial aid request to the Department of Education ("ED") on behalf of the student. The ED will send the approved financial aid monies to the institution. The institution will subtract tuition, fees, and other charges from the amount of financial aid received by the student. Any excess funds received by the institution must be made available to the student within time frames prescribed in ED regulations. The institution will send the funds, also known as financial aid refunds ("FARs"), for students receiving amounts along with key contact information. The Disbursement business then communicates with the student via a U.S. postal service mailing and e-mails with instructions to proceed to a dedicated website to complete documentation in order to receive funds due to the student. The student, among other options, is presented with a choice as to whether to send the funds due to them to an existing bank account via ACH and provide account information, receive a check for the funds (if the educational institution allows paper checks to be disbursed), or open an account with Customers Bank. If the student elects to open a bank account with Customers, an account is opened and the student's funds due are deposited into the Customers Bank bank account the same business day the file and funds are received. The student is given access to the student's monies via an internet based virtual debit card, through a plastic debit card and via check or other instrument.
Customers Bank combined the Disbursement business with its existing BankMobile platform late in second quarter 2016. The BankMobile segment services over 1.5 million deposit accounts at September 30, 2016 and has the potential to add between 450,000 to 500,000 new student accounts annually. Since the acquisition of the Disbursement business, BankMobile has added over 200,000 new deposit accounts and converted 300,000 deposit accounts at the student account holder's election from a prior business partner of Higher One.
Customers has significantly altered the revenue and expense business model that was followed when the Disbursement business was owned by Higher One. Customers' virtual debit card and plastic debit card give the students access to their money 24 hours per day 365 days per year, in a no or low fee product. In Customers' business model, the fees received by Customers for providing this service to students are predominately paid by merchants servicing the students through interchange fees paid by the merchant. Customers Bank also charges the educational providers a fee for their use of Customers' student disbursement applications. Fees are also paid by students for out-of-network ATM use (the student has free use of approximately 43,000 ATMs across the United States and 55,000 across the world), lost cards that must be replaced, and fees for specific uses of bank product offerings.
Customers' strategy is to provide unmatched valuable service to students at low to no cost while they are attending school, develop student loyalty by providing high quality services and anticipating student financial needs, develop long term customer loyalty while the student is in college, and then work to retain the post graduate student for a lifetime customer. The economics of the Customers Bank business model are intended to be reasonably profitable, while providing valuable financial services to the student, and enjoy the benefit of higher balances and greater account usage in the post college years so that BankMobile retains the student as a customer for life.
Currently under federal law and regulation, Customers Bancorp, Inc. must remain under $10 billion in total assets as of December 31 of each year to qualify as a small issuer of debit cards and receive the optimal debit card processing fee. Failure to qualify for the small issuer exception would result in a significant reduction in interchange fee income. Failure to qualify for the small issuer exception would mean the BankMobile segment would operate unprofitably or additional fees would need to be charged to students to replace the lost revenue. Customers has stated its intent to sell the BankMobile segment within the next twelve to twenty-four months, depending upon market conditions and opportunities.
As previously noted, Customers has substantively changed the Disbursement business revenue model to eliminate or reduce many of the fees previously charged by Higher One. Customers anticipates total revenues derived from the Disbursement business in the first full year of operation of approximately $60 million, predominately from interchange but also including fees from educational institutions participating in the program and other miscellaneous fees for specific services. Customers also anticipates that expenses of operating the Disbursement business will be of a similar amount as revenues, not including allocation of Customers Bancorp overhead to the Disbursement business. It is further anticipated that the Disbursement business (and the BankMobile segment) will operate at approximately break even by the end of 2016. Although these represent management’s preliminary expectations regarding revenues, expenses and results of operations regarding the Disbursement business, the integration of the Disbursement business and implementation of Customers’ business model for the Disbursement business are ongoing, and actual results may differ materially from these preliminary expectations.
Results of Operations
Three Months Ended September 30, 2016
Compared to
Three Months Ended September 30, 2015
Net income available to common shareholders increased
$4.3 million
, or 30.3%, to
$18.6 million
for the three months ended
September 30, 2016
, compared to
$14.3 million
for the three months ended
September 30, 2015
. The increased net income available to common shareholders resulted from an increase in net interest income of
$14.7 million
, largely reflecting the loan portfolio growth of the past year, a reduction in the provision for loan losses expense of
$2.0 million
, and an increase in non-interest income of
$21.3 million
, offset in part by an increase in non-interest expense of
$25.9 million
, an increase in income tax expense of
$6.2 million
, and an increase in preferred stock dividends of
$1.6 million
.
Net interest income increased
$14.7 million
, or
29.3%
, for the three months ended
September 30, 2016
to
$64.6 million
, compared to
$49.9 million
for the three months ended
September 30, 2015
. This increase resulted principally from higher average loan and security balances of
$2.0 billion
as well as a
4
basis point expansion in net interest margin to
2.83%
in the
third
quarter of
2016
compared to the third quarter of 2015.
The provision for loan losses decreased
$2.0 million
to
$0.1 million
for the three months ended
September 30, 2016
, compared to
$2.1 million
for the same period in
2015
, as total loan balances increased only $3.0 million during third quarter 2016 (as planned) and asset quality remained exceptional.
Non-interest income
increased
$21.3 million
, or 345.4%, for the three months ended
September 30, 2016
to
$27.5 million
, compared to
$6.2 million
for the three months ended
September 30, 2015
. The
increase
in
third
quarter
2016
was primarily a result of increases in interchange and card revenue of
$11.4 million
, deposit and wire transfer fees of
$4.0 million
, university fees of $1.0, and a $2.2 million recovery of a previously recorded loss. The interchange and card revenue, deposit and wire transfer fee, and university fee increases totaling $16.4 million resulted from Customers' acquisition of the Disbursement business.
Non-interest expense increased
$25.9 million
, or
85.5%
, for the three months ended
September 30, 2016
to
$56.2 million
, compared to
$30.3 million
during the three months ended
September 30, 2015
as a result of increases in technology costs of
$10.1 million
, salaries and employee benefits of
$7.7 million
, and professional services of
$4.3 million
. These increases resulted largely from increased operating costs for BankMobile of $17.5 million and the increases in resources and services necessary to support and operate a
$9.6 billion
bank. In addition,
third
quarter
2016
non-interest expenses include a $3.9 million one-time expense for technology-related services.
Income tax expense increased
$6.2 million
for the three months ended
September 30, 2016
to
$14.6 million
, compared to
$8.4 million
for the same period of
2015
. The increase in income tax expense was driven primarily from increased taxable income of
$12.1 million
in
third
quarter
2016
, and an increase in the estimated effective tax rate for 2016 primarily due to an increasing proportion of income producing assets domiciled in New York, particularly in New York City. Customers’
third
quarter
2016
income tax expense reflected an estimated effective tax rate of
40.8%
, compared to a
third
quarter
2015
effective tax rate of
35.5%
. Customers'
third
quarter
2016
income tax expense also included an adjustment of $0.8 million that increased income tax expense as a result of a "return to provision adjustment" recorded upon filing Customers' 2015 tax return during third quarter 2016.
Preferred stock dividends increased
$1.6 million
for the three months ended September 30, 2016 to $2.6 million, compared to $1.0 million for the three months ended September 30, 2015. The increased preferred stock dividends resulted from issuances of $167.5 million of preferred stock during 2016 for a total balance of $225 million at September 30, 2016, compared to $57.5 million of preferred stock outstanding at September 30, 2015.
Net Interest Income
Net interest income (the difference between the interest earned on loans, investments and interest-earning deposits with banks, and interest paid on deposits, borrowed funds and subordinated debt) is the primary source of Customers' earnings.
The following table summarizes Customers' net interest income and related spread and margin for the periods indicated.
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|
|
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|
|
|
|
|
|
Three Months Ended September 30,
|
|
2016
|
|
2015
|
|
Average
Balance
|
|
Interest
Income or
Expense
|
|
Average
Yield or
Cost (%)
|
|
Average
Balance
|
|
Interest
Income or
Expense
|
|
Average
Yield or
Cost
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning deposits
|
$
|
237,753
|
|
|
$
|
326
|
|
|
0.55
|
%
|
|
$
|
312,286
|
|
|
$
|
202
|
|
|
0.26
|
%
|
Investment securities (A)
|
534,333
|
|
|
3,528
|
|
|
2.64
|
%
|
|
377,157
|
|
|
2,283
|
|
|
2.42
|
%
|
Loans held for sale
|
2,124,097
|
|
|
18,737
|
|
|
3.51
|
%
|
|
1,720,863
|
|
|
14,006
|
|
|
3.23
|
%
|
Loans receivable (B)
|
6,117,367
|
|
|
60,362
|
|
|
3.93
|
%
|
|
4,648,986
|
|
|
46,291
|
|
|
3.95
|
%
|
Other interest-earning assets
|
90,010
|
|
|
1,259
|
|
|
5.56
|
%
|
|
67,299
|
|
|
954
|
|
|
5.62
|
%
|
Total interest-earning assets
|
9,103,560
|
|
|
84,212
|
|
|
3.68
|
%
|
|
7,126,591
|
|
|
63,736
|
|
|
3.55
|
%
|
Non-interest-earning assets
|
336,013
|
|
|
|
|
|
|
257,220
|
|
|
|
|
|
Total assets
|
$
|
9,439,573
|
|
|
|
|
|
|
$
|
7,383,811
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking accounts
|
$
|
202,645
|
|
|
278
|
|
|
0.55
|
%
|
|
$
|
135,539
|
|
|
177
|
|
|
0.52
|
%
|
Money market deposit accounts
|
3,115,076
|
|
|
5,200
|
|
|
0.66
|
%
|
|
2,490,617
|
|
|
3,166
|
|
|
0.50
|
%
|
Other savings accounts
|
36,516
|
|
|
22
|
|
|
0.24
|
%
|
|
35,089
|
|
|
23
|
|
|
0.26
|
%
|
Certificates of deposit
|
2,796,028
|
|
|
7,509
|
|
|
1.07
|
%
|
|
2,277,072
|
|
|
5,656
|
|
|
0.99
|
%
|
Total interest-bearing deposits
|
6,150,265
|
|
|
13,009
|
|
|
0.84
|
%
|
|
4,938,317
|
|
|
9,022
|
|
|
0.72
|
%
|
Borrowings
|
1,586,262
|
|
|
6,618
|
|
|
1.66
|
%
|
|
1,214,803
|
|
|
4,780
|
|
|
1.57
|
%
|
Total interest-bearing liabilities
|
7,736,527
|
|
|
19,627
|
|
|
1.01
|
%
|
|
6,153,120
|
|
|
13,802
|
|
|
0.89
|
%
|
Non-interest-bearing deposits
|
863,435
|
|
|
|
|
|
|
675,455
|
|
|
|
|
|
Total deposits and borrowings
|
8,599,962
|
|
|
|
|
0.91
|
%
|
|
6,828,575
|
|
|
|
|
0.80
|
%
|
Other non-interest-bearing liabilities
|
129,199
|
|
|
|
|
|
|
19,998
|
|
|
|
|
|
Total liabilities
|
8,729,161
|
|
|
|
|
|
|
6,848,573
|
|
|
|
|
|
Shareholders’ Equity
|
710,412
|
|
|
|
|
|
|
535,238
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
$
|
9,439,573
|
|
|
|
|
|
|
$
|
7,383,811
|
|
|
|
|
|
Net interest earnings
|
|
|
64,585
|
|
|
|
|
|
|
49,934
|
|
|
|
Tax-equivalent adjustment (C)
|
|
|
96
|
|
|
|
|
|
|
105
|
|
|
|
Net interest earnings
|
|
|
$
|
64,681
|
|
|
|
|
|
|
$
|
50,039
|
|
|
|
Interest spread
|
|
|
|
|
2.77
|
%
|
|
|
|
|
|
2.75
|
%
|
Net interest margin
|
|
|
|
|
2.82
|
%
|
|
|
|
|
|
2.78
|
%
|
Net interest margin tax equivalent (C)
|
|
|
|
|
2.83
|
%
|
|
|
|
|
|
2.79
|
%
|
|
|
(A)
|
For presentation in this table, average balances and the corresponding average yields for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.
|
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|
(B)
|
Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees.
|
|
|
(C)
|
Non-GAAP tax-equivalent basis, using a 35% statutory tax rate to approximate interest income as a taxable asset.
|
The following table presents the dollar amount of changes in interest income and interest expense for the major categories of interest-earning assets and interest-bearing liabilities. Information is provided for each 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 September 30,
|
|
2016 vs. 2015
|
|
Increase (Decrease) due
to Change in
|
|
|
|
Rate
|
|
Volume
|
|
Total
|
(amounts in thousands)
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
Interest-earning deposits
|
$
|
182
|
|
|
$
|
(58
|
)
|
|
$
|
124
|
|
Investment securities
|
223
|
|
|
1,022
|
|
|
1,245
|
|
Loans held for sale
|
1,279
|
|
|
3,452
|
|
|
4,731
|
|
Loans receivable
|
(307
|
)
|
|
14,378
|
|
|
14,071
|
|
Other interest-earning assets
|
(10
|
)
|
|
315
|
|
|
305
|
|
Total interest income
|
1,367
|
|
|
19,109
|
|
|
20,476
|
|
Interest expense:
|
|
|
|
|
|
Interest checking accounts
|
10
|
|
|
91
|
|
|
101
|
|
Money market deposit accounts
|
1,135
|
|
|
899
|
|
|
2,034
|
|
Savings accounts
|
(2
|
)
|
|
1
|
|
|
(1
|
)
|
Certificates of deposit
|
500
|
|
|
1,353
|
|
|
1,853
|
|
Total interest-bearing deposits
|
1,643
|
|
|
2,344
|
|
|
3,987
|
|
Borrowings
|
308
|
|
|
1,530
|
|
|
1,838
|
|
Total interest expense
|
1,951
|
|
|
3,874
|
|
|
5,825
|
|
Net interest income
|
$
|
(584
|
)
|
|
$
|
15,235
|
|
|
$
|
14,651
|
|
Net interest income for the three months ended
September 30, 2016
was
$64.6 million
, an increase of
$14.7 million
, or
29.3%
, from net interest income of $49.9 million for
third
quarter
2015
, as average loan and security balances increased
$2.0 billion
. Net interest margin expanded by
4
basis points to
2.83%
for third quarter 2016 compared to 2.79% for
third
quarter
2015
.
|
|
•
|
Commercial loan average balances increased $975 million, including commercial loans to mortgage banking companies, in
third
quarter
2016
compared to
third
quarter
2015
.
|
|
|
•
|
Multi-family average loan balances increased $928 million in third quarter 2016 compared to third quarter 2015.
|
|
|
•
|
The net interest margin grew to
2.83%
in
third
quarter
2016
as the average yield earned on assets increased
13
basis points, while the cost of funding the portfolio increased
11
basis points.
|
The increases in loan volumes for the periods presented were the result of focused efforts by Customers' lending teams to execute an organic growth strategy.
Interest expense on total interest-bearing deposits increased $
4.0 million
in
third
quarter
2016
compared to
third
quarter
2015
. This increase resulted from increased deposit volume as average interest-bearing deposits increased $
1.2 billion
for the three months ended
September 30, 2016
compared to average interest-bearing deposits for the three months ended
September 30, 2015
. The average rate on interest-bearing deposits increased
12
basis points for the
third
quarter
2016
compared to
third
quarter
2015
, reflecting higher interest rates offered by Customers on its money market deposit accounts and certificates of deposits in order to remain competitive and attract new and retain existing deposit customers.
Interest expense on borrowings increased
$1.8 million
in
third
quarter
2016
compared to
third
quarter
2015
. This increase was primarily driven by increased volumes as average borrowings for the three months ended
September 30, 2016
increased by
$371.5 million
when compared to average borrowings for the three months ended
September 30, 2015
. The average rate on borrowings increased
9
basis points for
third
quarter
2016
compared to
third
quarter
2015
primarily due to higher rates on short term borrowings used to fund commercial loans to mortgage companies.
Customers’ net interest margin (tax equivalent) increased by
4
basis points to
2.83%
for the three months ended
September 30, 2016
compared to the prior year period, as the increased yields from variable rate commercial loans and the investment portfolio more than offset the higher funding costs.
Provision for Loan Losses
The Bank has established an allowance for loan losses through a provision for loan losses charged as an expense on the consolidated statements of income. The loan portfolio is reviewed quarterly to assess and measure both the performance of the portfolio and the adequacy of the allowance for loan losses.
The provision for loan losses decreased by
$2.0 million
to
$0.1 million
for the three months ended
September 30, 2016
, compared to
$2.1 million
for the same period in
2015
. The third quarter 2016 provision of $0.1 million was a result of minimal loan growth during third quarter 2016, as planned, and asset quality remained exceptional. The third quarter 2015 provision for loan losses of $2.1 million included a $1.2 million provision for net growth in the held-for-investment loan portfolio (predominately multi-family loans) and a net provision of approximately $0.9 million primarily for estimated credit quality deterioration identified with loans considered impaired as of September 30, 2015.
For more information about provision expense, the allowance for loan losses, and Customers' loss experience, see “Credit Risk” and “Asset Quality” herein.
Non-Interest Income
The table below presents the components of non-interest income for the three months ended
September 30, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2016
|
|
2015
|
(amounts in thousands)
|
|
|
|
Interchange and card revenue
|
$
|
11,547
|
|
|
$
|
128
|
|
Deposit fees
|
4,218
|
|
|
265
|
|
Mortgage warehouse transactional fees
|
3,080
|
|
|
2,792
|
|
Bank-owned life insurance
|
1,386
|
|
|
1,177
|
|
Gain on sale of loans
|
1,206
|
|
|
1,131
|
|
Mortgage loans and banking income
|
287
|
|
|
167
|
|
Gain (loss) on sale of investment securities
|
(1
|
)
|
|
(16
|
)
|
Other
|
5,763
|
|
|
527
|
|
Total non-interest income
|
$
|
27,486
|
|
|
$
|
6,171
|
|
Non-interest income
increased
$21.3 million
during the three months ended
September 30, 2016
to
$27.5 million
, compared to
$6.2 million
for the three months ended
September 30, 2015
. The
increase
in
third
quarter
2016
was primarily a result of an increase of
$11.4 million
in interchange and card revenue, an increase of
$4.0 million
in deposit and wire transfer fees, an increase of $1.0 million in university fees, and a $2.2 million recovery of a previously recorded loss. The interchange and card revenue, deposit and wire transfer fee, and university fee increases totaled $16.4 million at BankMobile.
Non-Interest Expense
The table below presents the components of non-interest expense for the three months ended
September 30, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2016
|
|
2015
|
(amounts in thousands)
|
|
|
|
Salaries and employee benefits
|
$
|
22,681
|
|
|
$
|
14,981
|
|
Technology, communication and bank operations
|
12,525
|
|
|
2,422
|
|
Professional services
|
7,006
|
|
|
2,673
|
|
FDIC assessments, taxes, and regulatory fees
|
2,726
|
|
|
3,222
|
|
Occupancy
|
2,450
|
|
|
2,169
|
|
Other real estate owned expense
|
1,192
|
|
|
1,722
|
|
Loan workout
|
592
|
|
|
285
|
|
Advertising and promotion
|
591
|
|
|
330
|
|
Acquisition related expenses
|
144
|
|
|
—
|
|
Other
|
6,311
|
|
|
2,503
|
|
Total non-interest expense
|
$
|
56,218
|
|
|
$
|
30,307
|
|
Non-interest expense was
$56.2 million
for the three months ended
September 30, 2016
, an
increase
of
$25.9 million
from non-interest expense of
$30.3 million
for the three months ended
September 30, 2015
.
Salaries and employee benefits, which represent the largest component of non-interest expense,
increased
$7.7 million
, or
51.4%
, to
$22.7 million
for the three months ended
September 30, 2016
. This increase was primarily related to headcount growth from the acquisition of the Disbursement business and to support the larger multi-family, commercial real estate and commercial and industrial loan portfolios, and the increased deposits. Total team members increased to
757
full-time equivalents at
September 30, 2016
from
484
full-time equivalents at
September 30, 2015
. The increase in full-time equivalents was primarily related to the acquisition of the Disbursement business, which added approximately 225 team members during June 2016, with the remaining team members added to support a growing $9.6 billion bank.
Technology, communication and bank operations
expenses
increased
by
$10.1 million
, or
417.1%
, to
$12.5 million
for the three months ended
September 30, 2016
from
$2.4 million
for the three months ended
September 30, 2015
. This
increase
was primarily attributable to increased technology costs for BankMobile of $5.4 million resulting from the acquisition of the Disbursement business in June 2016 and a $3.9 million one-time expense for bank technology-related services.
Professional services
increased
by
$4.3 million
, or
162.1%
, to
$7.0 million
for the three months ended
September 30, 2016
from
$2.7 million
for the three months ended
September 30, 2015
. This increase was primarily related to increased professional service expenses for BankMobile of $3.9 million resulting from the acquisition of the Disbursement business.
FDIC assessments, taxes, and regulatory fees decreased by
$0.5 million
, or
15.4%
, to
$2.7 million
for the three months ended
September 30, 2016
from
$3.2 million
for the three months ended
September 30, 2015
. This decrease was primarily related to a lower insurance assessment charged by the FDIC as the FDIC's Deposit Insurance Fund reached a target ratio.
Other
expenses
increased
by
$3.8 million
, or
152.1%
, to
$6.3 million
for the three months ended
September 30, 2016
from
$2.5 million
for the three months ended
September 30, 2015
. This
increase
was primarily attributable to increased operating costs for BankMobile of $3.5 million resulting from the acquisition of the Disbursement business in June 2016.
Income Taxes
Income tax expense increased
$6.2 million
in the three months ended
September 30, 2016
to
$14.6 million
, compared to
$8.4 million
in the same period of
2015
. The increase in income tax expense was driven primarily from increased taxable income of
$12.1 million
in
third
quarter
2016
as well as an increase in the estimated effective tax rate for 2016 primarily due to an increasing proportion of income producing assets domiciled in New York, particularly in New York City. Customers’
third
quarter
2016
income tax expense reflected an estimated effective tax rate of
40.8%
, compared to a
third
quarter
2015
effective tax rate of
35.5%
. Customers'
third
quarter
2016
income tax expense also included an adjustment of $0.8 million that increased income tax expense as a result of a return to provision adjustment recorded upon filing Customers' 2015 tax return during third quarter 2016.
Preferred Stock Dividends
Preferred stock dividends increased
$1.6 million
for the three months ended September 30, 2016 to $2.6 million, compared to $1.0 million for the three months ended September 30, 2015. The increased preferred stock dividends in third quarter 2016 resulted from the accrual of dividends on the Series C preferred stock issued in second quarter 2015, the Series D preferred stock issued in first quarter 2016, the Series E preferred stock issued in second quarter 2016, and the Series F preferred stock issued in third quarter 2016. Total preferred stock outstanding as of September 30, 2016 was $225.0 million compared to $57.5 million of preferred stock outstanding as of September 30, 2015.
Nine Months Ended September 30, 2016
Compared to
Nine Months Ended September 30, 2015
Net income available to common shareholders increased
$13.1 million
, or
33.3%
, to
$52.4 million
for the
nine
months ended
September 30, 2016
, compared to
$39.3 million
for the
nine
months ended
September 30, 2015
. The increased net income available to common shareholders resulted from an increase in net interest income of
$42.5 million
, largely reflecting the loan portfolio growth of the past year, a
decrease
in provision expense of
$11.5 million
, and an increase in non-interest income of
$22.9 million
, offset in part by an increase in non-interest expense of
$44.9 million
, an increase in income tax expense of
$14.6 million
, and an increase in preferred stock dividends of
$4.4 million
.
Net interest income increased
$42.5 million
, or
29.8%
, for the
nine
months ended
September 30, 2016
to
$185.4 million
, compared to
$142.8 million
for the
nine months ended
September 30, 2015
. This increase resulted principally from higher average loan and security balances of
$2.0 billion
as well as a
4
basis point expansion in net interest margin to
2.84%
for the first
nine
months of
2016
compared to the first nine months of 2015.
The provision for loan losses
decreased
$11.5 million
to
$2.9 million
for the
nine
months ended
September 30, 2016
, compared to
$14.4 million
for the same period in
2015
. The provision for loan losses of
$2.9 million
included provisions for loan growth and impairment measured on specific loans of approximately $5.0 million, offset in part by increased estimated cash flows expected to be collected on purchased credit-impaired loans, a reduction in the estimated amounts owed to the FDIC for previous FDIC assisted transactions, and other recoveries of approximately $2.1 million. The 2015 provision expense included a provision of $6.0 million for a fraudulent loan that was charged off in full during 2015 and an increase in estimated amounts owed to the FDIC for previous FDIC assisted transactions of $3.8 million.
Non-interest income
increased
$22.9 million
, or 125.4%, during the
nine
months ended
September 30, 2016
to
$41.2 million
, compared to
$18.3 million
for the
nine
months ended
September 30, 2015
. The
increase
was primarily a result of an increase of
$13.4 million
in interchange and card revenues, deposit and wire transfer fees of
$4.6 million
, and an increase in other income of
$4.7 million
resulting primarily from a $2.2 million recovery of a previously recorded loss and university fees of $1.2 million. The interchange and card revenue, deposit and wire transfer fee, and university fee increases totaled $19.0 million at BankMobile.
Non-interest expense increased
$44.9 million
, or 53.8%, during the
nine
months ended
September 30, 2016
to
$128.3 million
, compared to
$83.4 million
during the
nine
months ended
September 30, 2015
as a result of increases in salaries and employee benefits of $14.7 million, technology costs of $11.2 million, professional services of $5.8 million, FDIC assessments, taxes and regulatory fees of $3.7 million, acquisition related expenses of $1.2 million and other operating expenses of $6.8 million. These increases resulted largely from increased operating costs for BankMobile of $22.2 million, a $3.9 million one-time expense for technology-related services, one-time charges of $1.4 million associated with legal matters, and an increase in resources and services necessary to support and operate a $9.6 billion bank. Non-interest expenses for the nine months ended September 30, 2015 also included an adjustment of $2.3 million that reduced Pennsylvania shares tax expense.
Income tax expense increased
$14.6 million
in the
nine
months ended
September 30, 2016
to
$37.1 million
, compared to
$22.5 million
in the same period of
2015
. The increase in income tax expense was driven by increased taxable income of
$32.2 million
in the first
nine
months of
2016
and an adjustment of $0.8 million that increased income tax expense as a result of a return to provision true-up recorded upon the filing of Customers' 2015 tax return during third quarter 2016. Customers' effective tax rate increased to
38.9%
for the
nine
months ended
September 30, 2016
, compared to
35.5%
for the same period of
2015
. The increase in the effective tax rate was primarily driven by an increased proportion of income producing assets domiciled in New York, particularly in New York City.
Preferred stock dividends increased
$4.4 million
in the
nine
months ended
September 30, 2016
to $5.9 million, compared to $1.5 million in the same period of 2015. The increased preferred stock dividends resulted from issuances of $167.5 million of preferred stock during 2016 for a total balance of $225.0 million, compared to $57.5 million of preferred stock outstanding at September 30, 2015.
Net Interest Income
Net interest income (the difference between the interest earned on loans, investments and interest-earning deposits with banks, and interest paid on deposits, borrowed funds and subordinated debt) is the primary source of Customers' earnings.
The following table summarizes Customers' net interest income and related spread and margin for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
Average
Balance
|
|
Interest
Income or
Expense
|
|
Average
Yield or
Cost (%)
|
|
Average
Balance
|
|
Interest
Income or
Expense
|
|
Average
Yield or
Cost
|
(amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Interest earning deposits
|
$
|
211,971
|
|
|
$
|
845
|
|
|
0.53
|
%
|
|
$
|
295,485
|
|
|
$
|
566
|
|
|
0.26
|
%
|
Investment securities, taxable (A)
|
548,921
|
|
|
10,875
|
|
|
2.64
|
%
|
|
389,253
|
|
|
6,899
|
|
|
2.36
|
%
|
Loans held for sale
|
1,915,572
|
|
|
50,272
|
|
|
3.51
|
%
|
|
1,594,942
|
|
|
38,428
|
|
|
3.22
|
%
|
Loans (B)
|
5,949,829
|
|
|
173,847
|
|
|
3.90
|
%
|
|
4,472,704
|
|
|
132,185
|
|
|
3.95
|
%
|
Other interest-earning assets
|
90,911
|
|
|
3,092
|
|
|
4.54
|
%
|
|
73,368
|
|
|
4,059
|
|
|
7.40
|
%
|
Total interest earning assets
|
8,717,204
|
|
|
238,931
|
|
|
3.66
|
%
|
|
6,825,752
|
|
|
182,137
|
|
|
3.57
|
%
|
Non-interest earning assets
|
305,326
|
|
|
|
|
|
|
265,184
|
|
|
|
|
|
Total assets
|
$
|
9,022,530
|
|
|
|
|
|
|
$
|
7,090,936
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
Interest checking
|
$
|
160,525
|
|
|
681
|
|
|
0.57
|
%
|
|
$
|
119,472
|
|
|
495
|
|
|
0.55
|
%
|
Money market
|
3,044,696
|
|
|
13,674
|
|
|
0.60
|
%
|
|
2,336,667
|
|
|
9,244
|
|
|
0.53
|
%
|
Other savings
|
39,075
|
|
|
66
|
|
|
0.23
|
%
|
|
35,462
|
|
|
87
|
|
|
0.33
|
%
|
Certificates of deposit
|
2,556,935
|
|
|
19,944
|
|
|
1.04
|
%
|
|
1,997,640
|
|
|
14,867
|
|
|
0.99
|
%
|
Total interest bearing deposits
|
5,801,231
|
|
|
34,365
|
|
|
0.79
|
%
|
|
4,489,241
|
|
|
24,693
|
|
|
0.74
|
%
|
Borrowings
|
1,693,455
|
|
|
19,196
|
|
|
1.51
|
%
|
|
1,395,863
|
|
|
14,622
|
|
|
1.40
|
%
|
Total interest-bearing liabilities
|
7,494,686
|
|
|
53,561
|
|
|
0.95
|
%
|
|
5,885,104
|
|
|
39,315
|
|
|
0.89
|
%
|
Non-interest-bearing deposits
|
800,358
|
|
|
|
|
|
|
684,466
|
|
|
|
|
|
Total deposits & borrowings
|
8,295,044
|
|
|
|
|
0.86
|
%
|
|
6,569,570
|
|
|
|
|
0.80
|
%
|
Other non-interest bearing liabilities
|
76,774
|
|
|
|
|
|
|
26,025
|
|
|
|
|
|
Total liabilities
|
8,371,818
|
|
|
|
|
|
|
6,595,595
|
|
|
|
|
|
Shareholders’ Equity
|
650,712
|
|
|
|
|
|
|
495,341
|
|
|
|
|
|
Total liabilities and shareholders’ equity
|
$
|
9,022,530
|
|
|
|
|
|
|
$
|
7,090,936
|
|
|
|
|
|
Net interest earnings
|
|
|
185,370
|
|
|
|
|
|
|
142,822
|
|
|
|
Tax-equivalent adjustment (C)
|
|
|
298
|
|
|
|
|
|
|
337
|
|
|
|
Net interest earnings
|
|
|
$
|
185,668
|
|
|
|
|
|
|
$
|
143,159
|
|
|
|
Interest spread
|
|
|
|
|
2.80
|
%
|
|
|
|
|
|
2.77
|
%
|
Net interest margin
|
|
|
|
|
2.84
|
%
|
|
|
|
|
|
2.80
|
%
|
Net interest margin tax equivalent (C)
|
|
|
|
|
2.84
|
%
|
|
|
|
|
|
2.80
|
%
|
|
|
(A)
|
For presentation in this table, average balances and the corresponding average yields for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.
|
|
|
(B)
|
Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees.
|
|
|
(C)
|
Non-GAAP tax-equivalent basis, using a 35% statutory tax rate to approximate interest income as a taxable asset.
|
The following table presents the dollar amount of changes in interest income and interest expense for the major categories of interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2016 vs. 2015
|
|
Increase (Decrease) due
to Change in
|
|
|
|
Rate
|
|
Volume
|
|
Total
|
(amounts in thousands)
|
|
|
|
|
|
Interest income:
|
|
|
|
|
|
Interest earning deposits
|
$
|
475
|
|
|
$
|
(196
|
)
|
|
$
|
279
|
|
Investment securities
|
887
|
|
|
3,089
|
|
|
3,976
|
|
Loans held for sale
|
3,613
|
|
|
8,231
|
|
|
11,844
|
|
Loans
|
(1,625
|
)
|
|
43,287
|
|
|
41,662
|
|
Other interest-earning assets
|
(1,797
|
)
|
|
830
|
|
|
(967
|
)
|
Total interest income
|
1,553
|
|
|
55,241
|
|
|
56,794
|
|
Interest expense:
|
|
|
|
|
|
Interest checking
|
12
|
|
|
174
|
|
|
186
|
|
Money market deposit accounts
|
1,360
|
|
|
3,070
|
|
|
4,430
|
|
Savings
|
(29
|
)
|
|
8
|
|
|
(21
|
)
|
Certificates of deposit
|
732
|
|
|
4,345
|
|
|
5,077
|
|
Total interest bearing deposits
|
2,075
|
|
|
7,597
|
|
|
9,672
|
|
Borrowings
|
1,266
|
|
|
3,308
|
|
|
4,574
|
|
Total interest expense
|
3,341
|
|
|
10,905
|
|
|
14,246
|
|
Net interest income
|
$
|
(1,788
|
)
|
|
$
|
44,336
|
|
|
$
|
42,548
|
|
Net interest income for the
nine months ended September 30, 2016
was
$185.4 million
, an increase of
$42.5 million
, or
29.8%
, when compared to net interest income of
$142.8 million
for the
nine
months ended
September 30, 2015
. This increase was primarily driven by increased average loan and security balances of
$2.0 billion
. Net interest margin also expanded by
4
basis points to
2.84%
from the
nine
months ended
September 30, 2015
and contributed to the higher net interest income.
|
|
•
|
Regarding the increases in loan balances, commercial loan average balances increased $852 million, including commercial loans to mortgage banking companies, in the first
nine
months of
2016
compared to the first
nine
months of 2015.
|
|
|
•
|
Multi-family average loan balances increased $981 million in the first nine months of 2016 compared to the first nine months of 2015.
|
|
|
•
|
The increased volume from variable rate commercial loans and the investment portfolio more than offset the higher funding costs.
|
Interest expense on total interest-bearing deposits increased
$9.7 million
for the
nine
months ended
September 30, 2016
compared to the
nine
months ended
September 30, 2015
. This increase primarily resulted from increased deposit volume as average interest-bearing deposits for the
nine
months ended
September 30, 2016
increased by
$1.3 billion
when compared to average interest-bearing deposits for the
nine
months ended
September 30, 2015
. The average rate on interest-bearing deposits increased
5
basis points for the
nine
months ended
September 30, 2016
compared to the
nine
months ended
September 30, 2015
, reflecting higher interest rates offered by Customers on its money market deposit accounts and certificates of deposits in order to remain competitive and attract new and retain existing deposit customers.
Interest expense on borrowings increased
$4.6 million
for the
nine
months ended
September 30, 2016
, compared to the
nine
months ended
September 30, 2015
. This increase was driven by increased volume as average borrowings increased by
$297.6 million
when compared to average borrowings for the
nine
months ended
September 30, 2015
, in addition to a
11
basis point increase in average rates for the period due to higher rates on short term borrowings used to fund commercial loans to mortgage companies.
Provision for Loan Losses
The provision for loan losses decreased by
$11.5 million
to
$2.9 million
for the
nine
months ended
September 30, 2016
, compared to
$14.4 million
for the same period in
2015
. The provision for loan losses of
$2.9 million
included provisions for loan growth and impairment measured on specific specific loans of approximately $5.0 million, offset in part by increased estimated cash flows expected to be collected on purchased credit-impaired loans, a reduction in the estimated amounts owed to the FDIC for previous FDIC assisted transactions, and other recoveries of approximately $2.1 million. The 2015 provision expense included a provision of $6.0 million for a fraudulent loan that was charged off in full during 2015 and an increase in estimated amounts owed to the FDIC for previous FDIC assisted transactions of $3.8 million.
For more information about provision and allowance for loan losses and our loss experience, see “Credit Risk” and “Asset Quality” herein.
Non-Interest Income
The table below presents the components of non-interest income for the
nine
months ended
September 30, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
(amounts in thousands)
|
|
|
|
Interchange and card revenue
|
$
|
13,806
|
|
|
$
|
390
|
|
Mortgage warehouse transactional fees
|
8,702
|
|
|
7,864
|
|
Deposit fees
|
5,260
|
|
|
691
|
|
Bank-owned life insurance
|
3,629
|
|
|
3,407
|
|
Gain on sale of loans
|
2,135
|
|
|
3,189
|
|
Mortgage loans and banking income
|
737
|
|
|
605
|
|
Gain (loss) on sale of investment securities
|
25
|
|
|
(85
|
)
|
Other
|
6,943
|
|
|
2,236
|
|
Total non-interest income
|
$
|
41,237
|
|
|
$
|
18,297
|
|
Non-interest income
increased
$22.9 million
during the
nine
months ended
September 30, 2016
to
$41.2 million
, compared to
$18.3 million
for the
nine
months ended
September 30, 2015
. The
increase
was primarily a result of an increase of
$13.4 million
in interchange and card revenues, deposit and wire transfer fees of
$4.6 million
, and an increase in other non-interest income of
$4.7 million
resulting primarily from a $2.2 million recovery of a previously recorded loss and university fees of $1.2 million. The interchange and card revenue, deposit and wire transfer fee, and university fee increases totaled $19.0 million at BankMobile.
Non-Interest Expense
The table below presents the components of non-interest expense for the
nine
months ended
September 30, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
(amounts in thousands)
|
|
|
|
Salaries and employee benefits
|
$
|
58,051
|
|
|
$
|
43,381
|
|
Technology, communication and bank operations
|
19,021
|
|
|
7,791
|
|
Professional services
|
13,213
|
|
|
7,378
|
|
FDIC assessments, taxes, and regulatory fees
|
11,191
|
|
|
7,495
|
|
Occupancy
|
7,248
|
|
|
6,469
|
|
Other real estate owned expense
|
1,663
|
|
|
2,026
|
|
Loan workout expense
|
1,497
|
|
|
541
|
|
Acquisition related expenses
|
1,195
|
|
|
—
|
|
Advertising and promotion
|
1,178
|
|
|
1,106
|
|
Other
|
14,049
|
|
|
7,245
|
|
Total non-interest expense
|
$
|
128,306
|
|
|
$
|
83,432
|
|
Non-interest expense was
$128.3 million
for the
nine
months ended
September 30, 2016
, an increase of
$44.9 million
from non-interest expense of
$83.4 million
for the
nine
months ended
September 30, 2015
.
Salaries and employee benefits, which represent the largest component of non-interest expense, increased
$14.7 million
, or
33.8%
, to
$58.1 million
for the
nine
months ended
September 30, 2016
. The increase was primarily related to headcount growth from the acquisition of the Disbursement business and to support the larger multi-family, commercial real estate and commercial and industrial loan portfolios, and the increased deposits. Total team members increased to
757
full-time equivalents at
September 30, 2016
, from
484
full-time equivalents at
September 30, 2015
. The increase in full-time equivalents was primarily related to the acquisition of the Disbursement business which added approximately 225 employees during June 2016, with the remaining team members added to support a $9.6 billion bank.
Technology, communication and bank operations increased by
$11.2 million
, or
144.1%
, to
$19.0 million
for the
nine
months ended
September 30, 2016
from
$7.8 million
for the
nine
months ended
September 30, 2015
. This
increase
was primarily attributable to increased technology costs for BankMobile of $6.5 million resulting from the acquisition of the Disbursement business in June 2016 and a $3.9 million one-time expense for technology-related services.
Professional services expense
increased
by
$5.8 million
, or
79.1%
, to
$13.2 million
for the
nine
months ended
September 30, 2016
from
$7.4 million
for the
nine
months ended
September 30, 2015
. The increase was primarily related to increased professional services expense for BankMobile of $4.1 million resulting from the acquisition of the Disbursement business and other professional services expense to support a $9.6 billion bank.
FDIC assessments, taxes, and regulatory fees
increased
by
$3.7 million
, or
49.3%
, to
$11.2 million
for the
nine
months ended
September 30, 2016
from
$7.5 million
for the
nine
months ended
September 30, 2015
. This increase was primarily attributable to an adjustment that reduced Pennsylvania shares tax expense by $2.3 million for the nine months ended September 30, 2015 and increased FDIC insurance assessments driven mainly by the organic growth of the Bank.
Acquisition related expenses were
$1.2 million
for the
nine
months ended
September 30, 2016
. Expenses were primarily consulting, professional services and other expenses related to the acquisition of the Disbursement business.
Other expenses increased by
$6.8 million
, or
93.9%
, to $
14.0 million
for the
nine
months ended
September 30, 2016
from $
7.2 million
for the
nine
months ended
September 30, 2015
. The increase was primarily attributable to increased operating costs for BankMobile of $4.2 million, one-time charges associated with legal matters of $1.4 million, and other operating costs increases necessary to support and operate a $9.6 billion bank.
Income Taxes
Income tax expense increased
$14.6 million
in the
nine
months ended
September 30, 2016
to
$37.1 million
, compared to
$22.5 million
in the same period of
2015
. The increase in income tax expense was driven by increased taxable income of
$32.2 million
in the first
nine
months of
2016
and an adjustment of $0.8 million that increased income tax expense as a result of a return to provision true-up recorded upon the filing of Customers' 2015 tax return during third quarter 2016. Customers' effective tax rate increased to
38.9%
for the
nine
months ended
September 30, 2016
, compared to
35.5%
for the same period of
2015
. The increase in the effective tax rate was primarily driven by an increased proportion of income producing assets domiciled in New York, particularly in New York City.
Preferred Stock Dividends
Preferred stock dividends
increased
$4.4 million
in the
nine
months ended
September 30, 2016
to $5.9 million, compared to $1.5 million for the nine months ended September 30, 2015. The increased preferred stock dividends resulted from the accrual of dividends on the Series C preferred stock issued in second quarter 2015, the Series D preferred stock issued in first quarter 2016, the Series E preferred stock issued in second quarter 2016, and the Series F preferred stock issued in third quarter 2016. Total preferred stock outstanding at September 30, 2016 was $225.0 million compared to $57.5 million preferred stock outstanding as of September 30, 2015.
Financial Condition
General
Total assets were
$9.6 billion
at
September 30, 2016
. This represented a
$1.2 billion
, or
14.3%
, increase from total assets of
$8.4 billion
at
December 31, 2015
. The major change in Customers' financial position occurred as the result of organic growth in our loan portfolio, which increased by
$1.2 billion
since
December 31, 2015
, or
16.1%
, to
$8.4 billion
at
September 30, 2016
. The main drivers were the growth of commercial loans held for investment, which increased
$0.6 billion
, or
12.2%
, to
$5.7 billion
at
September 30, 2016
compared to
$5.1 billion
at
December 31, 2015
and commercial loans to mortgage companies held for sale which increased
$0.6 billion
, or
35.3%
, to
$2.4 billion
at
September 30, 2016
compared to
$1.8 billion
at
December 31, 2015
.
Total liabilities were
$8.8 billion
at
September 30, 2016
. This represented a
$1.0 billion
, or
12.3%
, increase from
$7.8 billion
at
December 31, 2015
. The increase in total liabilities resulted from increased deposits, which increased by
$1.5 billion
, or
25.0%
, to
$7.4 billion
at
September 30, 2016
from
$5.9 billion
at
December 31, 2015
. Transaction deposits grew by
$0.9 billion
, or
25.2%
, to
$4.5 billion
at
September 30, 2016
from
$3.6 billion
at
December 31, 2015
. Deposit growth was primarily the result of growth in non-interest bearing demand deposits of $0.4 billion (primarily generated by BankMobile), money market accounts of
$0.4 billion
and certificates of deposit accounts of
$0.6 billion
.
The following table sets forth certain key condensed balance sheet data as of
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31,
2015
|
(amounts in thousands)
|
|
|
|
Cash and cash equivalents
|
$
|
265,588
|
|
|
$
|
264,593
|
|
Investment securities, available for sale
|
530,896
|
|
|
560,253
|
|
Loans held for sale (includes $2,377,445 and $1,757,807, respectively, at fair value)
|
2,402,708
|
|
|
1,797,064
|
|
Loans receivable
|
6,016,995
|
|
|
5,453,479
|
|
Allowance for loan losses
|
(37,897
|
)
|
|
(35,647
|
)
|
Total assets
|
9,602,610
|
|
|
8,398,205
|
|
Total deposits
|
7,388,970
|
|
|
5,909,501
|
|
Federal funds purchased
|
52,000
|
|
|
70,000
|
|
FHLB advances
|
1,036,700
|
|
|
1,625,300
|
|
Other borrowings
|
86,957
|
|
|
86,457
|
|
Subordinated debt
|
108,758
|
|
|
108,685
|
|
Total liabilities
|
8,812,790
|
|
|
7,844,303
|
|
Total shareholders’ equity
|
789,820
|
|
|
553,902
|
|
Total liabilities and shareholders’ equity
|
9,602,610
|
|
|
8,398,205
|
|
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks and interest-earning deposits. Cash and due from banks consists mainly of vault cash and cash items in the process of collection. These balances totaled
$39.7 million
at
September 30, 2016
. This represents a
$13.8 million
decrease
from
$53.6 million
at
December 31, 2015
. These balances vary from day to day, primarily due to variations in customers’ deposits with the Bank. Interest-earning deposits consist of cash deposited at other banks, primarily the Federal Reserve Bank of Philadelphia. Interest-earning deposits were
$225.8 million
and
$211.0 million
at
September 30, 2016
and
December 31, 2015
, respectively. Included in the reported balances of cash and cash equivalents at September 30, 2016 is the $20 million placed in escrow to be paid to Higher One over the next two years in connection with the acquisition of the Disbursement business.
Investment Securities
The investment securities portfolio is an important source of interest income and liquidity. At
September 30, 2016
, investments consisted of residential and commercial real estate mortgage-backed securities guaranteed by an agency of the United States government, corporate notes and marketable equity securities. In addition to generating revenue, the investment portfolio is maintained to manage interest-rate risk, provide liquidity and collateral for borrowings, and diversify the credit risk of interest-earning assets. The portfolio is structured to maximize net interest income, given changes in the economic environment, liquidity position, and balance sheet mix.
At
September 30, 2016
, investment securities were
$530.9 million
compared to
$560.3 million
at
December 31, 2015
. The
decrease
was primarily the result of maturities, sales and principal repayments of
$48.9 million
during the
nine
months ended
September 30, 2016
, offset in part by investment security purchases of
$5.0 million
and net increases in fair values of
$15.2 million
.
Loans
Existing lending relationships are primarily with small and middle market businesses and individual consumers primarily in Bucks, Berks, Chester, Montgomery, Delaware, and Philadelphia Counties, Pennsylvania; Camden and Mercer Counties, New Jersey; and Westchester County and New York City, New York; and the New England area. The loans to mortgage banking companies portfolio is nation-wide. The loan portfolio consists primarily of loans to mortgage banking companies, multi-family, commercial real estate, and commercial and industrial loans. The Bank continues to focus on small and middle market business loans to grow its commercial lending efforts, establish a specialty lending business, and expand its consumer lending products, as outlined below:
Commercial Lending
Customers' commercial lending is divided into four groups: Business Banking, Small and Middle Market Business Banking, Multi-family and Commercial Real Estate Lending, and Mortgage Banking Lending. This grouping is designed to allow for more effective resource deployment, higher standards of risk management, stronger oversight of asset quality, better management of interest rate risk and higher productivity levels.
The commercial lending group focuses primarily on companies with annual revenues ranging from $1 million to $50 million, which typically have credit requirements between $0.5 million and $10 million.
The small and middle market business banking platform originates loans, including Small Business Administration loans, through the branch network sales force and a team of dedicated relationship managers. The support administration of this platform is centralized including risk management, product management, marketing, performance tracking and overall strategy. Credit and sales training has been established for Customers' sales force, ensuring that it has small business experts in place providing appropriate financial solutions to the small business owners in its communities. A division approach focuses on industries that offer high asset quality and are deposit rich to drive profitability.
In 2009, Customers launched its lending to mortgage banking businesses products, which primarily provides financing to mortgage bankers for residential mortgage originations from loan closing until sale in the secondary market. Many providers of liquidity in this segment exited the business in 2009 during a period of market turmoil. Customers saw an opportunity to provide liquidity to this business segment at attractive spreads. There was also the opportunity to attract escrow deposits and to generate fee income in this business. The goal of the mortgage banking businesses lending group is to provide liquidity to mortgage companies. These loans are primarily used by mortgage companies to fund their pipelines from closing of individual mortgage loans until their sale into the secondary market. The underlying residential loans are taken as collateral for the Bank’s loans. As of
September 30, 2016
, loans in the warehouse lending portfolio totaled
$2.4 billion
and are designated as held for sale.
The goal of the Bank’s multi-family lending group is to build a portfolio of high-quality multi-family loans within the Bank’s covered markets, while cross selling other products and services. This product primarily targets refinancing existing loans with other banks using conservative underwriting standards and provides purchase money for new acquisitions by borrowers. The primary collateral for these loans is a first lien mortgage on the multi-family property, plus an assignment of all leases related to such property. As of
September 30, 2016
, the Bank had multi-family loans of
$3.2 billion
outstanding, making up approximately
37.7%
of the Bank’s total loan portfolio, compared to
$2.9 billion
, or approximately
40.7%
of the total loan portfolio at
December 31, 2015
.
As of
September 30, 2016
, the Bank had
$8.1 billion
in commercial loans outstanding, totaling approximately
96.0%
of its total loan portfolio, which includes loans held for sale, compared to
$6.9 billion
commercial loans outstanding, composing approximately
94.6%
of its loan portfolio at
December 31, 2015
.
Consumer Lending
Customers provides home equity and residential mortgage loans to customers. Underwriting standards for home equity lending are conservative and lending is offered to solidify customer relationships and grow relationship revenues in the long term. This lending is important in Customers' efforts to grow total relationship revenues for its consumer households. As of
September 30, 2016
, the Bank had
$338.5 million
in consumer loans outstanding, or
4.0%
, of the Bank’s total loan portfolio, which includes loans held for sale. The Bank plans to expand its product offerings in real estate secured consumer lending.
Customers Bank has launched a community outreach program in Philadelphia to finance homeownership in urban communities. As part of this program, the Bank is offering an “Affordable Mortgage Product”. This community outreach program is penetrating the underserved population, especially in low and moderate income neighborhoods. As part of this commitment, a limited purpose office was opened in Progress Plaza, 1501 North Broad Street, Philadelphia, PA. The program includes homebuyer seminars that prepare potential homebuyers for homeownership by teaching money management and budgeting skills, including the financial responsibilities that come with having a mortgage and owning a home. The “Affordable Mortgage Product” is offered throughout Customers Bank’s assessment areas.
Held-for-Sale Loans
The composition of loans held for sale as of
September 30, 2016
and
December 31, 2015
was as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
2016
|
|
2015
|
(amounts in thousands)
|
|
Commercial loans:
|
|
|
|
Mortgage warehouse loans at fair value
|
$
|
2,373,877
|
|
|
$
|
1,754,950
|
|
Multi-family loans at lower of cost or fair value
|
25,263
|
|
|
39,257
|
|
Total commercial loans held for sale
|
2,399,140
|
|
|
1,794,207
|
|
Consumer loans:
|
|
|
|
Residential mortgage loans at fair value
|
3,568
|
|
|
2,857
|
|
Loans held for sale
|
$
|
2,402,708
|
|
|
$
|
1,797,064
|
|
At
September 30, 2016
, loans held for sale were
$2.4 billion
, or
28.5%
, of the total loan portfolio, compared to
$1.8 billion
, or
24.8%
, of the total loan portfolio at
December 31, 2015
. The loans held-for-sale portfolio at
September 30, 2016
included
$2.4 billion
of commercial loans to mortgage banking businesses,
$25.3 million
of multi-family loans and
$3.6 million
of consumer residential mortgage loans, compared to
$1.8 billion
of commercial loans to mortgage banking businesses,
$39.3 million
of multi-family loans and
$2.9 million
of consumer residential mortgages loans at
December 31, 2015
. Held-for-sale loans are carried on the balance sheet at either fair value (due to the election of the fair value option) or the lower of cost or fair value. An allowance for loan losses is not recorded on loans that are held for sale.
The mortgage warehouse loan held for sale balances increased
$618.9 million
to
$2.4 billion
as of
September 30, 2016
compared to
December 31, 2015
. The increase resulted primarily from the increased level of home mortgage refinance activity nation-wide as a result of the sharp decline in longer term borrowing rates experienced in 2016. Mortgage warehouse balances are typically elevated during the summer months when home purchasing activity is typically stronger.
Loans Receivable
Loans receivable (excluding loans held for sale), net of the allowance for loan losses, increased by
$561.3 million
to
$6.0 billion
at
September 30, 2016
from
$5.4 billion
at
December 31, 2015
. Loans receivable as of
September 30, 2016
and
December 31, 2015
consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
2016
|
|
2015
|
(amounts in thousands)
|
|
Commercial:
|
|
|
|
Multi-family
|
$
|
3,150,298
|
|
|
$
|
2,909,439
|
|
Commercial and industrial (including owner occupied commercial real estate)
|
1,296,721
|
|
|
1,111,400
|
|
Commercial real estate non-owner occupied
|
1,151,099
|
|
|
956,255
|
|
Construction
|
83,835
|
|
|
87,240
|
|
Total commercial loans
|
5,681,953
|
|
|
5,064,334
|
|
Consumer:
|
|
|
|
Residential real estate
|
227,122
|
|
|
271,613
|
|
Manufactured housing
|
104,404
|
|
|
113,490
|
|
Other
|
3,420
|
|
|
3,708
|
|
Total consumer loans
|
334,946
|
|
|
388,811
|
|
Total loans receivable
|
6,016,899
|
|
|
5,453,145
|
|
Deferred costs and unamortized premiums, net
|
96
|
|
|
334
|
|
Allowance for loan losses
|
(37,897
|
)
|
|
(35,647
|
)
|
Loans receivable, net of allowance for loan losses
|
$
|
5,979,098
|
|
|
$
|
5,417,832
|
|
Multi-family net loan growth (excluding loans held for sale) of
$240.9 million
in 2016 reflects efforts by Customers to deepen penetration into its markets during the period. Customers plans to moderate its multi-family loan growth for the remainder of 2016.
Credit Risk
Customers manages credit risk by maintaining diversification in its loan portfolio, establishing and enforcing prudent underwriting standards, diligent collection efforts and continuous and periodic loan classification reviews. Management also considers the effect of credit risk on financial performance by maintaining an adequate allowance for loan losses. Credit losses are charged to the allowance for loan losses when they are identified, and provisions are added to the allowance for loan losses when and as appropriate. The adequacy of the allowance for loan losses to absorb estimated incurred losses as of the last day of the reporting period is evaluated at least quarterly.
The provision for loan losses was
$0.1 million
and
$2.1 million
for the three months ended
September 30, 2016
and
2015
, respectively. The provision for loan losses was
$2.9 million
and
$14.4 million
for the nine months ended
September 30, 2016
and
2015
, respectively. The allowance for loan losses maintained for loans receivable (excludes loans held for sale) was
$37.9 million
, or
0.63%
of loans receivable, at
September 30, 2016
and
$35.6 million
, or
0.65%
of loans receivable, at
December 31, 2015
. Net charge-offs were
$0.9 million
for the
nine
months ended
September 30, 2016
, a decrease of
$6.8 million
compared to the same period in
2015
. The decrease in net charge offs was mainly driven by the $5.3 million partial charge-off recorded in third quarter 2015 for the $9.0 million fraudulent loan identified in the commercial loan portfolio. The remaining $3.7 million was charged-off in fourth quarter 2015.
On July 11, 2016, Customers entered into an agreement to terminate all existing loss sharing agreements with the FDIC. All rights and obligations under these loss sharing agreements have been resolved and terminated under this agreement. Covered loans and other real estate owned were reclassified and were no longer presented as of June 30, 2016.
The chart below depicts changes in the Bank’s allowance for loan losses for the periods indicated. The amounts presented for the provision for loan losses below do not include the effect of changes to estimated benefits resulting from the FDIC loss share arrangements for the covered loans for periods prior to the termination of the FDIC loss sharing agreements.
Analysis of the Allowance for Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
(amounts in thousands)
|
|
|
|
|
|
|
|
Balance at the beginning of the period
|
$
|
38,097
|
|
|
$
|
37,491
|
|
|
$
|
35,647
|
|
|
$
|
30,932
|
|
Loan charge-offs (1)
|
|
|
|
|
|
|
|
Commercial and industrial
|
237
|
|
|
5,559
|
|
|
774
|
|
|
6,793
|
|
Commercial real estate owner occupied
|
—
|
|
|
35
|
|
|
—
|
|
|
378
|
|
Commercial real estate non-owner occupied
|
140
|
|
|
82
|
|
|
140
|
|
|
327
|
|
Construction
|
—
|
|
|
—
|
|
|
—
|
|
|
1,064
|
|
Residential real estate
|
43
|
|
|
256
|
|
|
456
|
|
|
282
|
|
Other consumer
|
246
|
|
|
—
|
|
|
478
|
|
|
36
|
|
Total Charge-offs
|
666
|
|
|
5,932
|
|
|
1,848
|
|
|
8,880
|
|
Loan recoveries (1)
|
|
|
|
|
|
|
|
Commercial and industrial
|
62
|
|
|
248
|
|
|
173
|
|
|
351
|
|
Commercial real estate owner occupied
|
—
|
|
|
13
|
|
|
—
|
|
|
14
|
|
Commercial real estate non-owner occupied
|
—
|
|
|
—
|
|
|
8
|
|
|
—
|
|
Construction
|
8
|
|
|
8
|
|
|
465
|
|
|
195
|
|
Residential real estate
|
298
|
|
|
—
|
|
|
299
|
|
|
572
|
|
Other consumer
|
10
|
|
|
6
|
|
|
10
|
|
|
91
|
|
Total Recoveries
|
378
|
|
|
275
|
|
|
955
|
|
|
1,223
|
|
Total net charge-offs
|
288
|
|
|
5,657
|
|
|
893
|
|
|
7,657
|
|
Provision for loan losses
|
88
|
|
|
1,989
|
|
|
3,143
|
|
|
10,548
|
|
Balance at the end of the period
|
$
|
37,897
|
|
|
$
|
33,823
|
|
|
$
|
37,897
|
|
|
$
|
33,823
|
|
|
|
(1)
|
Charge-offs and recoveries on purchased-credit-impaired loans that are accounted for in pools are recognized on a net basis when the pool matures.
|
The allowance for loan losses is based on a periodic evaluation of the loan portfolio and is maintained at a level that management considers adequate to absorb probable losses incurred as of the balance sheet date. All commercial loans are assigned credit risk ratings, based upon an assessment of the borrower, the structure of the transaction and the available collateral and/or guarantees. All loans are monitored regularly by the responsible officer, and the risk ratings are adjusted when considered appropriate. The risk assessment allows management to identify problem loans timely. Management considers a variety of factors, and recognizes the inherent risk of loss that always exists in the lending process. Management uses a disciplined methodology to estimate an appropriate level of allowance for loan losses. See “Asset Quality” for further discussion of the allowance for loan losses.
Approximately 80% of the Bank’s commercial real estate, commercial and residential construction, consumer residential and commercial and industrial loan types have real estate as collateral (collectively, “the real estate portfolio”). The Bank’s lien position on the real estate collateral will vary on a loan-by-loan basis and will change as a result of changes in the value of the collateral. Current appraisals providing current value estimates of the property are received when the Bank’s 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 fifteen 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 used to determine the estimated fair value of the underlying collateral and compared, net of estimated selling costs if the loan is collateral dependent, to the outstanding loan balance to measure a specific reserve. Appraisals used in this evaluation process are typically less than two years aged. New appraisals are typically obtained for loans where real estate is the primary source of collateral when they are first evaluated individually for impairment. 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 future cash flows to be received and compared, net of estimated selling costs if appropriate, to the outstanding loan balance to estimate the required reserve, if any.
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 450
Contingencies
and ASC 310-40
Troubled Debt Restructurings by Creditors,
impaired loans, consisting primarily of non-accrual and restructured loans, are considered in the methodology for determining the allowance for credit losses. Impaired loans are generally evaluated based on the expected future cash flows or the fair value of the underlying collateral (less estimated costs to sell) if principal repayment is expected to come from the sale or operation of such collateral.
Losses incurred on covered loans were eligible for partial reimbursement by the FDIC prior to the termination of Customers' loss sharing agreements with the FDIC (discussed below). In this situation, subsequent to the purchase date, the expected cash flows on the covered loans were subject to evaluation. Decreases in the present value of expected cash flows on the covered loans were recognized by increasing the allowance for loan losses with a related charge to the provision for loan losses. At the same time, the FDIC indemnification asset was increased reflecting an estimated future collection from the FDIC, which was recorded as a reduction to the provision for loan losses. If the expected cash flows on the covered loans increased such that a previously recorded impairment could be reversed, the Bank recorded a reduction in the allowance for loan losses (with a related credit to the provision for loan losses) accompanied by a reduction in the FDIC receivable balance (with a related charge to the provision for loan losses). Increases in expected cash flows on covered loans and decreases in expected cash flows from the FDIC loss sharing receivable, when there are no previously recorded impairments, were considered together and recognized over the remaining life of the loans as interest income. Decreases in the valuations of other real estate owned covered by the loss sharing agreements were recorded net of the estimated FDIC receivable as an increase to other real estate owned expense (a component of non-interest expense).
On July 11, 2016, Customers entered into an agreement to terminate all existing loss sharing agreements with the FDIC. All rights and obligations under these loss sharing agreements have been resolved and terminated under this agreement. Covered loans and other real estate owned were reclassified were no longer presented as covered beginning June 30, 2016.
Asset Quality
Customers divides its loan portfolio into two categories to analyze and understand loan activity and performance: loans that were originated and loans that were acquired. Customers' originated loans were subject to the current underwriting standards that were put in place in 2009. Management believes this additional information provides a better understanding of the risk in the portfolio and the various types of reserves that are available to absorb loan losses that may emerge in future periods. Credit losses from originated loans are absorbed by the allowance for loan losses. Credit losses from acquired loans are absorbed by the allowance for loan losses, nonaccretable difference fair value marks, and cash reserves, as described below. The allowance for loan losses is intended to absorb only those losses estimated to have been incurred after acquisition, whereas the fair value mark and cash reserves absorb losses estimated to have been embedded in the acquired loans at acquisition. The schedule that follows includes both loans held for sale and loans held for investment.
Asset Quality at
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Type
|
Total Loans
|
|
Current
|
|
30-89
Days
|
|
90
Days or More
and
Accruing
|
|
Non-
accrual/
NPL (a)
|
|
OREO
(b)
|
|
NPA
(a)+(b)
|
|
NPL
to
Loan
Type
(%)
|
|
NPA
to
Loans +
OREO
(%)
|
(amounts in thousands)
|
|
|
|
Originated Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-Family
|
$
|
3,146,121
|
|
|
$
|
3,146,121
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
%
|
|
—
|
%
|
Commercial & Industrial (1)
|
1,192,720
|
|
|
1,186,394
|
|
|
—
|
|
|
—
|
|
|
6,326
|
|
|
271
|
|
|
6,597
|
|
|
0.53
|
%
|
|
0.55
|
%
|
Commercial Real Estate Non-Owner Occupied
|
1,113,620
|
|
|
1,113,620
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
%
|
|
—
|
%
|
Residential
|
118,167
|
|
|
118,135
|
|
|
—
|
|
|
—
|
|
|
32
|
|
|
—
|
|
|
32
|
|
|
0.03
|
%
|
|
0.03
|
%
|
Construction
|
83,835
|
|
|
83,835
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
%
|
|
—
|
%
|
Other consumer
|
816
|
|
|
816
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
%
|
|
—
|
%
|
Total Originated Loans
|
5,655,279
|
|
|
5,648,921
|
|
|
—
|
|
|
—
|
|
|
6,358
|
|
|
271
|
|
|
6,629
|
|
|
0.11
|
%
|
|
0.12
|
%
|
Loans Acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Acquisitions (2)
|
177,085
|
|
|
168,347
|
|
|
1,280
|
|
|
2,412
|
|
|
5,046
|
|
|
3,202
|
|
|
8,248
|
|
|
2.85
|
%
|
|
4.57
|
%
|
Loan Purchases
(2)
|
184,535
|
|
|
175,828
|
|
|
3,048
|
|
|
3,667
|
|
|
1,992
|
|
|
424
|
|
|
2,416
|
|
|
1.08
|
%
|
|
1.31
|
%
|
Total Loans Acquired
|
361,620
|
|
|
344,175
|
|
|
4,328
|
|
|
6,079
|
|
|
7,038
|
|
|
3,626
|
|
|
10,664
|
|
|
1.95
|
%
|
|
2.92
|
%
|
Deferred costs and unamortized premiums, net
|
96
|
|
|
96
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Total Loans Receivable (2)
|
6,016,995
|
|
|
5,993,192
|
|
|
4,328
|
|
|
6,079
|
|
|
13,396
|
|
|
3,897
|
|
|
17,293
|
|
|
0.22
|
%
|
|
0.29
|
%
|
Total Loans Held for Sale (3)
|
2,402,708
|
|
|
2,402,708
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Total Portfolio
|
$
|
8,419,703
|
|
|
$
|
8,395,900
|
|
|
$
|
4,328
|
|
|
$
|
6,079
|
|
|
$
|
13,396
|
|
|
$
|
3,897
|
|
|
$
|
17,293
|
|
|
0.16
|
%
|
|
0.21
|
%
|
(1) Commercial & industrial loans, including owner occupied commercial real estate.
(2) Includes purchased credit impaired loans.
(3) Consists primarily of short-term commercial loans to mortgage companies. Please refer to NOTE 7 - LOANS HELD FOR SALE to the unaudited consolidated financial statements for more information.
Asset Quality at
September 30, 2016
(continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Type
|
Total Loans
|
|
NPL
|
|
ALL
|
|
Cash
Reserve
|
|
Total
Credit
Reserves
|
|
Reserves
to Loans
(%)
|
|
Reserves
to NPLs
(%)
|
(amounts in thousands)
|
|
Originated Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Multi-Family
|
$
|
3,146,121
|
|
|
$
|
—
|
|
|
$
|
11,673
|
|
|
$
|
—
|
|
|
$
|
11,673
|
|
|
0.37
|
%
|
|
—
|
%
|
Commercial & Industrial (1)
|
1,192,720
|
|
|
6,326
|
|
|
12,129
|
|
|
—
|
|
|
12,129
|
|
|
1.02
|
%
|
|
191.73
|
%
|
Commercial Real Estate Non-Owner Occupied
|
1,113,620
|
|
|
—
|
|
|
4,417
|
|
|
—
|
|
|
4,417
|
|
|
0.40
|
%
|
|
—
|
%
|
Residential
|
118,167
|
|
|
32
|
|
|
2,232
|
|
|
—
|
|
|
2,232
|
|
|
1.89
|
%
|
|
6,975.00
|
%
|
Construction
|
83,835
|
|
|
—
|
|
|
1,049
|
|
|
—
|
|
|
1,049
|
|
|
1.25
|
%
|
|
—
|
%
|
Other consumer
|
816
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
10
|
|
|
1.23
|
%
|
|
—
|
%
|
Total Originated Loans
|
5,655,279
|
|
|
6,358
|
|
|
31,510
|
|
|
—
|
|
|
31,510
|
|
|
0.56
|
%
|
|
495.60
|
%
|
Loans Acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Acquisitions (2)
|
177,085
|
|
|
5,046
|
|
|
5,965
|
|
|
—
|
|
|
5,965
|
|
|
3.37
|
%
|
|
118.21
|
%
|
Loan Purchases
(2)
|
184,535
|
|
|
1,992
|
|
|
422
|
|
|
667
|
|
|
1,089
|
|
|
0.59
|
%
|
|
54.67
|
%
|
Total Loans Acquired
|
361,620
|
|
|
7,038
|
|
|
6,387
|
|
|
667
|
|
|
7,054
|
|
|
1.95
|
%
|
|
100.23
|
%
|
Deferred costs and unamortized premiums, net
|
96
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Total Loans Receivable (2)
|
6,016,995
|
|
|
13,396
|
|
|
37,897
|
|
|
667
|
|
|
38,564
|
|
|
0.64
|
%
|
|
287.88
|
%
|
Total Loans Held for Sale (3)
|
2,402,708
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Total Portfolio
|
$
|
8,419,703
|
|
|
$
|
13,396
|
|
|
$
|
37,897
|
|
|
$
|
667
|
|
|
$
|
38,564
|
|
|
0.46
|
%
|
|
287.88
|
%
|
(1) Commercial & industrial loans, including owner occupied commercial real estate.
(2) Includes purchased credit impaired loans.
(3) Consists primarily of short-term commercial loans to mortgage companies. Please refer to NOTE 7 - LOANS HELD FOR SALE to the unaudited consolidated financial statements for more information.
Originated Loans
Post 2009 originated loans (excluding held-for-sale loans) totaled
$5.7 billion
, or
94.0%
of total loans receivable, at
September 30, 2016
, compared to $5.0 billion, or 91.7% of total loans , at
December 31, 2015
. The new management team at that time adopted new underwriting standards that management believes better limits risks of loss than the pre-2009, or legacy underwriting standards, or the underwriting standards of acquired, typically troubled, banks. Post 2009 non-performing loans were
$6.4 million
, or
0.11%
of post 2009 originated loans, at
September 30, 2016
, compared to $3.6 million, or 0.07% of post 2009 originated loans, at
December 31, 2015
. The post 2009 originated loans were supported by an allowance for loan losses of
$31.5 million
(
0.56%
of post 2009 originated loans) and $27.7 million (0.55% of post 2009 originated loans), respectively, at
September 30, 2016
and
December 31, 2015
.
Loans Acquired
At
September 30, 2016
, Customers reported
$361.6 million
of acquired loans, which was
6.0%
of total loans receivable, compared to $450.6 million, or 8.3% of total loans receivable at
December 31, 2015
. Non-performing acquired loans totaled
$7.0 million
and $7.2 million, respectively, at
September 30, 2016
and
December 31, 2015
. When loans are acquired, they are recorded on the balance sheet at fair value. Acquired loans include purchased portfolios, FDIC failed-bank acquisitions, and unassisted acquisitions. Of the manufactured housing loans purchased from Tammac prior to 2012, $59.0 million were supported by a
$0.7 million
cash reserve at
September 30, 2016
, compared to $63.4 million supported by a cash reserve of $1.2 million at
December 31, 2015
. The cash reserve was created as part of the purchase transaction to absorb losses and is maintained in a demand deposit account at the Bank. All current losses and delinquent interest are absorbed by this reserve. For the manufactured housing loans purchased in 2012, Tammac has an obligation to pay the Bank the full payoff amount of the defaulted loan, including any principal, unpaid interest, or advances on the loans, once the borrower vacates the property. At
September 30, 2016
, $38.0 million of these loans were outstanding, compared to $41.9 million at
December 31, 2015
.
Many of the acquired loans were purchased at a discount. The price paid considered management’s judgment as to the credit and interest rate risk inherent in the portfolio at the time of purchase. Every quarter, management reassesses the risk and adjusts the cash flow forecast to incorporate changes in the credit outlook. Generally, a decrease in forecasted cash flows for a purchased loan will result in a provision for loan losses, and absent charge-offs, an increase in the allowance for loan losses. Acquired loans have a significantly higher percentage of non-performing loans than loans originated after September 2009. Management acquired these loans with the expectation that non-performing loan levels would be elevated, and therefore incorporated that expectation into the price paid. Customers has assigned these loans to its Special Assets Group, a team that focuses on workouts for these acquired non-performing assets. Total acquired loans were supported by reserves (allowance for loan losses and cash reserves) of
$7.1 million
(
1.95%
of total acquired loans) and $9.1 million (2.03% of total acquired loans), respectively, at
September 30, 2016
and
December 31, 2015
.
Deposits
The Bank offers a variety of deposit accounts, including checking, savings, money market deposit accounts (“MMDA”) and time deposits. Deposits are generally obtained primarily from our geographic service area. Customers also acquires deposits nationwide through deposit brokers, listing services and other relationships. Total deposits increased to
$7.4 billion
at
September 30, 2016
, an increase of
$1.5 billion
, or
25.0%
, from
$5.9 billion
at
December 31, 2015
. Demand deposits were
$1.3 billion
at
September 30, 2016
, compared to
$780.9 million
at
December 31, 2015
, an increase of
$501.8 million
, or
64.3%
. These amounts consist primarily of non-interest bearing demand deposits. Savings, including MMDA, totaled
$3.2 billion
at
September 30, 2016
, an increase of
$396.3 million
, or
14.2%
, from
$2.8 billion
at
December 31, 2015
. This increase was primarily attributed to an increase in money market accounts, including accounts held by municipalities. Total time deposits were
$2.9 billion
at
September 30, 2016
, an increase of
$581.4 million
, or
24.8%
, from
$2.3 billion
at
December 31, 2015
. At
September 30, 2016
, the Bank had
$1.3 billion
in state and municipal deposits to which Customers has pledged available borrowing capacity through the FHLB to the depositor through a letter of credit arrangement. State and municipal deposits under this program
increased
$27.9 million
, or
2.2%
from
December 31, 2015
.
The components of deposits were as follows at the dates indicated:
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31,
2015
|
(amounts in thousands)
|
|
|
|
Demand
|
$
|
1,282,673
|
|
|
$
|
780,894
|
|
Savings, including MMDA
|
3,177,264
|
|
|
2,781,010
|
|
Time, $100,000 and over
|
2,041,390
|
|
|
1,624,562
|
|
Time, other
|
887,643
|
|
|
723,035
|
|
Total deposits
|
$
|
7,388,970
|
|
|
$
|
5,909,501
|
|
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, federal funds purchased, senior unsecured notes and subordinated debt. Subordinated debt is also considered as Tier 2 capital for certain regulatory calculations. As of
September 30, 2016
and
December 31, 2015
, total outstanding borrowings were
$1.3 billion
and
$1.9 billion
, respectively, which represented a decrease of
$0.6 billion
, or
32.1%
. This
decrease
was primarily the result of an increase in deposits, reducing the need for short term borrowings.
Capital Adequacy and Shareholders’ Equity
Shareholders’ equity increased
$235.9 million
to
$789.8 million
at
September 30, 2016
, compared to shareholders' equity of
$553.9 million
at
December 31, 2015
, a
42.6%
increase in the first nine months of 2016. The primary components of the increase were as follows:
|
|
•
|
the issuance of
6,700,000
shares of preferred stock in 2016; 1,000,000 shares on January 29, 2016 with net proceeds of $24.1 million, 2,300,000 shares on April 28, 2016 with net proceeds of $55.6 million, and 3,400,000 shares on September 16, 2016 with net proceeds of $82.3 million;
|
|
|
•
|
the issuance of 219,386 shares of common stock in connection with an ATM offering, with net proceeds of $5.5 million during third quarter 2016;
|
|
|
•
|
net income of $
58.3 million
for the
nine
months ended
September 30, 2016
;
|
|
|
•
|
net other comprehensive income of
$8.8 million
for the
nine
months ended
September 30, 2016
;
|
|
|
•
|
share-based compensation expense of
$4.6 million
for the
nine
months ended
September 30, 2016
;
|
|
|
•
|
offset in part by the accrual of preferred stock dividends of
$5.9 million
for the
nine
months ended
September 30, 2016
.
|
During the nine months ended September 30, 2016, Customers completed the following capital transactions:
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series F
On September 16, 2016, Customers Bancorp issued
3,400,000
shares of Fixed-to-Floating Rate Non-Cumulative Perpetual
Preferred Stock, Series F, par value
$1.00
per share, at a price of
$25.00
per share in a public offering. Dividends on the Series F Preferred Stock will accrue and be payable quarterly in arrears, at a fixed rate per annum equal to
6.00%
from the original issue date to, but excluding, December 15, 2021, and thereafter at a floating rate per annum equal to three-month LIBOR on the related dividend determination date plus a spread of
4.762%
per annum. Customers received net proceeds of
$82.3 million
from the offering, after deducting offering costs.
At the Market Issuance of Common Stock
On August 11, 2016, Customers Bancorp entered into an At Market Issuance Sales Agreement ("the Sales Agreement") with FBR Capital Markets & Co., Keefe, Bruyette & Woods, Inc. and Maxim Group LLC. Customers Bancorp has authorized the sale, at its discretion, of shares of its common stock, par value $1.00 per share, in an aggregate offering amount up to $50 million under the Sales Agreement. During third quarter 2016, Customers issued
219,386
shares in connection with this Sales Agreement receiving net proceeds of
$5.5 million
, net of offering costs.
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series E
On April 28, 2016, Customers Bancorp issued
2,300,000
shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series E, par value $1.00 per share, at a price of
$25.00
per share. Dividends on the Series E Preferred Stock will accrue and be payable quarterly in arrears, at a fixed rate per annum equal to
6.45%
from the original issue date to, but excluding, June 15, 2021, and thereafter at a floating rate per annum equal to three-month LIBOR on the related dividend determination date plus a spread of
5.14%
per annum. Customers received net proceeds of
$55.6 million
from the offering, after deducting offering costs.
Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series D
O
n January 29, 2016, Customers Bancorp issued 1,000,000 shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series D, par value
$1.00
per share, at a price of
$25.00
per share. Dividends on the Series D Preferred Stock will accrue and be payable quarterly in arrears, at a fixed rate per annum equal to 6.50% from the original issue date to, but excluding, March 15, 2021, and thereafter at a floating rate per annum equal to three-month LIBOR on the related dividend determination date plus a spread of 5.09% per annum.
Dividends on the Series D, Series E, and Series F Preferred Stock will not be cumulative. If Customers Bancorp's board of directors or a duly authorized committee of the board does not declare a dividend on the Series D, Series E, and Series F Preferred Stock in respect of a dividend period, then no dividend shall be deemed to have accrued for such dividend period, be payable on the applicable dividend payment date, or be cumulative, and Customers Bancorp will have no obligation to pay any dividend for that dividend period, whether or not the board of directors or a duly authorized committee of the board declares a dividend on the Series D, Series E, and Series F Preferred Stock for any future dividend period.
The Series D, Series E, and Series F Preferred Stock have no stated maturity, are not subject to any mandatory redemption, sinking fund or other similar provisions and will remain outstanding unless redeemed at Customers Bancorp's option. Customers Bancorp may redeem the Series D, Series E, and Series F Preferred Stock at its option, at a redemption price equal to
$25.00
per share, plus any declared and unpaid dividends (without regard to any undeclared dividends), (i) in whole or in part, from time to time, on any dividend payment date on or after March 15, 2021 for the Series D Preferred Stock, June 15, 2021 for the Series E Preferred Stock, and December 15, 2021 for the Series F Preferred Stock, and or (ii) in whole but not in part, within 90 days following the occurrence of a regulatory capital treatment event. Any redemption of the Series D, Series E, and Series F Preferred Stock are subject to prior approval of the Board of Governors of the Federal Reserve System. The Series D, Series E, and Series F Preferred Stock qualify as Tier 1 capital under regulatory capital guidelines. Except in limited circumstances, the Series D, Series E, and Series F Preferred Stock do not have any voting rights.
We are subject to various regulatory capital requirements that are monitored by federal banking agencies. Failure to meet minimum capital requirements can lead to supervisory actions by regulators; any supervisory action could have a direct material effect on our financial statements. At
September 30, 2016
, the Bank and Customers Bancorp met all capital adequacy requirements to which they were subject. Capital levels continue to exceed the well-capitalized threshold established by regulation at the Bank and exceed the applicable Basel III regulatory thresholds for Customers Bancorp and the Bank.
The capital ratios for the Bank and the Bancorp at
September 30, 2016
and
December 31, 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual
|
|
For Capital Adequacy Purposes (Minimum Plus Capital Buffer)
|
|
To Be Well Capitalized
Under
Prompt Corrective Action
Provisions
|
(amounts in thousands)
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
As of September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
553,391
|
|
|
7.117
|
%
|
|
$
|
398,497
|
|
|
5.125
|
%
|
|
N/A
|
|
|
N/A
|
|
Customers Bank
|
$
|
772,484
|
|
|
9.971
|
%
|
|
$
|
397,045
|
|
|
5.125
|
%
|
|
$
|
503,569
|
|
|
6.500
|
%
|
Tier 1 capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
770,070
|
|
|
9.904
|
%
|
|
$
|
515,130
|
|
|
6.625
|
%
|
|
N/A
|
|
|
N/A
|
|
Customers Bank
|
$
|
772,484
|
|
|
9.971
|
%
|
|
$
|
513,253
|
|
|
6.625
|
%
|
|
$
|
619,777
|
|
|
8.000
|
%
|
Total capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
904,305
|
|
|
11.630
|
%
|
|
$
|
670,641
|
|
|
8.625
|
%
|
|
N/A
|
|
|
N/A
|
|
Customers Bank
|
$
|
919,234
|
|
|
11.865
|
%
|
|
$
|
668,198
|
|
|
8.625
|
%
|
|
$
|
774,722
|
|
|
10.000
|
%
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
770,070
|
|
|
8.182
|
%
|
|
$
|
376,467
|
|
|
4.000
|
%
|
|
N/A
|
|
|
N/A
|
|
Customers Bank
|
$
|
772,484
|
|
|
8.229
|
%
|
|
$
|
375,508
|
|
|
4.000
|
%
|
|
$
|
469,385
|
|
|
5.000
|
%
|
As of December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
Common equity Tier 1 capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
500,624
|
|
|
7.610
|
%
|
|
$
|
296,014
|
|
|
4.500
|
%
|
|
N/A
|
|
|
N/A
|
|
Customers Bank
|
$
|
565,217
|
|
|
8.620
|
%
|
|
$
|
294,916
|
|
|
4.500
|
%
|
|
$
|
425,990
|
|
|
6.500
|
%
|
Tier 1 capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
556,193
|
|
|
8.460
|
%
|
|
$
|
394,685
|
|
|
6.000
|
%
|
|
N/A
|
|
|
N/A
|
|
Customers Bank
|
$
|
565,217
|
|
|
8.620
|
%
|
|
$
|
393,221
|
|
|
6.000
|
%
|
|
$
|
524,295
|
|
|
8.000
|
%
|
Total capital (to risk weighted assets)
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
698,323
|
|
|
10.620
|
%
|
|
$
|
526,247
|
|
|
8.000
|
%
|
|
N/A
|
|
|
N/A
|
|
Customers Bank
|
$
|
710,864
|
|
|
10.850
|
%
|
|
$
|
524,295
|
|
|
8.000
|
%
|
|
$
|
655,369
|
|
|
10.000
|
%
|
Tier 1 capital (to average assets)
|
|
|
|
|
|
|
|
|
|
|
|
Customers Bancorp, Inc.
|
$
|
556,193
|
|
|
7.160
|
%
|
|
$
|
310,812
|
|
|
4.000
|
%
|
|
N/A
|
|
|
N/A
|
|
Customers Bank
|
$
|
565,217
|
|
|
7.300
|
%
|
|
$
|
309,883
|
|
|
4.000
|
%
|
|
$
|
387,353
|
|
|
5.000
|
%
|
The capital ratios above reflect the capital requirements under "Basel III" effective during the first quarter 2015 and the capital conservation buffer effective January 1, 2016. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers. As of
September 30, 2016
, the Bank and Bancorp were in compliance with the Basel III requirements. See "NOTE 11 - REGULATORY CAPITAL" for additional discussion regarding regulatory capital requirements.
Off-Balance Sheet Arrangements
The Bank 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 our customers. These financial instruments include commitments to extend credit, including unused portions of lines of credit, and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the balance sheets.
With commitments to extend credit, exposures to credit loss in the event of non-performance by the other party to the financial instrument is represented by the contractual amount of those instruments. The same credit policies are used in making commitments and conditional obligations as for on-balance sheet instruments. Because they involve credit risk similar to extending a loan, they are subject to the Bank’s credit policy and other underwriting standards.
As of
September 30, 2016
and
December 31, 2015
, the following off-balance sheet commitments, financial instruments and other arrangements were outstanding:
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
(amounts in thousands)
|
|
Commitments to fund loans
|
$
|
163,453
|
|
|
$
|
537,380
|
|
Unfunded commitments to fund mortgage warehouse loans
|
747,416
|
|
|
1,302,759
|
|
Unfunded commitments under lines of credit
|
511,394
|
|
|
436,550
|
|
Letters of credit
|
40,611
|
|
|
42,002
|
|
Commitments to fund loans, unfunded commitments to fund mortgage warehouse loans, unfunded commitments under lines of credit and letters of credit are agreements to extend credit to or for the benefit of a customer in the ordinary course of our business.
Commitments to fund loans and unfunded commitments under lines of credit may be obligations of Customers 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. Customers evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if Customers deems it necessary upon extension of credit, is based on management’s credit evaluation. The types of collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.
Mortgage warehouse loan commitments are agreements to purchase mortgage loans from mortgage bankers that agree to purchase the loans back in a short period of time or to sell to third party mortgage originators. These commitments generally fluctuate monthly as existing loans are repurchased by the mortgage bankers and new loans are purchased by the Bank.
Outstanding letters of credit written are conditional commitments issued by Customers to guarantee the performance of a customer to a third party. Letters of credit may obligate Customers to fund draws under those letters of credit whether or not a customer continues to meet the conditions of the extension of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Liquidity and Capital Resources
Liquidity for a financial institution is a measure of that institution’s ability to meet depositors’ needs for funds, to satisfy or fund loan commitments, and for other operating purposes. Ensuring adequate liquidity is an objective of the asset/liability management process. Customers coordinates its management of liquidity with its interest rate sensitivity and capital position, and strives to maintain a strong liquidity position.
Customers' investment portfolio provides periodic cash flows through regular maturities and amortization and can be used as collateral to secure additional liquidity funding. Our principal sources of funds are deposits, proceeds from debt issuances, principal and interest payments on loans, other funds from operations, and proceeds from stock issuances. Borrowing arrangements are maintained with the Federal Home Loan Bank and the Federal Reserve Bank of Philadelphia to meet short-term liquidity needs. Longer term borrowing arrangements are also maintained with the Federal Home Loan Bank. As of
September 30, 2016
, our borrowing capacity with the Federal Home Loan Bank was $4.1 billion, of which $1.0 billion was utilized in borrowings and $1.6 billion of available capacity was utilized to collateralize state and municipal deposits. As of
September 30, 2016
, our borrowing capacity with the Federal Reserve Bank of Philadelphia was $58.7 million.
Net cash flows
used in
operating activities were
$528.7 million
during the
nine
months ended
September 30, 2016
, compared to net cash flows
used in
operating activities of
$300.3 million
during the
nine
months ended
September 30, 2015
. During the
nine
months ended
September 30, 2016
, originations of loans held for sale exceeded proceeds from sales of loans held for sale by
$619.1 million
. During the
nine
months ended
September 30, 2015
, originations of loans held for sale exceeded proceeds from sales of loans held for sale by
$344.5 million
.
Investing activities
used
net cash flows of
$507.4 million
during the
nine
months ended
September 30, 2016
, compared to net cash flows
used in
investing activities of
$412.9 million
during the
nine
months ended
September 30, 2015
. Proceeds from the sale of loans totaled $
91.9 million
during the
nine
months ended
September 30, 2016
, compared to $
192.3 million
during the
nine
months ended
September 30, 2015
. The acquisition of the Disbursement business also used $17.0 million of cash during the nine months ended September 30, 2016.
Financing activities
provided
a net aggregate of
$1.0 billion
during the
nine
months ended
September 30, 2016
, compared to
$725.6 million
during the
nine
months ended
September 30, 2015
. During the
nine
months ended
September 30, 2016
, increases in deposits provided
$1.5 billion
, net repayments of short-term borrowed funds used
$663.6 million
, net repayments of federal funds purchased used
$18.0 million
, net proceeds from long-term FHLB advances provided
$75.0 million
, net proceeds from the issuance of preferred stock provided
$162.0 million
, proceeds from the issuance of common stock provided
$6.6 million
, and payment of preferred stock dividends used
$5.5 million
. During the
nine
months ended
September 30, 2015
, increases in deposits provided $
1.3 billion
, net repayments from short-term borrowed funds used $
657.1 million
, net increase in federal funds purchased provided $50.0 million, net proceeds from long-term FHLB advances provided $
25.0 million
, net proceeds from the issuance of preferred stock provided
$55.6 million
, payment of preferred stock dividends used
$1.3 million
, and net proceeds from the issuance of common stock provided
$0.7 million
. These financing activities provided sufficient cash flows to support Customers' investing and operating activities.
Overall, based on our core deposit base and available sources of borrowed funds, management believes that Customers has adequate resources to meet its short-term and long-term cash requirements for the foreseeable future.
Effect of Government Monetary Policies
Our earnings are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. An important function of the Federal Reserve Board is to regulate the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities and changes in reserve requirements against member bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits, and their use may also affect rates charged on loans or paid for deposits.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity
The largest component of our net income is net interest income, and the majority of our financial instruments are interest rate sensitive assets and liabilities with various term structures and maturities. One of the primary objectives of management is to maximize net interest income while minimizing interest rate risk. Interest rate risk is derived from timing differences in the repricing of assets and liabilities, loan prepayments, deposit withdrawals, and differences in lending and funding rates. Our Asset/Liability Committee actively seeks to monitor and control the mix of interest rate sensitive assets and interest rate sensitive liabilities.
We use 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 economic value of equity. The combination of these two methods provides a reasonably comprehensive summary of the levels of interest rate risk of our exposure to time factors and changes in interest rate environments.
Income simulation modeling is used to measure our interest rate sensitivity and manage our 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, we have estimated the net interest income for the period ending
September 30,
2017, based upon the assets, liabilities and off-balance sheet financial instruments in existence at
September 30, 2016
. We have 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, current market interest rates were increased immediately by 100, 200, and 300 basis points. For downward rate shocks modeling a falling rate environment, current market rates were only decreased immediately by 100 basis points due to the limitations of the current low interest rate environment that renders the Down 200 and Down 300 rate shocks impractical. The following table reflects the estimated percentage change in estimated net interest income for the period ending
September 30, 2016
, resulting from changes in interest rates.
Net change in net interest income
|
|
|
|
Rate Shocks
|
% Change
|
Up 3%
|
2.6
|
%
|
Up 2%
|
5.1
|
%
|
Up 1%
|
4.2
|
%
|
Down 1%
|
(4.1
|
)%
|
The net changes in net interest income in all scenarios are within Customers Bank’s interest rate risk policy guidelines.
Economic Value of Equity (“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, current market interest rates were increased immediately by 100, 200, and 300 basis points. For downward rate shocks modeling a falling rate environment, current market rates were only decreased immediately by 100 basis points due to the limitations of the current low interest rate environment that renders the Down 200 and Down 300 rate shocks impractical. 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
September 30, 2016
, resulting from shocks to interest rates.
|
|
|
|
Rate Shocks
|
From base
|
Up 3%
|
(20.4
|
)%
|
Up 2%
|
(9.8
|
)%
|
Up 1%
|
(3.0
|
)%
|
Down 1%
|
(2.0
|
)%
|
The net changes in economic value of equity in all scenarios are within Customers Bank’s interest rate risk policy guidelines.
The matching of assets and liabilities may also be analyzed by examining the extent to which such assets and liabilities are interest rate sensitive and by monitoring a bank’s interest rate sensitivity “gap”. An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest earning assets maturing or repricing within a specific time period and the amount of interest bearing liabilities maturing or repricing within that time period.
The following table sets forth the amounts of Customers Bank's interest-earning assets and interest-bearing liabilities outstanding at
September 30, 2016
that are anticipated, based upon certain assumptions, to reprice or mature in each of the future time periods shown. Except as stated below, the amount of assets and liabilities shown that reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities at
September 30, 2016
on the basis of contractual maturities, anticipated prepayments, and scheduled rate adjustments within a three-month period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be repaid and/or repriced as a result of contractual amortization and anticipated prepayments of adjustable and fixed rate loans, and as a result of contractual-rate adjustments on adjustable-rate loans.