10-Q 1 cubi-2018930x10q.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 September 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)

cubiedgarlogoa09.jpgcubiedgarlogoa09.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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
x
  
Accelerated filer
 
¨
 
 
 
 
 
Non-accelerated filer
 
o 
  
Smaller Reporting Company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging Growth Company
 
¨
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
¨
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 November 2, 2018, 31,687,340 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)
 
September 30,
2018
 
December 31,
2017
ASSETS
 
 
(As Restated)
Cash and due from banks
$
12,943

 
$
20,388

Interest-earning deposits
653,091

 
125,935

Cash and cash equivalents
666,034

 
146,323

Investment securities, at fair value
668,851

 
471,371

Loans held for sale (includes $1,383 and $1,886, respectively, at fair value)
1,383

 
146,077

Loans receivable, mortgage warehouse, at fair value
1,516,327

 
1,793,408

Loans receivable
7,239,950

 
6,768,258

Allowance for loan losses
(40,741
)
 
(38,015
)
Total loans receivable, net of allowance for loan losses
8,715,536

 
8,523,651

FHLB, Federal Reserve Bank, and other restricted stock
74,206

 
105,918

Accrued interest receivable
32,986

 
27,021

Bank premises and equipment, net
11,300

 
11,955

Bank-owned life insurance
263,117

 
257,720

Other real estate owned
1,450

 
1,726

Goodwill and other intangibles
16,825

 
16,295

Other assets
165,416

 
131,498

Total assets
$
10,617,104

 
$
9,839,555

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Demand, non-interest bearing
$
1,338,167

 
$
1,052,115

Interest-bearing
7,175,547

 
5,748,027

Total deposits
8,513,714

 
6,800,142

Federal funds purchased

 
155,000

FHLB advances
835,000

 
1,611,860

Other borrowings
123,779

 
186,497

Subordinated debt
108,953

 
108,880

Accrued interest payable and other liabilities
80,846

 
56,212

Total liabilities
9,662,292

 
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 September 30, 2018 and December 31, 2017
217,471

 
217,471

Common stock, par value $1.00 per share; 200,000,000 shares authorized; 32,217,600 and 31,912,763 shares issued as of September 30, 2018 and December 31, 2017; 31,687,340 and 31,382,503 shares outstanding as of September 30, 2018 and December 31, 2017
32,218

 
31,913

Additional paid in capital
431,205

 
422,096

Retained earnings
302,404

 
258,076

Accumulated other comprehensive loss, net
(20,253
)
 
(359
)
Treasury stock, at cost (530,260 shares as of September 30, 2018 and December 31, 2017)
(8,233
)
 
(8,233
)
Total shareholders’ equity
954,812

 
920,964

Total liabilities and shareholders’ equity
$
10,617,104

 
$
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
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Interest income:
 
 
 
 
 
 
 
Loans
$
97,815

 
$
88,740

 
$
278,986

 
$
248,708

Investment securities
8,495

 
7,307

 
26,932

 
21,017

Other
3,735

 
2,238

 
8,731

 
5,507

Total interest income
110,045

 
98,285

 
314,649

 
275,232

Interest expense:
 
 
 
 
 
 
 
Deposits
32,804

 
18,381

 
76,779

 
48,934

Other borrowings
2,431

 
3,168

 
9,082

 
6,767

FHLB advances
9,125

 
7,032

 
27,381

 
15,433

Subordinated debt
1,684

 
1,685

 
5,053

 
5,055

Total interest expense
46,044

 
30,266

 
118,295

 
76,189

Net interest income
64,001

 
68,019

 
196,354

 
199,043

Provision for loan losses
2,924

 
2,352

 
4,257

 
5,937

Net interest income after provision for loan losses
61,077

 
65,667

 
192,097

 
193,106

Non-interest income:
 
 
 
 
 
 
 
Interchange and card revenue
7,084

 
9,570

 
23,127

 
31,729

Deposit fees
2,002

 
2,659

 
5,726

 
7,918

Bank-owned life insurance
1,869

 
1,672

 
5,769

 
5,297

Mortgage warehouse transactional fees
1,809

 
2,396

 
5,663

 
7,139

Gain on sale of SBA and other loans
1,096

 
1,144

 
3,404

 
3,045

Mortgage banking income
207

 
257

 
532

 
703

Impairment loss on investment securities

 
(8,349
)
 

 
(12,934
)
(Loss) gain on sale of investment securities
(18,659
)
 
5,349

 
(18,659
)
 
8,532

Other
6,676

 
3,328

 
13,558

 
7,741

Total non-interest income
2,084

 
18,026

 
39,120

 
59,170

Non-interest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
25,462

 
24,807

 
78,135

 
69,569

Technology, communication, and bank operations
11,657

 
14,401

 
32,923

 
33,227

Professional services
4,743

 
7,403

 
14,563

 
21,142

Merger and acquisition related expenses
2,945

 

 
3,920

 

Occupancy
2,901

 
2,857

 
8,876

 
8,228

FDIC assessments, non-income taxes, and regulatory fees
2,415

 
2,475

 
6,750

 
6,615

Provision for operating losses
1,171

 
1,509

 
3,930

 
4,901

Advertising and promotion
820

 
404

 
1,529

 
1,108

Loan workout
516

 
915

 
1,823

 
1,844

Other real estate owned expenses
66

 
445

 
164

 
550

Other
4,408

 
5,824

 
10,521

 
13,634

Total non-interest expense
57,104

 
61,040

 
163,134

 
160,818

Income before income tax expense
6,057

 
22,653

 
68,083

 
91,458

Income tax expense
28

 
14,899

 
14,250

 
34,236

Net income
6,029

 
7,754

 
53,833

 
57,222

Preferred stock dividends
3,615

 
3,615

 
10,844

 
10,844

Net income available to common shareholders
$
2,414

 
$
4,139

 
$
42,989

 
$
46,378

Basic earnings per common share
$
0.08

 
$
0.13

 
$
1.36

 
$
1.52

Diluted earnings per common share
$
0.07

 
$
0.13

 
$
1.33

 
$
1.42


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
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
6,029

 
$
7,754

 
$
53,833

 
$
57,222

Unrealized (losses) gains on available-for-sale debt securities:
 
 
 
 
 
 
 
Unrealized (losses) gains arising during the period
(1,629
)
 
(3,570
)
 
(47,917
)
 
15,192

Income tax effect
423

 
1,393

 
12,458

 
(5,924
)
Reclassification adjustments for losses (gains) on securities included in net income
18,659

 
(5,349
)
 
18,659

 
(8,532
)
Income tax effect
(4,851
)
 
2,086

 
(4,851
)
 
3,327

Net unrealized gains (losses) on available-for-sale debt securities
12,602

 
(5,440
)
 
(21,651
)
 
4,063

Unrealized gains on cash flow hedges:
 
 
 
 
 
 
 
Unrealized gains (losses) arising during the period
4,062

 
171

 
6,830

 
(189
)
Income tax effect
(1,056
)
 
(67
)
 
(1,775
)
 
74

Reclassification adjustment for (gains) losses included in net income
(2,519
)
 
572

 
(2,647
)
 
2,166

Income tax effect
655

 
(223
)
 
688

 
(845
)
Net unrealized gains on cash flow hedges
1,142

 
453

 
3,096

 
1,206

Other comprehensive income (loss), net of income tax effect
13,744

 
(4,987
)
 
(18,555
)
 
5,269

Comprehensive income
$
19,773

 
$
2,767

 
$
35,278

 
$
62,491


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)

 
Three Months Ended September 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, June 30, 2018
9,000,000

 
$
217,471

 
31,669,643

 
$
32,200

 
$
428,796

 
$
299,990

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

Net income

 

 

 

 

 
6,029

 

 

 
6,029

Other comprehensive income

 

 

 

 

 

 
13,744

 

 
13,744

Preferred stock dividends

 

 

 

 

 
(3,615
)
 

 

 
(3,615
)
Share-based compensation expense

 

 

 

 
1,980

 

 

 

 
1,980

Issuance of common stock under share-based compensation arrangements

 

 
17,697

 
18

 
429

 

 

 

 
447

Balance, September 30, 2018
9,000,000

 
$
217,471

 
31,687,340

 
$
32,218

 
$
431,205

 
$
302,404

 
$
(20,253
)
 
$
(8,233
)
 
$
954,812

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 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
 
Treasury
Stock
 
Total
Balance, June 30, 2017
9,000,000

 
$
217,471

 
30,730,784

 
$
31,261

 
$
428,488

 
$
235,938

 
$
5,364

 
$
(8,233
)
 
$
910,289

Net income

 

 

 

 

 
7,754

 

 

 
7,754

Other comprehensive loss

 

 

 

 

 

 
(4,987
)
 

 
(4,987
)
Preferred stock dividends

 

 

 

 

 
(3,615
)
 

 

 
(3,615
)
Share-based compensation expense

 

 

 

 
1,602

 

 

 

 
1,602

Exercise of warrants

 

 
6,413

 
6

 
131

 

 

 

 
137

Issuance of common stock under share-based compensation arrangements

 

 
50,435

 
51

 
(588
)
 
(1
)
 

 

 
(538
)
Balance, September 30, 2017
9,000,000

 
$
217,471

 
30,787,632

 
$
31,318

 
$
429,633

 
$
240,076

 
$
377

 
$
(8,233
)
 
$
910,642


See accompanying notes to the unaudited consolidated financial statements.















6


CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY — UNAUDITED (CONTINUED)
(amounts in thousands, except shares outstanding data)

 
Nine Months Ended September 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

 

 

 

 

 
53,833

 

 

 
53,833

Other comprehensive loss

 

 

 

 

 

 
(18,555
)
 

 
(18,555
)
Preferred stock dividends

 

 

 

 

 
(10,844
)
 

 

 
(10,844
)
Share-based compensation expense

 

 

 

 
5,641

 

 

 

 
5,641

Exercise of warrants

 

 
5,242

 
5

 
107

 

 

 

 
112

Issuance of common stock under share-based compensation arrangements

 

 
299,595

 
300

 
3,361

 

 

 

 
3,661

Balance, September 30, 2018
9,000,000

 
$
217,471

 
31,687,340

 
$
32,218

 
$
431,205

 
$
302,404

 
$
(20,253
)
 
$
(8,233
)
 
$
954,812

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 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

 

 

 

 

 
57,222

 

 

 
57,222

Other comprehensive income

 

 

 

 

 

 
5,269

 

 
5,269

Preferred stock dividends

 

 

 

 

 
(10,844
)
 

 
 
 
(10,844
)
Share-based compensation expense

 

 

 

 
4,536

 

 

 

 
4,536

Exercise of warrants

 

 
50,387

 
50

 
507

 

 

 

 
557

Issuance of common stock under share-based compensation arrangements

 

 
447,328

 
448

 
(2,418
)
 

 

 

 
(1,970
)
Balance, September 30, 2017
9,000,000

 
$
217,471

 
30,787,632

 
$
31,318

 
$
429,633

 
$
240,076

 
$
377

 
$
(8,233
)
 
$
910,642


See accompanying notes to the unaudited consolidated financial statements.

7



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

 
Nine Months Ended
September 30,
 
2018
 
2017
Cash Flows from Operating Activities
 
 
(As Restated)
Net income
$
53,833

 
$
57,222

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for loan losses
4,257

 
5,937

Depreciation and amortization
10,235

 
7,476

Share-based compensation expense
6,595

 
5,377

Deferred taxes
6,238

 
286

Net amortization of investment securities premiums and discounts
1,204

 
520

Unrealized loss recognized on equity securities
1,533

 

Loss (gain) on sale of investment securities
18,659

 
(8,532
)
Impairment loss on investment securities

 
12,934

Gain on sale of SBA and other loans
(3,880
)
 
(3,553
)
Origination of loans held for sale
(22,978
)
 
(32,343
)
Proceeds from the sale of loans held for sale
23,936

 
31,718

Amortization of fair value discounts and premiums
164

 
93

Net (gain) loss on sales of other real estate owned
(35
)
 
154

Valuation and other adjustments to other real estate owned
124

 
298

Earnings on investment in bank-owned life insurance
(5,769
)
 
(5,297
)
Increase in accrued interest receivable and other assets
(21,525
)
 
(27,862
)
Increase (decrease) in accrued interest payable and other liabilities
25,774

 
(14,106
)
Net Cash Provided By Operating Activities
98,365

 
30,322

Cash Flows from Investing Activities
 
 
 
Proceeds from maturities, calls and principal repayments of securities available for sale
38,926

 
36,461

Proceeds from sales of investment securities available for sale
476,182

 
670,522

Purchases of investment securities available for sale
(763,242
)
 
(796,594
)
Origination of mortgage warehouse loans
(21,739,744
)
 
(22,738,383
)
Proceeds from repayments of mortgage warehouse loans
22,016,825

 
22,893,950

Net increase in loans, excluding mortgage warehouse loans
(20,476
)
 
(921,049
)
Proceeds from sales of loans
42,211

 
124,703

Purchase of loans
(347,740
)
 
(262,641
)
Purchases of bank-owned life insurance

 
(90,000
)
Proceeds from bank-owned life insurance
529

 
1,418

Net proceeds from (purchases of) FHLB, Federal Reserve Bank, and other restricted stock
31,712

 
(30,203
)
Purchases of bank premises and equipment
(1,344
)
 
(1,725
)
Proceeds from sales of other real estate owned
421

 
1,680

Purchase of university relationship intangible asset
(1,502
)
 

Purchase of leased assets under operating leases
(21,849
)
 

Net Cash Used In Investing Activities
(289,091
)
 
(1,111,861
)
Cash Flows from Financing Activities
 
 
 
Net increase in deposits
1,713,572

 
293,301

Net (decrease) increase in short-term borrowed funds from the FHLB
(776,860
)
 
593,543

Net (decrease) increase in federal funds purchased
(155,000
)
 
64,000

(Repayments of) proceeds from issuance of long-term debt
(63,250
)
 
98,564

Preferred stock dividends paid
(10,844
)
 
(10,844
)
Exercise of warrants
112

 
557

Payments of employee taxes withheld from share-based awards
(711
)
 
(4,923
)
Proceeds from issuance of common stock
3,418

 
2,112

Net Cash Provided By Financing Activities
710,437

 
1,036,310

Net Increase (Decrease) in Cash and Cash Equivalents
519,711

 
(45,229
)
Cash and Cash Equivalents – Beginning
146,323

 
264,709

Cash and Cash Equivalents – Ending
$
666,034

 
$
219,480

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(continued)

 
 
 
 
 
 
Supplementary Cash Flows Information:
 
 
 
Interest paid
$
114,973

 
$
70,706

Income taxes paid
4,156

 
31,545

Non-cash items:
 
 
 
Transfer of loans to other real estate owned
$
234

 
$
83

Transfer of loans held for investment to held for sale

 
150,638

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

 


See accompanying notes to the unaudited consolidated financial statements.

8


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.
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.

9


NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation
The interim unaudited consolidated financial statements of Customers have been prepared in conformity with U.S. GAAP and pursuant to the rules and regulations of the SEC. These interim unaudited consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the financial position and the results of operations and cash flows of Customers 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. On November 13, 2018, Customers Bancorp filed with the SEC a report on Form 8-K advising that its 2017, 2016, and 2015 audited consolidated financial statements and its interim unaudited consolidated financial statements as of and for the three and six month periods ended March 31, 2018 and 2017 and June 30, 2018 and 2017, respectively, should no longer be relied upon because of incorrect classifications of the cash flows used in and provided by its commercial mortgage warehouse lending activities between operating and investing activities on the consolidated statements of cash flows because the related loan balances were incorrectly classified as held for sale instead of held for investment (i.e., loans receivable) on its consolidated balance sheets. These misclassifications have no impact on total cash balances, total loans, total assets, the allowance for loan losses, total capital, regulatory capital ratios, net interest income, net interest margin, net income to shareholders, basic or diluted earnings per share, return on average assets, return on average equity, the efficiency ratio, asset quality ratios or other key performance metrics, including non-GAAP performance metrics, that Customers routinely discusses with analysts and investors. The December 31, 2017 consolidated balance sheet presented in this report has been derived from Customers' audited 2017 consolidated financial statements, restated to correct the classification of the mortgage warehouse loans as held for investment instead of held for sale. Because of a fair value option election that Customers made on July 1, 2012 that continues today, these loans are, and will continue to be, reported at their fair value and accordingly do not have an allowance for loan losses. 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 included in its 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") except to the extent they are affected by the restatement. 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 or any other period. There have been no material changes to Customers' significant accounting policies as disclosed in Customers' 2017 Form 10-K, except for the accounting policies related to Cash and Cash Equivalents and Statements of Cash Flows and Loans Held for Sale and Loans at Fair Value as described below.

10


Restatement of Previously Issued Financial Statements
In November 2018, Customers determined that the cash flow activities associated with its commercial mortgage warehouse lending activities should have been reported as investing activities in its consolidated statements of cash flows because the related loan balances should have been classified as held for investment (i.e., loans receivable). Effective with the filing of this quarterly report on Form 10-Q, Customers changed its accounting policies such that commercial mortgage warehouse loans will be classified as held for investment and presented as "Loans receivable, mortgage warehouse, at fair value" on its consolidated balance sheets. The cash flow activities associated with these commercial mortgage warehouse lending activities will be reported as investing activities in the consolidated statements of cash flows.
The following tables set forth the effects of the correction on the consolidated balance sheet as of December 31, 2017 and the consolidated statements of cash flows for the nine months ended September 30, 2017.
 
 
December 31, 2017
Consolidated Balance Sheet
 
As Previously Reported
 
Adjustments
 
As Restated
(amounts in thousands)
 
 
 
 
 
 
Loans held for sale
 
$
1,939,485

 
$
(1,793,408
)
 
$
146,077

Loans receivable, mortgage warehouse, at fair value
 

 
1,793,408

 
1,793,408

Total loans receivable, net of allowance for loan losses
 
6,730,243

 
1,793,408

 
8,523,651

 
 
For the Nine Months Ended September 30, 2017
Consolidated Statements of Cash Flows
 
As Previously Reported
 
Adjustments
 
As Restated
(amounts in thousands)
 
 
 
 
 
 
Origination of loans held for sale
 
$
(22,770,726
)
 
$
22,738,383

 
$
(32,343
)
Proceeds from the sale of loans held for sale
 
22,925,668

 
(22,893,950
)
 
31,718

Net cash provided by operating activities
 
185,889

 
(155,567
)
 
30,322

Origination of mortgage warehouse loans
 

 
(22,738,383
)
 
(22,738,383
)
Proceeds from repayments of mortgage warehouse loans
 

 
22,893,950

 
22,893,950

Net cash used in investing activities
 
(1,267,428
)
 
155,567

 
(1,111,861
)
In addition, the December 31, 2017 comparative balances disclosed in NOTE 6 - LOANS HELD FOR SALE, NOTE 7 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES, and NOTE 9 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, and the comparative balances reported throughout Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this quarterly report on Form 10-Q, have been restated to present the corrected classification.


11


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.
Recently Issued Accounting Standards

Accounting Standards Adopted in 2018
Standard
 
Summary of guidance
 
Effects on Financial Statements
ASU 2018-13,
Fair Value (Topic 820): Changes to the Disclosure Requirements for Fair Value Measurement

Issued August 2018

 
Ÿ  Eliminates disclosure requirements for the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements.
Ÿ  Clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurement as of the reporting date.
Ÿ  Expands disclosures to include unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
Ÿ  Certain amendments are applied prospectively and retrospectively.
Ÿ  Effective for fiscal year beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption permitted.
 
Ÿ  Customers early adopted on September 30, 2018.
Ÿ  The adoption did not have a significant impact on Customers' financial condition, results of operations and consolidated financial statements.

 
 
 
 
 
ASU 2018-03,
Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10)

Issued February 2018
 
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 on Customers' financial condition, results of operations and consolidated financial statements as Customers currently does not have any significant equity securities without readily determinable fair values.

 
 
 
 
 
ASU 2018-02,
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income/(Loss) ("AOCI")

Issued February 2018
 
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.
 
 
 
 
 

12


Accounting Standards Adopted in 2018 (continued)

Standard
 
Summary of guidance
 
Effects on Financial Statements
ASU 2017-12,
Targeted Improvements to Accounting for Hedging Activities

Issued August 2017

 
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  In October 2018, the FASB issued ASU 2018-16 “Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate ("SOFR") Overnight Index Swap ("OIS") Rate as a Benchmark Interest Rate for Hedge Accounting Purposes," which permits the OIS rate based on SOFR as a U.S. benchmark interest rate for hedge accounting purposes.
 
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 10 - DERIVATIVES INSTRUMENTS AND HEDGING ACTIVITIES as a result of early adopting this ASU.

 
 
 
 
 
ASU 2017-09,
Compensation - Stock Compensation: Scope of Modification Accounting

Issued May 2017

 
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.
 
 
 
 
 
ASU 2017-05,
Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets

Issued February 2017

 
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.
 
 
 
 
 
ASU 2017-01,
Clarifying the Definition of a Business

Issued January 2017

 
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.
 
 
 
 
 
ASU 2016-18,
Statement of Cash Flows: Restricted Cash

Issued November 2016

 
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' financial condition, results of operations and consolidated financial statements, including its consolidated statement of cash flows, and therefore did not result in a retrospective application.
 
 
 
 
 


13


Accounting Standards Adopted in 2018 (continued)
Standard
 
Summary of guidance
 
Effects on Financial Statements
ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory

Issued October 2016

 
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.
 
 
 
 
 
ASU 2016-15,
Statement of Cash Flow: Classification of Certain Cash Receipts and Cash Payments

Issued August 2016

 
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 debt extinguishment costs should 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' financial condition, results of operations and consolidated financial statements, including its consolidated statement of cash flows, and therefore it did not result in a retrospective application.
 
 
 
 
 
ASU 2016-04,
Liabilities - Extinguishment of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products

Issued March 2016

 
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.
 
 
 
 
 

14


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

Issued January 2016

 
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 5 - 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.
 
 
 
 
 
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 either be 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 gains or losses).
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 12 - NON-INTEREST REVENUES.
 
 
 
 
 


15


Accounting Standards Issued But Not Yet Adopted
Standard
 
Summary of guidance
 
Effects on Financial Statements
ASU 2018-15,
Internal-Use Software (Subtopic 350-40): Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

Issued August 2018

 
Ÿ  Clarifies that service contracts with hosting arrangements must follow internal-use software guidance Subtopic 350-40 when determining which implementation costs to capitalize as an asset related to the service contract and which costs to expense.
Ÿ  Also clarifies that capitalized implementation costs of a hosting arrangement that is a service contract are to be amortized over the term of the hosting arrangement, which includes the noncancelable period of the arrangement plus options to extend the arrangement if reasonably certain to exercise.
Ÿ  Clarifies that existing impairment guidance in Subtopic 350-40 must be applied to the capitalized implementation costs as if they were long-lived assets.
Ÿ  Applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.
Ÿ  Effective for fiscal year beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption permitted.
 
Ÿ  Customers is currently evaluating the expected impact of this ASU on its financial condition, results of operations and consolidated financial statements.


 
 
 
 
 
ASU 2018-07,
Compensation - Stock Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting

Issued June 2018


 
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.
 
 
 
 
 

16


Accounting Standards Issued But Not Yet Adopted (continued)
Standard
 
Summary of guidance
 
Effects on Financial Statements
ASU 2017-11,
Accounting for Certain Financial Instruments with Down Round Features

Issued July 2017

 
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, with early adoption permitted.
 
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.
 
 
 
 
 
ASU 2017-08,
Receivables-Nonrefundable Fees and Other Costs: Premium Amortization on Purchased Callable Debt Securities

Issued March 2017

 
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.
 
 
 
 
 
ASU 2016-13,
Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments

Issued June 2016

 
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 has established a company-wide, cross-discipline governance structure, which provides implementation oversight and continues evaluating the impact of this ASU and reviewing the loss modeling requirements consistent with lifetime expected loss estimates.
Ÿ  Customers has selected a third-party vendor to assist in the implementation process of its new model, which 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.


 
 
 
 
 


17


Accounting Standards Issued But Not Yet Adopted (continued)
Standard
 
Summary of guidance
 
Effects on Financial Statements
ASU 2016-02,
Leases

Issued February 2016

 
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 in the process of its implementation, which includes evaluating its leasing activities and certain contracts for embedded leases. Customers will be utilizing a lease accounting software solution for its real estate leases and updating processing and internal controls for its leasing activities.
Ÿ  Customers expects to recognize a lease liability and a corresponding right-of-use asset, at their present value, to predominately all of the $22 million of future minimum payments required under operating leases as disclosed in Note 10 of Customers’ 2017 Form 10-K, along with any leases entered into or extended during 2018. However, the population of contracts subject to balance sheet recognition and their initial measurement remains under evaluation. Customers does not expect material changes to the recognition of operating lease expense in its consolidated statements of income.
Ÿ  Customers expects to adopt certain practical expedients available under the new guidance, which will not require it to (1) reassess whether any expired or existing contracts contain leases, (2) reassess the lease classification for any expired or existing leases, or (3) reassess initial direct costs for any existing leases. Additionally, Customers will elect to apply the new lease guidance at the adoption date, rather than at the beginning of the earliest period presented and recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption, while continuing to present the comparative periods under Topic 840.
Ÿ  Customers does not intend to early adopt this new guidance.

 
 
 
 
 


18


NOTE 3 — EARNINGS PER SHARE
The following are the components and results of Customers' earnings per common share calculations for the periods presented.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
(amounts in thousands, except share and per share data)
 
 
 
 
 
 
 
Net income available to common shareholders
$
2,414

 
$
4,139

 
$
42,989

 
$
46,378

 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding - basic
31,671,122

 
30,739,671

 
31,554,407

 
30,597,314

Share-based compensation plans
601,622

 
1,754,480

 
750,573

 
2,004,917

Warrants
4,846

 
18,541

 
7,475

 
24,392

Weighted-average number of common shares - diluted
32,277,590

 
32,512,692

 
32,312,455

 
32,626,623

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.08

 
$
0.13

 
$
1.36

 
$
1.52

Diluted earnings per common share
$
0.07

 
$
0.13

 
$
1.33

 
$
1.42


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
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Anti-dilutive securities:
 
 
 
 
 
 
 
Share-based compensation awards
1,787,670

 
409,225

 
1,105,287

 
409,225

Warrants

 
52,242

 

 
52,242

Total anti-dilutive securities
1,787,670

 
461,467

 
1,105,287

 
461,467


19


NOTE 4 — CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT
The following tables present the changes in accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2018 and 2017. All amounts are presented net of tax. Amounts in parentheses indicate reductions to accumulated other comprehensive income.
 
Three Months Ended September 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 - June 30, 2018
$
(35,711
)
$

$
(35,711
)
 
$
1,714

 
$
(33,997
)
Other comprehensive income (loss) before reclassifications
(1,206
)

(1,206
)
 
3,006

 
1,800

Amounts reclassified from accumulated other comprehensive income (loss) to net income (1)
13,808


13,808

 
(1,864
)
 
11,944

Net current-period other comprehensive income
12,602


12,602

 
1,142

 
13,744

Balance - September 30, 2018
$
(23,109
)
$

$
(23,109
)
 
$
2,856

 
$
(20,253
)

 
Nine Months Ended September 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
(35,459
)

(35,459
)
 
5,055

 
(30,404
)
Amounts reclassified from accumulated other comprehensive income (loss) to net income (1)
13,808


13,808

 
(1,959
)
 
11,849

Net current-period other comprehensive income (loss)
(21,651
)

(21,651
)
 
3,096

 
(18,555
)
Balance - September 30, 2018
$
(23,109
)
$

$
(23,109
)
 
$
2,856

 
$
(20,253
)
 
 
 
 
 
 
 
 
(1) Reclassification amounts for available-for-sale debt securities are reported as loss on sale of investment securities on the consolidated statements of income. During the three and nine months ended September 30, 2018, reclassification amounts of $18.7 million ($13.8 million net of taxes), respectively, were reported as loss on sale of investment securities on the consolidated statements of income. Reclassification amounts for cash flow hedges are reported as either interest expense on FHLB advances on the consolidated statements of income or other non-interest income on the consolidated statements of income for gains from the discontinuance of cash flow hedge accounting for certain interest rate swaps. During the three and nine months ended September 30, 2018, reclassification amounts of $303 thousand ($224 thousand net of taxes) and $175 thousand ($129 thousand net of taxes) were reported as interest expense on FHLB advances on the consolidated statements of income. During the three and nine months ended September 30, 2018, reclassification amounts of $2.8 million ($2.1 million net of taxes), respectively, were reported as other non-interest income on the consolidated statements of income from the discontinuance of cash flow hedge accounting for certain interest rate swaps.
(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 2 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION for more information.
 


20


 
Three Months Ended September 30, 2017
(amounts in thousands)
Unrealized Gains (Losses) on Available-For-Sale Securities
 
Unrealized
Gains (Losses) on Cash Flow Hedges
 
Total
Balance - June 30, 2017
$
6,822

 
$
(1,458
)
 
$
5,364

Other comprehensive income (loss) before reclassifications
(2,177
)
 
104

 
(2,073
)
Amounts reclassified from accumulated other comprehensive income (loss) to net income (1)
(3,263
)
 
349

 
(2,914
)
Net current-period other comprehensive income (loss)
(5,440
)
 
453

 
(4,987
)
Balance - September 30, 2017
$
1,382

 
$
(1,005
)
 
$
377

 
Nine Months Ended September 30, 2017
(amounts in thousands)
Unrealized Gains (Losses) on Available-For-Sale 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
9,268

 
(115
)
 
9,153

Amounts reclassified from accumulated other comprehensive income (loss) to net income (1)
(5,205
)
 
1,321

 
(3,884
)
Net current-period other comprehensive income
4,063

 
1,206

 
5,269

Balance - September 30, 2017
$
1,382

 
$
(1,005
)
 
$
377

 
 
 
 
 
 
(1) Reclassification amounts for available-for-sale debt securities are reported as gain on sale of investment securities on the consolidated statements of income. During the three and nine months ended September 30, 2017, reclassification amounts of $5.3 million ($3.3 million net of taxes) and $8.5 million ($5.2 million net of taxes), respectively, were 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. During the three and nine months ended September 30, 2017, reclassification amounts of $572 thousand ($349 thousand net of taxes) and $2.2 million ($1.3 million net of taxes) were reported as interest expense on FHLB advances on the consolidated statements of income.


21


NOTE 5 — INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities as of September 30, 2018 and December 31, 2017 are summarized in the tables below:
 
September 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
$
316,785

 
$

 
$
(11,367
)
 
$
305,418

Corporate notes
381,475

 
347

 
(20,208
)
 
361,614

Available-for-sale debt securities
$
698,260

 
$
347

 
$
(31,575
)
 
667,032

Equity securities (1)
 
 
 
 
 
 
1,819

Total investment securities, at fair value
 
 
 
 
 
 
$
668,851

(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 2 - 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 nine month periods ended September 30, 2018 and 2017:
 
 
 
 
 
 
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
(amounts in thousands)
 
 
 
 
 
 
 
Proceeds from sale of available-for-sale securities
$
476,182

 
$
554,540

 
$
476,182

 
$
670,522

 
 
 
 
 
 
 
 
Gross gains
$

 
$
5,349

 
$

 
$
8,532

Gross losses
(18,659
)
 

 
(18,659
)
 

Net (losses)/gains
$
(18,659
)
 
$
5,349

 
$
(18,659
)
 
$
8,532

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

22


The following table shows debt securities by stated maturity.  Debt 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:
 
September 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
229,807

 
218,904

Due after ten years
151,668

 
142,710

Agency-guaranteed residential mortgage-backed securities
316,785

 
305,418

Total debt securities
$
698,260

 
$
667,032


Gross unrealized losses and fair value of Customers' available-for-sale debt securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2018 and December 31, 2017 were as follows:
 
September 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
$
305,418

 
$
(11,367
)
 
$

 
$

 
$
305,418

 
$