10-Q 1 cubi-2018630x10q.htm 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
Form 10-Q
 
 
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2018

¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     .
001-35542
(Commission File number)
 
(Exact name of registrant as specified in its charter)

cubiedgarlogoa07.jpgcubiedgarlogoa07.jpg
 

Pennsylvania
 
27-2290659
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
1015 Penn Avenue
Suite 103
Wyomissing PA 19610
(Address of principal executive offices)
(610) 933-2000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
 
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
  
Smaller Reporting Company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging Growth Company
 
¨
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ¨    No  x
On July 31, 2018, 31,669,839 shares of Voting Common Stock were outstanding.
 





CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
Table of Contents
 
 
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
Ex-31.1
 
 
 
 
 
Ex-31.2
 
 
 
 
 
Ex-32.1
 
 
 
 
 
Ex-32.2
 
 
 
 
 
Ex-101
 
 


2



CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET — UNAUDITED
(amounts in thousands, except share and per share data)
 
June 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Cash and due from banks
$
22,969

 
$
20,388

Interest-earning deposits
228,757

 
125,935

Cash and cash equivalents
251,726

 
146,323

Investment securities, at fair value
1,161,000

 
471,371

Loans held for sale (includes $1,931,781 and $1,795,294, respectively, at fair value)
1,931,781

 
1,939,485

Loans receivable
7,181,726

 
6,768,258

Allowance for loan losses
(38,288
)
 
(38,015
)
Total loans receivable, net of allowance for loan losses
7,143,438

 
6,730,243

FHLB, Federal Reserve Bank, and other restricted stock
136,066

 
105,918

Accrued interest receivable
33,956

 
27,021

Bank premises and equipment, net
11,224

 
11,955

Bank-owned life insurance
261,121

 
257,720

Other real estate owned
1,705

 
1,726

Goodwill and other intangibles
17,150

 
16,295

Other assets
143,679

 
131,498

Total assets
$
11,092,846

 
$
9,839,555

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Demand, non-interest bearing
$
1,090,744

 
$
1,052,115

Interest-bearing
6,205,210

 
5,748,027

Total deposits
7,295,954

 
6,800,142

Federal funds purchased
105,000

 
155,000

FHLB advances
2,389,797

 
1,611,860

Other borrowings
186,888

 
186,497

Subordinated debt
108,929

 
108,880

Accrued interest payable and other liabilities
70,051

 
56,212

Total liabilities
10,156,619

 
8,918,591

Shareholders’ equity:
 
 
 
Preferred stock, par value $1.00 per share; liquidation preference $25.00 per share; 100,000,000 shares authorized, 9,000,000 shares issued and outstanding as of June 30, 2018 and December 31, 2017
217,471

 
217,471

Common stock, par value $1.00 per share; 200,000,000 shares authorized; 32,199,903 and 31,912,763 shares issued as of June 30, 2018 and December 31, 2017; 31,669,643 and 31,382,503 shares outstanding as of June 30, 2018 and December 31, 2017
32,200

 
31,913

Additional paid in capital
428,796

 
422,096

Retained earnings
299,990

 
258,076

Accumulated other comprehensive loss, net
(33,997
)
 
(359
)
Treasury stock, at cost (530,260 shares as of June 30, 2018 and December 31, 2017)
(8,233
)
 
(8,233
)
Total shareholders’ equity
936,227

 
920,964

Total liabilities and shareholders’ equity
$
11,092,846

 
$
9,839,555

See accompanying notes to the unaudited consolidated financial statements.

3


CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME — UNAUDITED
(amounts in thousands, except per share data)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Interest income:
 
 
 
 
 
 
 
Loans receivable, including fees
$
74,238

 
$
67,036

 
$
141,117

 
$
128,497

Loans held for sale
21,002

 
17,524

 
40,054

 
31,470

Investment securities
9,765

 
7,823

 
18,437

 
13,710

Other
2,634

 
1,469

 
4,996

 
3,269

Total interest income
107,639

 
93,852

 
204,604

 
176,946

Interest expense:
 
 
 
 
 
 
 
Deposits
24,182

 
16,228

 
43,975

 
30,551

Other borrowings
3,275

 
1,993

 
6,651

 
3,600

FHLB advances
11,176

 
5,340

 
18,256

 
8,401

Subordinated debt
1,684

 
1,685

 
3,369

 
3,370

Total interest expense
40,317

 
25,246

 
72,251

 
45,922

Net interest income
67,322

 
68,606

 
132,353

 
131,024

Provision for loan losses
(784
)
 
535

 
1,333

 
3,585

Net interest income after provision for loan losses
68,106

 
68,071

 
131,020

 
127,439

Non-interest income:
 
 
 
 
 
 
 
Interchange and card revenue
6,382

 
8,648

 
16,043

 
22,158

Mortgage warehouse transactional fees
1,967

 
2,523

 
3,854

 
4,743

Bank-owned life insurance
1,869

 
2,258

 
3,900

 
3,624

Deposit fees
1,632

 
2,133

 
3,724

 
5,260

Gain on sale of SBA and other loans
947

 
573

 
2,308

 
1,901

Mortgage banking income
205

 
291

 
325

 
446

Gain on sale of investment securities

 
3,183

 

 
3,183

Impairment loss on investment securities

 
(2,882
)
 

 
(4,585
)
Other
3,125

 
1,664

 
6,883

 
4,414

Total non-interest income
16,127

 
18,391

 
37,037

 
41,144

Non-interest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
27,748

 
23,651

 
52,673

 
44,763

Technology, communication and bank operations
11,322

 
8,910

 
21,266

 
18,827

Professional services
3,811

 
6,227

 
9,820

 
13,739

Occupancy
3,141

 
2,657

 
5,975

 
5,371

FDIC assessments, non-income taxes, and regulatory fees
2,135

 
2,416

 
4,335

 
4,141

Provision for operating losses
1,233

 
1,746

 
2,759

 
3,392

Merger and acquisition related expenses
869

 

 
975

 

Loan workout
648

 
408

 
1,307

 
929

Advertising and promotion
319

 
378

 
709

 
704

Other real estate owned expenses
58

 
160

 
98

 
105

Other
2,466

 
3,860

 
6,114

 
7,807

Total non-interest expense
53,750

 
50,413

 
106,031

 
99,778

Income before income tax expense
30,483

 
36,049

 
62,026

 
68,805

Income tax expense
6,820

 
12,327

 
14,222

 
19,336

Net income
23,663

 
23,722

 
47,804

 
49,469

             Preferred stock dividends
3,615

 
3,615

 
7,229

 
7,229

             Net income available to common shareholders
$
20,048

 
$
20,107

 
$
40,575

 
$
42,240

Basic earnings per common share
$
0.64

 
$
0.66

 
$
1.29

 
$
1.38

Diluted earnings per common share
$
0.62

 
$
0.62

 
$
1.26

 
$
1.29

See accompanying notes to the unaudited consolidated financial statements.

4


CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — UNAUDITED
(amounts in thousands)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
23,663

 
$
23,722

 
$
47,804

 
$
49,469

Unrealized (losses) gains on available-for-sale debt securities:
 
 
 
 
 
 
 
Unrealized (losses) gains arising during the period
(12,190
)
 
19,885

 
(46,288
)
 
18,762

Income tax effect
3,170

 
(7,755
)
 
12,035

 
(7,317
)
Reclassification adjustments for gains on securities included in net income

 
(3,183
)
 

 
(3,183
)
Income tax effect

 
1,241

 

 
1,241

Net unrealized (losses) gains on available-for-sale debt securities
(9,020
)
 
10,188

 
(34,253
)
 
9,503

Unrealized gains on cash flow hedges:
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
1,895

 
(689
)
 
2,768

 
(360
)
Income tax effect
(492
)
 
269

 
(719
)
 
141

Reclassification adjustment for (gains) losses included in net income
(259
)
 
767

 
(128
)
 
1,594

Income tax effect
67

 
(299
)
 
33

 
(622
)
Net unrealized gains on cash flow hedges
1,211

 
48

 
1,954

 
753

Other comprehensive (loss) income, net of income tax effect
(7,809
)
 
10,236

 
(32,299
)
 
10,256

Comprehensive income
$
15,854

 
$
33,958

 
$
15,505

 
$
59,725

 See accompanying notes to the unaudited consolidated financial statements.

5


CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY — UNAUDITED
(amounts in thousands, except shares outstanding data)
 
 
Six Months Ended June 30, 2018
 
Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
Shares of
Preferred
Stock
Outstanding
 
Preferred
Stock
 
Shares of
Common
Stock
Outstanding
 
Common
Stock
 
Additional
Paid in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Stock
 
Total
Balance, December 31, 2017
9,000,000

 
$
217,471

 
31,382,503

 
$
31,913

 
$
422,096

 
$
258,076

 
$
(359
)
 
$
(8,233
)
 
$
920,964

Reclassification of the income tax effects of the Tax Cuts and Jobs Act from accumulated other comprehensive loss

 

 

 

 

 
298

 
(298
)
 

 

Reclassification of net unrealized gains on equity securities from accumulated other comprehensive loss

 

 

 

 

 
1,041

 
(1,041
)
 

 

Net income

 

 

 

 

 
47,804

 

 

 
47,804

Other comprehensive loss

 

 

 

 

 

 
(32,299
)
 

 
(32,299
)
Preferred stock dividends

 

 

 

 

 
(7,229
)
 

 

 
(7,229
)
Share-based compensation expense

 

 

 

 
3,661

 

 

 

 
3,661

Exercise of warrants

 

 
5,242

 
5

 
107

 

 

 

 
112

Issuance of common stock under share-based compensation arrangements

 

 
281,898

 
282

 
2,932

 

 

 

 
3,214

Balance, June 30, 2018
9,000,000

 
$
217,471

 
31,669,643

 
$
32,200

 
$
428,796

 
$
299,990

 
$
(33,997
)
 
$
(8,233
)
 
$
936,227

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
Shares of
Preferred
Stock
Outstanding
 
Preferred Stock
 
Shares of
Common
Stock
Outstanding
 
Common
Stock
 
Additional
Paid in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income/(Loss)
 
Treasury
Stock
 
Total
Balance, December 31, 2016
9,000,000

 
$
217,471

 
30,289,917

 
$
30,820

 
$
427,008

 
$
193,698

 
$
(4,892
)
 
$
(8,233
)
 
$
855,872

Net income

 

 

 

 

 
49,469

 

 

 
49,469

Other comprehensive income

 

 

 

 

 

 
10,256

 

 
10,256

Preferred stock dividends

 

 

 

 

 
(7,229
)
 

 
 
 
(7,229
)
Share-based compensation expense

 

 

 

 
2,934

 

 

 

 
2,934

Exercise of warrants

 

 
43,974

 
44

 
376

 

 

 

 
420

Issuance of common stock under share-based compensation arrangements

 

 
396,893

 
397

 
(1,830
)
 

 

 

 
(1,433
)
Balance, June 30, 2017
9,000,000

 
$
217,471

 
30,730,784

 
$
31,261

 
$
428,488

 
$
235,938

 
$
5,364

 
$
(8,233
)
 
$
910,289

See accompanying notes to the unaudited consolidated financial statements.

6



CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(amounts in thousands) 

 
Six Months Ended
June 30,
 
2018
 
2017
Cash Flows from Operating Activities
 
 
 
Net income
$
47,804

 
$
49,469

Adjustments to reconcile net income to net cash (used in) provided by operating activities:
 
 
 
Provision for loan losses
1,333

 
3,585

Depreciation and amortization
6,716

 
2,393

Share-based compensation expense
4,384

 
3,562

Deferred taxes
4,172

 
(2,588
)
Net amortization of investment securities premiums and discounts
813

 
232

Unrealized loss recognized on equity securities
296

 

Gain on sale of investment securities

 
(3,183
)
Impairment loss on investment securities

 
4,585

Gain on sale of SBA and other loans
(2,572
)
 
(2,183
)
Origination of loans held for sale
(14,272,175
)
 
(14,714,280
)
Proceeds from the sale of loans held for sale
14,135,931

 
14,727,734

Amortization of fair value discounts and premiums
85

 
98

Net gain on sales of other real estate owned
(28
)
 
(163
)
Valuation and other adjustments to other real estate owned
78

 
231

Earnings on investment in bank-owned life insurance
(3,900
)
 
(3,624
)
Increase in accrued interest receivable and other assets
(7,857
)
 
(9,003
)
Increase (decrease) in accrued interest payable and other liabilities
13,061

 
(29,357
)
Net Cash (Used In) Provided By Operating Activities
(71,859
)
 
27,508

Cash Flows from Investing Activities
 
 
 
Proceeds from maturities, calls and principal repayments of securities available for sale
26,216

 
22,843

Proceeds from sales of investment securities available for sale

 
115,982

Purchases of investment securities available for sale
(763,242
)
 
(644,011
)
Net increase in loans
(18,680
)
 
(572,253
)
Proceeds from sales of loans
29,038

 
112,927

Purchase of loans
(278,508
)
 
(262,641
)
Purchases of bank-owned life insurance

 
(50,000
)
Proceeds from bank-owned life insurance
529

 
1,418

Net purchases of FHLB, Federal Reserve Bank, and other restricted stock
(30,148
)
 
(61,281
)
Purchases of bank premises and equipment
(608
)
 
(1,732
)
Proceeds from sales of other real estate owned
28

 
682

Purchase of leased assets under operating leases
(6,486
)
 

Net Cash Used In Investing Activities
(1,041,861
)
 
(1,338,066
)
Cash Flows from Financing Activities
 
 
 
Net increase in deposits
495,812

 
171,587

Net increase in short-term borrowed funds from the FHLB
777,937

 
1,130,800

Net (decrease) increase in federal funds purchased
(50,000
)
 
67,000

Net proceeds from issuance of long-term debt

 
98,574

        Preferred stock dividends paid
(7,229
)
 
(7,229
)
        Exercise of warrants
112

 
420

        Payments of employee taxes withheld from share-based awards
(700
)
 
(3,961
)
        Proceeds from issuance of common stock
3,191

 
1,900

Net Cash Provided By Financing Activities
1,219,123

 
1,459,091

Net Increase in Cash and Cash Equivalents
105,403

 
148,533

Cash and Cash Equivalents – Beginning
146,323

 
264,709

Cash and Cash Equivalents – Ending
$
251,726

 
$
413,242

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(continued)

 
 
 
 
 
 
Supplementary Cash Flows Information:
 
 
 
Interest paid
$
73,162

 
$
44,983

Income taxes paid
4,174

 
21,715

Non-cash items:
 
 
 
                Transfer of loans to other real estate owned
$
57

 
$

                Transfer of loans held for investment to held for sale

 
150,758

                Transfer of loans held for sale to held for investment
129,691

 

                University relationship intangible purchased not settled
1,502

 

See accompanying notes to the unaudited consolidated financial statements.

7


CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
NOTE 1 — DESCRIPTION OF THE BUSINESS
Customers Bancorp, Inc. (the “Bancorp” or “Customers Bancorp”) is a bank holding company engaged in banking activities through its wholly owned subsidiary, Customers Bank (the “Bank”), collectively referred to as “Customers” herein.  The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).
Customers Bancorp, Inc. and its wholly owned subsidiaries, Customers Bank, and non-bank subsidiaries, serve residents and businesses in Southeastern Pennsylvania (Bucks, Berks, Chester, Philadelphia and Delaware Counties); Rye Brook, New York (Westchester County); Hamilton, New Jersey (Mercer County); Boston, Massachusetts; Providence, Rhode Island; Portsmouth, New Hampshire (Rockingham County); Manhattan and Melville, New York; Washington, D.C.; Chicago, Illinois; and nationally for certain loan and deposit products.  The Bank has 13 full-service branches and provides commercial banking products, primarily loans and deposits. In addition, Customers Bank also administratively supports loan and other financial products to customers through its limited-purpose offices in Boston, Massachusetts, Providence, Rhode Island, Portsmouth, New Hampshire, Manhattan and Melville, New York, Philadelphia, Pennsylvania, Washington, D.C., and Chicago, Illinois. The Bank also provides liquidity to residential mortgage originators nationwide through commercial loans to mortgage companies.
Through BankMobile, a division of Customers Bank, Customers offers state of the art high tech digital banking services to consumers, students, and the "under banked" nationwide. In October 2017, Customers announced its intent to spin-off its BankMobile business directly to Customers’ shareholders, to be followed by a merger of BankMobile into Flagship Community Bank ("Flagship"), as the most favorable option for disposition of BankMobile to Customers' shareholders rather than selling the business directly to a third party. Until execution of the spin-off and merger transaction, the assets and liabilities of BankMobile will be reported as held and used for all periods presented. Previously, Customers had stated its intention to sell BankMobile and, accordingly, all BankMobile operating results for the three and six months ended June 30, 2017 and cash flows for the six months ended June 30, 2017 were presented as discontinued operations. All prior period amounts have been reclassified to conform with the current period consolidated financial statement presentation. See NOTE 2 SPIN-OFF AND MERGER for more information regarding the spin-off and merger transaction.
Customers is subject to regulation of the Pennsylvania Department of Banking and Securities and the Federal Reserve Bank and is periodically examined by those regulatory authorities. Customers Bancorp has made certain equity investments through its wholly owned subsidiaries CB Green Ventures Pte Ltd. and CUBI India Ventures Pte Ltd.
NOTE 2 – SPIN-OFF AND MERGER

In third quarter 2017, Customers decided that the best strategy for its shareholders to realize the value of the BankMobile business was to divest BankMobile through a spin-off of BankMobile to Customers’ shareholders to be followed by a merger with Flagship Community Bank ("Flagship"). An Amended and Restated Purchase and Assumption Agreement and Plan of Merger (the "Amended Agreement") with Flagship to effect the spin-off and merger and Flagship's related purchase of BankMobile deposits from Customers was executed on November 17, 2017. Per the provisions of the Amended Agreement, the spin-off will be followed by a merger of the BankMobile spin-off subsidiary into Flagship, with Customers' shareholders first receiving shares of the BankMobile spin-off subsidiary as a dividend in the spin-off and then receiving shares of Flagship common stock in the merger of the BankMobile spin-off subsidiary into Flagship in exchange for shares of the BankMobile spin-off subsidiary common stock they receive in the spin-off. Separately, Flagship will assume the deposits and purchase certain associated assets of BankMobile for $10 million. Following completion of the spin-off and merger and other transactions contemplated in the Amended Agreement between Customers and Flagship, the BankMobile spin-off subsidiary shareholders would receive collectively more than 50% of Flagship common stock. The common stock of the merged entities, expected to be called BankMobile, is expected to be listed on a national securities exchange after completion of the transactions. In connection with the signing of the Amended Agreement on November 17, 2017, Customers deposited $1.0 million in an escrow account with a third party to be reserved for payment to Flagship in the event the Amended Agreement is terminated for reasons described in the Amended Agreement. This $1.0 million is considered restricted cash and is presented in cash and cash equivalents in the accompanying June 30, 2018 consolidated balance sheet. The Amended Agreement provides that completion of the transactions will be subject to the receipt of all necessary closing conditions. Although the possibility still exits that the spin-off and merger could close by September 30, 2018, at this time, no assurance can be given that the spin-off and merger will occur by or shortly after September 30, 2018.

8


As of June 30, 2017, BankMobile met the criteria to be classified as held for sale and, accordingly, the operating results of BankMobile for the three and six month periods ended June 30, 2017, along with the associated cash flows of BankMobile for the six months ended June 30, 2017, were presented as "Discontinued operations." However, generally accepted accounting principles require that assets, liabilities, operating results, and cash flows associated with a business to be disposed of through a spin-off/merger transaction should not be reported as held for sale or discontinued operations until execution of the spin-off/merger transaction. As a result, beginning in third quarter 2017, the period in which Customers decided to spin-off BankMobile rather than selling directly to a third party, BankMobile's operating results and cash flows were no longer reported as held for sale or discontinued operations but instead were reported as held and used. At September 30, 2017, Customers measured the business at the lower of its (i) carrying amount before it was classified as held for sale, adjusted for depreciation and amortization expense that would have been recognized had the business been continuously classified as held and used, or (ii) fair value at the date the decision not to sell was made.

Amounts previously reported as discontinued operations for the three and six month periods ended June 30, 2017 have been reclassified to conform with the current period presentation within the accompanying consolidated financial statements as summarized below. Customers will continue reporting the Community Business Banking and BankMobile segment results. See NOTE 12 - BUSINESS SEGMENTS.

The following tables summarize the effect of the reclassification of BankMobile from held for sale to held and used on the previously reported consolidated statements of income for the three and six months ended June 30, 2017:
 
 
 
 
 
 
 
Three Months Ended June 30, 2017

(amounts in thousands)
As Previously Reported
 
Effect of Reclassification From Held For Sale to Held and Used
 
After Reclassification
 Interest income
$
93,852

 
$

 
$
93,852

 Interest expense
25,236

 
10

 
25,246

 Net interest income
68,616

 
(10
)
 
68,606

 Provision for loan losses
535

 

 
535

 Non-interest income
6,971

 
11,420

 
18,391

 Non-interest expense
30,567

 
19,846

 
50,413

 Income from continuing operations before income taxes
44,485

 
(8,436
)
 
36,049

 Provision for income taxes
15,533

 
(3,206
)
 
12,327

 Net income from continuing operations
28,952

 
(5,230
)
 
23,722

 Loss from discontinued operations before income taxes
(8,436
)
 
8,436

 

 Income tax benefit from discontinued operations
(3,206
)
 
3,206

 

 Net loss from discontinued operations
(5,230
)

5,230



 Net income
23,722




23,722

 Preferred stock dividends
3,615

 

 
3,615

 Net income available to common shareholders
$
20,107

 
$

 
$
20,107

 
 
 
 
 
 

9


 
Six Months Ended June 30, 2017

(amounts in thousands)
As Previously Reported
 
Effect of Reclassification From Held For Sale to Held and Used
 
After Reclassification
 Interest income
$
176,946

 
$

 
$
176,946

 Interest expense
45,906

 
16

 
45,922

 Net interest income
131,040

 
(16
)
 
131,024

 Provision for loan losses
3,585

 

 
3,585

 Non-interest income
12,398

 
28,746

 
41,144

 Non-interest expense
60,714

 
39,064

 
99,778

 Income from continuing operations before income taxes
79,139

 
(10,334
)
 
68,805

 Provision for income taxes
23,263

 
(3,927
)
 
19,336

 Net income from continuing operations
55,876

 
(6,407
)
 
49,469

 Loss from discontinued operations before income taxes
(10,334
)
 
10,334

 

 Income tax benefit from discontinued operations
(3,927
)
 
3,927

 

 Net loss from discontinued operations
(6,407
)
 
6,407

 

 Net income
49,469

 

 
49,469

 Preferred stock dividends
7,229

 

 
7,229

 Net income available to common shareholders
$
42,240

 
$

 
$
42,240

 
 
 
 
 
 

10


NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation
The interim unaudited consolidated financial statements of Customers Bancorp and subsidiaries have been prepared pursuant to the rules and regulations of the SEC. These interim unaudited consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the financial position and the results of operations and cash flows of Customers Bancorp and subsidiaries for the interim periods presented. Certain information and footnote disclosures normally included in the annual consolidated financial statements have been omitted from these interim unaudited consolidated financial statements as permitted by SEC rules and regulations. The December 31, 2017 consolidated balance sheet presented in this report has been derived from Customers Bancorp’s audited 2017 consolidated financial statements. Management believes that the disclosures are adequate to present fairly the consolidated financial statements as of the dates and for the periods presented. These interim unaudited consolidated financial statements should be read in conjunction with the 2017 consolidated financial statements of Customers Bancorp and subsidiaries included in Customers' Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on February 23, 2018 (the "2017 Form 10-K"). That Form 10-K describes Customers Bancorp’s significant accounting policies, which include its policies on Principles of Consolidation; Cash and Cash Equivalents and Statements of Cash Flows; Restrictions on Cash and Amounts due from Banks; Business Combinations; Investment Securities; Loan Accounting Framework; Loans Held for Sale and Loans at Fair Value; Loans Receivable; Purchased Loans; Allowance for Loan Losses; Goodwill and Other Intangible Assets; Investments in FHLB, Federal Reserve Bank, and Other Restricted Stock; Other Real Estate Owned; Bank-Owned Life Insurance; Bank Premises and Equipment; Operating Leases; Treasury Stock; Income Taxes; Share-Based Compensation; Transfer of Financial Assets; Business Segments; Derivative Instruments and Hedging; Comprehensive Income (Loss); Earnings per Share; and Loss Contingencies. Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year.
Reclassifications
As described in NOTE 2 - SPIN-OFF AND MERGER, beginning in third quarter 2017, Customers reclassified BankMobile, a segment previously classified as held for sale, to held and used as it no longer met the held-for-sale criteria. Certain prior period amounts and note disclosures (including NOTE 4, NOTE 8 and NOTE 10) have been reclassified to conform with the current period presentation. Except for these reclassifications, there have been no material changes to Customers' significant accounting policies as disclosed in Customers' Annual Report on Form 10-K for the year ended December 31, 2017.
Presented below are recently issued accounting standards that Customers has adopted as well as those that the Financial Accounting Standards Board (“FASB”) has issued but are not yet effective or that Customers has not yet adopted.

11


Recently Issued Accounting Standards
Accounting Standards Adopted in 2018
Standard
 
Summary of guidance
 
Effects on Financial Statements
ASU 2018-03,
Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10)
 
Ÿ  Clarifies certain aspects of the guidance issued in ASU 2016-01 including: the ability to irrevocably elect to change the measurement approach for equity securities measured using the practical expedient (at cost plus or minus observable transactions less impairment) to a fair value method in accordance with ASC 820, Fair Value Measurement.
Ÿ  Provides clarification that if an observable transaction occurs for such securities, the adjustment is as of the observable transaction date.
Ÿ  Effective July 1, 2018 on a prospective basis with early adoption permitted.

 
Ÿ  Customers adopted on July 1, 2018 on a prospective basis.
Ÿ  The adoption did not have a significant impact as Customers currently does not have any significant equity securities without readily determinable fair values.

Issued February 2018
 
 
ASU 2018-02,
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income/(Loss) ("AOCI")
 
Ÿ  Allows for reclassification from AOCI to retained earnings for stranded tax effects resulting from the 2017 Tax Cut and Jobs Act.
Ÿ  Requires an entity to disclose whether it has elected to reclassify stranded tax effects from AOCI to retained earnings and its policy for releasing income tax effects from AOCI.
Ÿ  Effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted.

 
Ÿ  Customers early adopted on January 1, 2018.
Ÿ  The adoption resulted in the reclassification of $0.3 million in stranded tax effects in Customers' AOCI related to net unrealized losses on its available-for-sale debt securities and cash flow hedges.
Ÿ  The adoption did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements.
Issued February 2018
 
 
ASU 2017-12,
Targeted Improvements to Accounting for Hedging Activities
 
Ÿ  Aligns the entity's risk management activities and financial reporting for hedging relationships.
Ÿ  Amends the existing hedge accounting model and expands an entity's ability to hedge nonfinancial and financial risk components and reduce complexity in fair value hedges of interest-rate risk.
Ÿ  Eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line item as the hedge item.
Ÿ  Changes certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness.
Ÿ  Effective for fiscal years beginning after December 15, 2018. Early adoption is permitted.
 
Ÿ  Customers early adopted on January 1, 2018.
Ÿ  With the early adoption, Customers is able to pursue additional hedging strategies including the ability to apply fair value hedge accounting to a specified pool of assets by excluding the portion of the hedged items related to prepayments, defaults and other events.
Ÿ  These additional hedging strategies will allow Customers to better align the accounting and financial reporting of its hedging activities with the economic objectives thereby reducing the earnings volatility resulting from these hedging activities.
Ÿ  The adoption did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements. Customers has updated its disclosures in NOTE 11 - DERIVATIVES INSTRUMENTS AND HEDGING ACTIVITIES as a result of early adopting this ASU.

Issued August 2017
 
 
ASU 2017-09,
Compensation - Stock Compensation: Scope of Modification Accounting
 
Ÿ  Clarifies when to account for a change to the terms or conditions of a share-based-payment award as a modification in ASC 718.
Ÿ  Provides that modification accounting is only required if the fair value, vesting conditions, or the classification of the award as equity or a liability changes as a result of the change in terms or conditions.
Ÿ  Effective January 1, 2018 on a prospective basis for awards modified on or after the adoption date.
 
Ÿ  Customers adopted on January 1, 2018.
Ÿ  The adoption did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements.
Issued May 2017
 
 
ASU 2017-05,
Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
 
Ÿ  Clarifies the scope and application of the accounting guidance on the sale of nonfinancial assets to non-customers, including partial sales.
Ÿ  Clarifies that if substantially all of the fair value of the assets that are promised to the counterparty in a contract is concentrated in nonfinancial assets, then all of the financial assets promised to the counterparty are in substance nonfinancial assets within the scope of Subtopic 610-20.
Ÿ  Effective January 1, 2018 on a prospective basis.
 
Ÿ  Customers adopted on January 1, 2018.
Ÿ  The adoption did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements.
Issued February 2017
 
 
 
 
 
 
 

12


Accounting Standards Adopted in 2018 (continued)
Standard
 
Summary of guidance
 
Effects on Financial Statements
ASU 2017-01,
Clarifying the Definition of a Business
 
Ÿ  Narrows the definition of a business and clarifies that to be considered a business, the fair value of gross assets acquired (or disposed of) should not be concentrated in a single identifiable asset or a group of similar identifiable assets.
Ÿ  Also clarifies that in order to be considered a business, an acquisition would have to include an input and a substantive process that together will significantly contribute to the ability to create an output.
Ÿ  Effective January 1, 2018 on a prospective basis.
 
Ÿ  Customers adopted on January 1, 2018.
Ÿ  The adoption did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements.
Issued January 2017
 
 
ASU 2016-18,
Statement of Cash Flows: Restricted Cash
 
Ÿ  Requires inclusion of restricted cash in cash and cash equivalents when reconciling the beginning-of-period total amounts shown on the statement of cash flows.
Ÿ  Effective January 1, 2018 and requires retrospective application to all periods presented.
 
Ÿ  Customers adopted on January 1, 2018.
Ÿ  The adoption did not result in any significant impact on Customers' consolidated financial statements, including its consolidated statement of cash flows, and therefore did not result in a retrospective application.
Issued November 2016
 
 
ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
 
Ÿ  Requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs.
Ÿ  Eliminates the current exception for all intra-entity transfers of an asset other than inventory that requires deferral of the tax effects until the asset is sold to a third party or otherwise recovered through use.
Ÿ  Effective January 1, 2018 on a modified retrospective basis.
 
Ÿ  Customers adopted on January 1, 2018.
Ÿ  The adoption of the ASU did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements.
Issued October 2016
 
 
ASU 2016-15,
Statement of Cash Flow: Classification of Certain Cash Receipts and Cash Payments
 
Ÿ  Aims to reduce the existing diversity in practice with regards to the classification of the following specific items in the statement of cash flows:
1.
Cash payments for debt prepayment or extinguishment costs will be classified as an operating activity, while the portion of the payment attributable to principal will be classified as a financing activity.
2.
Cash paid by an acquirer soon after a business combination for the settlement of a contingent consideration liability recognized at the acquisition date will be classified in investing activities.
3.
Cash proceeds received from the settlement of insurance claims will be classified on the basis of the related insurance coverage (i.e., the nature of the loss).
4.
Cash proceeds received from the settlement of bank-owned life insurance policies will be classified as cash inflows from investing activities.
5.
A transferor's beneficial interest obtained in a securitization of financial assets will be disclosed as a non-cash activity, and cash received from beneficial interests will be classified in investing activities.

Ÿ Effective January 1, 2018 and requires retrospective application to all periods presented.

 
Ÿ  Customers adopted on January 1, 2018.
Ÿ  The adoption did not result in any significant impact on Customers' consolidated financial statements, including its consolidated statement of cash flows, and therefore it did not result in a retrospective application.
Issued August 2016
 
 
ASU 2016-04,
Liabilities - Extinguishment of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products
 
Ÿ  Requires issuers of prepaid stored-value products (such as gift cards, telecommunication cards, and traveler's checks), to derecognize the financial liability related to those products for breakage. Breakage is the value of prepaid stored-value products that is not redeemed by consumers for goods, services or cash.
Ÿ  The amendments in this ASU provide a narrow scope exception to the guidance in Subtopic 405-20 to require that breakage be accounted for consistent with the breakage guidance in Topic 606.
Ÿ  Effective January 1, 2018 on a modified retrospective basis.
 
Ÿ  Customers adopted on January 1, 2018.
Ÿ  The adoption of this ASU did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements.
Issued March 2016
 
 

13


Accounting Standards Adopted in 2018 (continued)
Standard
 
Summary of guidance
 
Effects on Financial Statements
ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
 
Ÿ  Requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income.
Ÿ  Simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment.
Ÿ  Eliminates the requirement for public entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet.
Ÿ  Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes.
Ÿ  Requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.
Ÿ  Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes to the financial statements.
Ÿ  Clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities.
Ÿ  Effective January 1, 2018 on a modified retrospective basis.
 
Ÿ  Customers adopted on January 1, 2018 using a modified retrospective approach.
Ÿ  The adoption of this ASU resulted in a cumulative-effect adjustment that resulted in a $1.0 million reduction in AOCI and a corresponding increase in retained earnings for the same amount.
Ÿ  The $1.0 million represented the net unrealized gain on Customers' investment in Religare equity securities at December 31, 2017, as disclosed in NOTE 6 - INVESTMENT SECURITIES.
Ÿ  Customers also refined its calculation to determine the fair value of its held-for- investment loan portfolio for disclosure purposes using an exit price notion as part of adopting this ASU. The refined calculation did not have a significant impact on Customers' fair value disclosures.
Issued January 2016
 
 
ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)

Issued May 2014
                  
 
Ÿ  Supersedes the revenue recognition requirements in ASC 605.
Ÿ  Requires an entity to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
Ÿ  The amendment includes a five-step process to assist an entity in achieving the main principle(s) of revenue recognition under ASC 605.
Ÿ Reframed the structure of the indicators of when an entity is acting as an agent and focused on evidence that an entity is acting as the principal or agent in a revenue transaction.
Ÿ Requires additional qualitative and quantitative disclosures relating to the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
Ÿ  Effective January 1 , 2018 and can be either applied retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption (modified retrospective approach).
 
Ÿ  Customers adopted on January 1, 2018 on a modified retrospective basis.
Ÿ  Because the ASU does not apply to revenue associated with leases and financial instruments (including loans and securities), Customers concluded that the new guidance did not have a material impact on the elements of its consolidated statements of operations most closely associated with leases and financial instruments (such as interest income, interest expense and securities gain).
Ÿ  Customers has identified its deposit-related fees, service charges, debit and prepaid card interchange income and university fees to be within the scope of the standard.
Ÿ  Customers has also completed its review of the related contracts and its evaluation of certain costs related to these revenue streams and determined that its debit and prepaid card interchange income, previously reported on a gross basis for periods prior to adoption, will need to be presented on a net basis under this ASU, as Customers is the agent.
Ÿ  The adoption of this ASU, did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements. Additional discussion related to the adoption and the required quantitative and qualitative disclosures are included in NOTE 13 - NON-INTEREST REVENUES.
 
 

14


Accounting Standards Issued But Not Yet Adopted
Standard
 
Summary of guidance
 
Effects on Financial Statements
ASU 2018-07,
Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting

 
Ÿ  Expands the scope of Topic 718, Compensation - Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services.
Ÿ  Applies to all share-based payment transactions in which a grantor acquires goods or services from non-employees to be used or consumed in a grantor's own operations by issuing share-based payment awards.
Ÿ With the amended guidance from ASU 2018-07, non-employees share-based payments are measured with an estimate of the fair value of the equity the business is obligated to issue at the grant date (the date that the business and the stock award recipient agree to the terms of the award).
Ÿ   Compensation would be recognized in the same period and in the same manner as if the entity had paid cash for goods or services instead of stock.
Ÿ   Effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.
 
Ÿ  Customers currently does not grant share-based payment awards to non-employees and, accordingly, does not expect the adoption of this ASU to have a significant impact on its financial condition, results of operations and consolidated financial statements; however, Customers will continue to evaluate the potential impact of this ASU through the adoption date.

Issued June 2018
 
 
ASU 2017-11,
Accounting for Certain Financial Instruments with Down Round Features
 
Ÿ  Changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features.
Ÿ  When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity's own stock. As a result, a freestanding equity-linked financial instrument (or embedded conversion option) would no longer be accounted for as a derivative liability at fair value as a result of the existence of a down round feature.
Ÿ  For freestanding equity-classified financial instruments, the amendments require entities to recognize the effect of the down round feature when it is triggered. That effect is treated as a dividend and as a reduction of net income available to common shareholders in basic earnings per share ("EPS").
Ÿ  Effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.
 
Ÿ  Customers currently does not have any equity-linked financial instruments (or embedded features) with down round features and, accordingly, does not expect the adoption of this ASU to have a significant impact on its financial condition, results of operations and consolidated financial statements; however, Customers will continue to evaluate the potential impact of this ASU through the adoption date.
Issued July 2017
 
 
ASU 2017-08,
Receivables-Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities
 
Ÿ  Requires that premiums for certain callable debt securities held be amortized to their earliest call date.
Ÿ  Effective for Customers beginning after December 15, 2018, with early adoption permitted.
Ÿ  Adoption of this new guidance must be applied on a modified retrospective approach.
 
Ÿ Customers currently has an immaterial amount of callable debt securities purchased at a premium and, accordingly, does not expect the adoption of this ASU to have a significant impact on its financial condition, results of operations and consolidated financial statements; however, Customers will continue to evaluate the potential impact through the adoption date.
Issued March 2017
 
 












15


Accounting Standards Issued But Not Yet Adopted (continued)

Standard
 
Summary of guidance
 
Effects on Financial Statements
ASU 2016-13,
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments
 
Ÿ  Requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate lifetime expected credit loss and record an allowance that, when deducted from the amortized cost basis of the financial asset (including HTM securities), presents the net amount expected to be collected on the financial asset.
Ÿ  Replaces today's "incurred loss" approach and is expected to result in earlier recognition of credit losses.
Ÿ  For available-for-sale debt securities, entities will be required to record allowances for credit losses rather than reduce the carrying amount, as they do today under the OTTI model, and will be allowed to reverse previously established allowances in the event the credit of the issuer improves.
Ÿ  Simplifies the accounting model for purchased credit-impaired debt securities and loans.
Ÿ  Effective beginning after December 15, 2019 with early adoption permitted.
Ÿ  Adoption can be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted.

 
Ÿ  Customers is currently evaluating the impact of this ASU, continuing its implementation efforts across the company and reviewing the loss modeling requirements consistent with lifetime expected loss estimates.
Ÿ  Customers expects that the new model will include different assumptions used in calculating credit losses, such as estimating losses over the estimated life of a financial asset and will consider expected future changes in macroeconomic conditions.
Ÿ  The adoption of this ASU may result in an increase to Customers' allowance for loan losses which will depend upon the nature and characteristics of Customers' loan portfolio at the adoption date, as well as the macroeconomic conditions and forecasts at that date.
Ÿ  Customers currently does not intend to early adopt this new guidance.

Issued June 2016
 
 
ASU 2016-02,
Leases
 
Ÿ  Supersedes the current lease accounting guidance for both lessees and lessors under ASC 840, Leases.
Ÿ  From the lessee's perspective, the new standard establishes a right-of-use ("ROU") model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.
Ÿ  Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for lessees.
Ÿ  This ASU will require lessors to account for leases using an approach that is substantially similar to the existing guidance for sales-type, direct financing leases and operating leases.
Ÿ  Effective beginning after December 15, 2018 with early adoption permitted.
Ÿ  A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.
Ÿ In July 2018, the FASB issued ASU 2018-11 “Leases (Topic 842): Targeted Improvements,” which provides lessees the option to apply the new leasing standard to all open leases as of the adoption date.
 
Ÿ  Customers is currently evaluating the impact of this ASU on its financial condition and results of operations and expects to recognize right-of-use assets and lease liabilities for substantially all of its operating lease commitments based on the present value of unpaid lease payments as of the date of adoption.
Ÿ Customers expects to apply the new transition option under ASU 2018-11.
Ÿ  Customers does not intend to early adopt this ASU.
Issued February 2016
 
 
 
 
 
 
 




16


NOTE 4 — EARNINGS PER SHARE
The following are the components and results of Customers' earnings per common share calculations for the periods presented.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
(amounts in thousands, except share and per share data)
 
 
 
 
 
 
 
Net income available to common shareholders
$
20,048

 
$
20,107

 
$
40,575

 
$
42,240

 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding - basic
31,564,893

 
30,641,554

 
31,495,082

 
30,524,955

Share-based compensation plans
807,258

 
1,910,634

 
823,245

 
2,129,773

Warrants
8,511

 
17,464

 
8,566

 
27,318

Weighted-average number of common shares - diluted
32,380,662

 
32,569,652

 
32,326,893

 
32,682,046

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.64

 
$
0.66

 
$
1.29

 
$
1.38

Diluted earnings per common share
$
0.62

 
$
0.62

 
$
1.26

 
$
1.29


The following is a summary of securities that could potentially dilute basic earnings per common share in future periods that were not included in the computation of diluted earnings per common share because either the performance conditions for certain of the share-based compensation awards have not been met or to do so would have been anti-dilutive for the periods presented.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Anti-dilutive securities:
 
 
 
 
 
 
 
Share-based compensation awards
1,069,225

 
288,325

 
1,069,225

 
282,725

Warrants

 
52,242

 

 
52,242

Total anti-dilutive securities
1,069,225

 
340,567

 
1,069,225

 
334,967


17


NOTE 5 — CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT
The following tables present the changes in accumulated other comprehensive income (loss) by component for the three and six months ended June 30, 2018 and 2017. All amounts are presented net of tax. Amounts in parentheses indicate reductions to accumulated other comprehensive income.
 
Three Months Ended June 30, 2018
 
Available-for-sale debt securities
 
 
 
 
(amounts in thousands)
Unrealized Gains (Losses)
Foreign Currency Items
Total Unrealized Gains (Losses)
 
Unrealized  
Gains (Losses) on Cash Flow  Hedges
 
Total
Balance - March 31, 2018
$
(26,691
)
$

$
(26,691
)
 
$
503

 
$
(26,188
)
Other comprehensive income (loss) before reclassifications
(9,020
)

(9,020
)
 
1,403

 
(7,617
)
Amounts reclassified from accumulated other comprehensive income (loss) to net income (1)



 
(192
)
 
(192
)
Net current-period other comprehensive income (loss)
(9,020
)

(9,020
)
 
1,211

 
(7,809
)
Balance - June 30, 2018
$
(35,711
)
$

$
(35,711
)
 
$
1,714

 
$
(33,997
)

 
Six Months Ended June 30, 2018
 
Available-for-sale securities
 
 
 
 
(amounts in thousands)
Unrealized Gains (Losses)
Foreign Currency Items
Total Unrealized Gains (Losses)
 
Unrealized  
Gains (Losses) on Cash Flow  Hedges
 
Total
Balance - December 31, 2017
$
(249
)
$
88

$
(161
)
 
$
(198
)
 
$
(359
)
Reclassification of the income tax effects of the Tax Cuts and Jobs Act (2)
(256
)

(256
)
 
(42
)
 
(298
)
Reclassification of net unrealized gains on equity securities (2)
(953
)
(88
)
(1,041
)
 

 
(1,041
)
Balance after reclassification adjustments on January 1, 2018
(1,458
)

(1,458
)
 
(240
)
 
(1,698
)
Other comprehensive income (loss) before reclassifications
(34,253
)

(34,253
)
 
2,049

 
(32,204
)
Amounts reclassified from accumulated other comprehensive income (loss) to net income (1)



 
(95
)
 
(95
)
Net current-period other comprehensive income (loss)
(34,253
)

(34,253
)
 
1,954

 
(32,299
)
Balance - June 30, 2018
$
(35,711
)
$

$
(35,711
)
 
$
1,714

 
$
(33,997
)
 
 
 
 
 
 
 
 
(1) Reclassification amounts for cash flow hedges are reported as interest expense on FHLB advances on the consolidated statements of income.
(2) Amounts reclassified from accumulated other comprehensive income (loss) on January 1, 2018 as a result of the adoption of ASU 2018-02 and ASU 2016-01 resulted in a decrease in accumulated other comprehensive income of $1.3 million and a corresponding increase in retained earnings for the same amount. See NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION for more information.
 


18


 
Three Months Ended June 30, 2017
(amounts in thousands)
Unrealized Gains (Losses) on Available-For-Sale Debt Securities
 
Unrealized  
Gains (Losses) on Cash Flow  Hedges
 
Total
Balance - March 31, 2017
$
(3,366
)
 
$
(1,506
)
 
$
(4,872
)
Other comprehensive income (loss) before reclassifications
12,130

 
(420
)
 
11,710

Amounts reclassified from accumulated other comprehensive income (loss) to net income (1)
(1,942
)
 
468

 
(1,474
)
Net current-period other comprehensive income
10,188

 
48

 
10,236

Balance - June 30, 2017
$
6,822

 
$
(1,458
)
 
$
5,364

 
Six Months Ended June 30, 2017
(amounts in thousands)
Unrealized Gains (Losses) on Available-For-Sale Debt Securities
 
Unrealized  
Gains (Losses) on Cash Flow  Hedges
 
Total
Balance - December 31, 2016
$
(2,681
)
 
$
(2,211
)
 
$
(4,892
)
Other comprehensive income (loss) before reclassifications
11,445

 
(219
)
 
11,226

Amounts reclassified from accumulated other comprehensive income (loss) to net income (1)
(1,942
)
 
972

 
(970
)
Net current-period other comprehensive income
9,503

 
753

 
10,256

Balance - June 30, 2017
$
6,822

 
$
(1,458
)
 
$
5,364

 
 
 
 
 
 
(1) Reclassification amounts for available-for-sale debt securities are reported as gain on sale of investment securities on the consolidated statements of income. Reclassification amounts for cash flow hedges are reported as interest expense on FHLB advances on the consolidated statements of income.


19


NOTE 6 — INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities as of June 30, 2018 and December 31, 2017 are summarized in the tables below:
 
June 30, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
(amounts in thousands)
 
 
 
 
 
 
 
Available-for-Sale Debt Securities:
 
 
 
 
 
 
 
Agency-guaranteed residential mortgage-backed securities
$
490,425

 
$

 
$
(13,862
)
 
$
476,563

Agency-guaranteed commercial real estate mortgage-backed securities
334,232

 

 
(13,859
)
 
320,373

Corporate notes
381,545

 
798

 
(21,335
)
 
361,008

Available-for-Sale Debt Securities
$
1,206,202

 
$
798

 
$
(49,056
)
 
1,157,944

Equity Securities (1)
 
 
 
 
 
 
3,056

Total Investment Securities, at Fair Value
 
 
 
 
 
 
$
1,161,000

(1) Includes equity securities issued by a foreign entity that are being measured at fair value with changes in fair value
recognized directly in earnings effective January 1, 2018 as a result of adopting ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (see NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION for additional information related to the adoption of this new standard).


 
December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
(amounts in thousands)
 
 
 
 
 
 
 
Available-for-Sale Securities:
 
 
 
 
 
 
 
Agency-guaranteed residential mortgage-backed securities
$
186,221

 
$
36

 
$
(2,799
)
 
$
183,458

Agency-guaranteed commercial real estate mortgage-backed securities
238,809

 
432

 
(769
)
 
238,472

Corporate notes (1)
44,959

 
1,130

 

 
46,089

Equity securities (2)
2,311

 
1,041

 

 
3,352

Total Available-for-Sale Securities, at Fair Value
$
472,300

 
$
2,639

 
$
(3,568
)
 
$
471,371

(1)
Includes subordinated debt issued by other bank holding companies.
(2)
Includes equity securities issued by a foreign entity.
The following table presents proceeds from the sale of investment securities and gross gains and gross losses realized on those sales for the three and six month periods ended June 30, 2018 and 2017:
 
 
 
 
 
 
 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
(amounts in thousands)
 
 
 
 
 
 
 
Proceeds from sale of available-for-sale securities
$

 
$
115,982

 
$

 
$
115,982

Gross gains
$

 
$
3,183

 
$

 
$
3,183

Gross losses

 

 

 

Net gains (losses)
$

 
$
3,183

 
$

 
$
3,183

These gains were determined using the specific identification method and were reported as gains on sale of investment securities included in non-interest income on the consolidated statements of income.

20


The following table shows debt investment securities by stated maturity.  Investment securities backed by mortgages have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay and, therefore, these debt securities are classified separately with no specific maturity date:
 
June 30, 2018
 
Amortized
Cost
 
Fair
Value
(amounts in thousands)
 
 
 
Due in one year or less
$

 
$

Due after one year through five years

 

Due after five years through ten years
179,413

 
171,214

Due after ten years
202,132

 
189,794

Agency-guaranteed residential mortgage-backed securities
490,425

 
476,563

Agency-guaranteed commercial real estate mortgage-backed securities
334,232

 
320,373

Total debt securities
$
1,206,202

 
$
1,157,944


Gross unrealized losses and fair value of Customers' available for sale debt investment securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2018 and December 31, 2017 were as follows:
 
June 30, 2018
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
(amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
Available-for-Sale Debt Securities:
 
 
 
 
 
 
 
 
 
 
 
Agency-guaranteed residential mortgage-backed securities
$
416,002

 
$
(10,256
)
 
$
60,561

 
$
(3,606
)
 
$
476,563

 
$
(13,862
)
Agency-guaranteed commercial real estate mortgage-backed securities
314,525

 
(13,532
)
 
5,848

 
(327
)
 
320,373

 
(13,859
)
Corporate notes
315,249

 
(21,335
)
 

 

 
315,249

 
(21,335
)
Total
$
1,045,776

 
$
(45,123
)
 
$
66,409

 
$
(3,933
)
 
$
1,112,185

 
$
(49,056
)
 
 
December 31, 2017
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
(amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
Available-for-Sale Debt Securities:
 
 
 
 
 
 
 
 
 
 
 
Agency-guaranteed residential mortgage-backed securities
$
104,861

 
$
(656
)
 
$
66,579

 
$
(2,143
)
 
$
171,440

 
$
(2,799
)
Agency-guaranteed commercial real estate mortgage-backed securities
115,970

 
(740
)
 
6,151

 
(29
)
 
122,121

 
(769
)
Total
$
220,831

 
$
(1,396
)
 
$
72,730

 
$
(2,172
)
 
$
293,561

 
$
(3,568
)
    
At June 30, 2018, there were sixty-four available-for-sale debt investment securities in the less-than-twelve-month category and sixteen available-for-sale debt investment securities in the twelve-month-or-more category.  The unrealized losses on the mortgage-backed securities are guaranteed by government-sponsored entities and primarily relate to changes in market interest rates. The unrealized losses on the corporate notes relate to securities with no company specific concentration. The unrealized losses were due to an upward shift in interest rates that resulted in a negative impact on the respective notes pricing. All amounts related to the mortgage-backed securities and the corporate notes are expected to be recovered when market prices recover or at maturity. Customers does not intend to sell these securities and it is not more likely than not that Customers will be required to sell the securities before recovery of the amortized cost basis.

21


During the three and six month period ended June 30, 2017, Customers recorded other-than-temporary impairment losses of $2.9 million and $4.6 million, respectively, related to its equity holdings in Religare Enterprises Ltd. ("Religare") for the full amount of the decline in fair value from the cost basis established at December 31, 2016 through June 30, 2017 because Customers no longer had the intent to hold these securities until a recovery in fair value. At December 31, 2017, the fair value of the Religare equity securities was $3.4 million which resulted in an unrealized gain of $1.0 million being recognized in accumulated other comprehensive income with no adjustment for deferred taxes as Customers currently does not have a tax strategy in place capable of generating sufficient capital gains to utilize any capital losses resulting from the Religare investment.
As described in NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION, the adoption of ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, on January 1, 2018 resulted in a cumulative effect adjustment to Customers' consolidated balance sheet with a $1.0 million reduction in accumulated other comprehensive income and a corresponding increase in retained earnings related to the December 31, 2017 unrealized gain on the Religare equity securities. In accordance with the new accounting guidance, changes in the fair value of the Religare equity securities since adoption were recorded directly in earnings, which resulted in an unrealized loss of $0.3 million being recognized in other non-interest income in the accompanying consolidated statements of income for the three and six months ended June 30, 2018, respectively.
At June 30, 2018 and December 31, 2017, Customers Bank had pledged investment securities aggregating $685.0 million and $16.9 million in fair value, respectively, as collateral against its borrowings primarily with the FHLB and an unused line of credit with another financial institution. These counterparties do not have the ability to sell or repledge these securities.
NOTE 7 – LOANS HELD FOR SALE
The composition of loans held for sale as of June 30, 2018 and December 31, 2017 was as follows:
 
June 30, 2018
 
December 31, 2017
(amounts in thousands)
 
 
 
Commercial loans:
 
 
 
Mortgage warehouse loans, at fair value
$
1,930,738

 
$
1,793,408

Multi-family loans at lower of cost or fair value

 
144,191

Total commercial loans held for sale
1,930,738

 
1,937,599

Consumer loans:
 
 
 
Residential mortgage loans, at fair value
1,043

 
1,886

Loans held for sale
$
1,931,781

 
$
1,939,485


Commercial loans held for sale consists predominately of commercial loans to mortgage companies (i.e., mortgage warehouse loans). These mortgage warehouse lending transactions are subject to master repurchase agreements and are designated as held for sale and reported at fair value based on an election made to account for the loans at fair value. Pursuant to the agreements, Customers funds the pipelines for these mortgage lenders by sending payments directly to the closing agents for funded loans (i.e., the purchase event) and receives proceeds directly from third party investors when the loans are sold into the secondary market (i.e., the sale event). The fair value of the mortgage warehouse loans is estimated as the amount of cash initially advanced to fund the mortgage, plus accrued interest and fees, as specified in the respective agreements. The interest rates on these loans are variable, and the lending transactions are short-term, with an average life of 20 days from purchase to sale. The primary goal of these lending transactions is to provide liquidity to mortgage companies.

Effective March 31, 2018, Customers Bank transferred $129.7 million of multi-family loans from loans held for sale to loan receivable (held for investment) because the Bank no longer has the intent to sell these loans. Customers Bank transferred these loans at their carrying value, which approximated their fair value at the time of transfer.

On June 30, 2017, Customers Bank transferred $150.6 million of multi-family loans from held for investment to loans held for sale. Customers Bank transferred these loans at their carrying value, which was lower than the estimated fair value at the time of transfer. At December 31, 2017, the carrying value of these loans approximated their fair value. Accordingly, a lower of cost or fair value adjustment was not recorded as of December 31, 2017.


22


NOTE 8 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
The following table presents loans receivable as of June 30, 2018 and December 31, 2017.
 
June 30, 2018
 
December 31, 2017
(amounts in thousands)
 
 Commercial:
 
 
 
 Multi-family
$
3,542,770

 
$
3,502,381

 Commercial and industrial (including owner occupied commercial real estate)
1,811,751

 
1,633,818

 Commercial real estate non-owner occupied
1,155,998

 
1,218,719

 Construction
88,141

 
85,393

 Total commercial loans
6,598,660

 
6,440,311

 Consumer:
 
 
 
 Residential real estate
493,222

 
234,090

 Manufactured housing
85,328

 
90,227

 Other
3,874

 
3,547

 Total consumer loans
582,424

 
327,864

Total loans receivable
7,181,084

 
6,768,175

Deferred costs and unamortized premiums, net
642

 
83

Allowance for loan losses
(38,288
)
 
(38,015
)
Loans receivable, net of allowance for loan losses
$
7,143,438

 
$
6,730,243





23


The following tables summarize loans receivable by loan type and performance status as of June 30, 2018 and December 31, 2017:
 
June 30, 2018
 
30-89 Days
Past Due (1)
 
90 Days
Or More
Past Due(1)
 
Total Past
Due (1)
 
Non-
Accrual
 
Current (2)
 
Purchased-
Credit-
Impaired
Loans (3)
 
Total
Loans (4)
(amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Multi-family
$

 
$

 
$

 
$
1,343

 
$
3,539,640

 
$
1,787