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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
________________________________________
FORM 10-K
________________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
001-35542
(Commission File Number)
________________________________________
(Exact name of registrant as specified in its charter)
________________________________________
Pennsylvania
(State or other jurisdiction of
incorporation or organization)
27-2290659
(I.R.S. Employer
Identification Number)
1015 Penn Avenue
Suite 103
Wyomissing PA 19610
(Address of principal executive offices)
(610) 933-2000
(Registrants telephone number, including area code)
N/A
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Voting Common Stock, par value $1.00 per share
6.375% Senior Notes due 2018
Fixed-to-Floating Rate Non-Cumulative Perpetual
Preferred Stock, Series C, par value $1.00 per share
Fixed-to-Floating Rate Non-Cumulative Perpetual
Preferred Stock, Series D, par value $1.00 per share
Name of Each Exchange on which Registered
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
________________________________________
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
No
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Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes
No
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
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
smaller reporting company. See the definitions of “large accelerated filer,” and “smaller reporting company” in Rule 12b-2 of
the Exchange Act. (Check One):
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
The aggregate market value of common stock held by non-affiliates of the registrant was approximately $677,880,282 as of
June 30, 2015, based upon the closing price quoted on the New York Stock Exchange for such date. Shares of common stock
held by each executive officer and director have been excluded because such persons may under certain circumstances be
deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination
for other purposes.
On February 19, 2016, 26,935,953 shares of Voting Common Stock were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement to be delivered to shareholders in connection with the Annual Meeting of
Shareholders to be held on or about May 25, 2016 are incorporated by reference into Part III of this Annual Report.
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INDEX
PART I
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Mine Safety Disclosures
PART II
Item 5.
Item 6.
Item 7.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Item 9B.
Other Information
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Item 15.
Exhibits and Financial Statement Schedules
SIGNATURES
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking information within the meaning of the safe harbor provisions of
the U.S. Private Securities Litigation Reform Act of 1995 (the “PSLRA”). Other written or oral statements we make from time
to time also may contain forward-looking information within the meaning of the safe harbor provisions of the PSLRA. These
statements relate to future events or future predictions, including events or predictions relating to future financial performance,
and are generally identifiable by the use of forward-looking terminology such as “believe,” “expect,” “may,” “will,” “should,”
“plan,” “intend,” or “anticipate” or the negative thereof or comparable terminology. These forward-looking statements are only
predictions and estimates regarding future events and circumstances and involve known and unknown risks, uncertainties and
other factors, including the risks described under “Risk Factors” in this Annual Report on Form 10-K and any updates to these
factors included in our Quarterly Reports on Form 10-Q for the quarters subsequent to December 31, 2015 or in other filings
we make with the SEC, that may cause actual results, levels of activity, performance or achievements to be materially different
from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking
statements. This information is based upon various assumptions that may not prove to be correct.
In addition to the risks described in the “Risk Factors” section of this Annual Report on Form 10-K and the other reports we
filed with the SEC, important factors to consider and evaluate with respect to such forward-looking statements include:
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Changes in the external competitive market factors that might impact results of operations;
Changes in laws and regulations, including without limitation changes in capital requirements under Basel III;
Changes in business strategy or an inability to execute our strategy due to the occurrence of unanticipated events;
Our ability to identify potential candidates for, and consummate, acquisition or investment transactions;
The timing of acquisition or investment transactions;
Constraints on our ability to consummate an attractive acquisition or investment transaction because of significant
competition for these opportunities;
Failure to complete any or all of the transactions described herein on the terms currently contemplated;
Local, regional and national economic conditions and events and the impact they may have on the Bancorp and its
customers;
Our ability to attract deposits and other sources of liquidity;
Changes in the financial performance and/or condition of the Bank’s borrowers;
Changes in the level of non-performing and classified assets and charge-offs;
Changes in estimates of future loan loss reserve requirements based upon the periodic review thereof under relevant
regulatory and accounting requirements;
Unforeseen challenges that may arise in connection with the consummation of our recently-announced transaction with
Higher One;
Inflation, interest rate, securities market and monetary fluctuations;
Timely development and acceptance of new banking products and services and perceived overall value of these products
and services by users;
Changes in consumer spending, borrowing and saving habits;
Technological changes;
Our ability to increase market share and control expenses;
Continued volatility in the credit and equity markets and its effect on the general economy;
Effects of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the
Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard
setters;
The businesses of Customers Bank and any acquisition targets or merger partners and subsidiaries not integrating
successfully or such integration being more difficult, time-consuming or costly than expected, including with respect to
our proposed acquisition of certain assets from Higher One;
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•
•
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Material differences in the actual financial results of merger and acquisition activities compared with expectations, such
as with respect to the full realization of anticipated cost savings and revenue enhancements within an expected time
frame, including with respect to our proposed acquisition of certain assets of Higher One;
Our ability to successfully implement our growth strategy, control expenses and maintain liquidity; and
Customers Bank’s ability to pay dividends to Customers Bancorp.
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof, or,
in the case of other documents referred to herein, the dates of those documents. Customers Bancorp does not undertake any
obligation to release publicly or otherwise provide any revisions to these forward-looking statements to reflect events or
circumstances occurring after the date hereof or to reflect the occurrence of unanticipated events, except as may be required
under applicable law.
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
PART I
Item 1. 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 (“Customers Bank” or the “Bank”), collectively referred to as
"Customers" herein. Customers Bancorp has made certain equity investments through its wholly owned subsidiaries CB Green
Ventures Pte Ltd. and CUBI India Ventures Pte Ltd.
Business Summary
Customers Bancorp, through its wholly owned subsidiary Customers Bank, provides financial products and services to small
and middle market businesses, not-for-profits, and consumers through its branches and offices in Southeastern Pennsylvania
(Bucks, Berks, Chester, Delaware and Philadelphia Counties), Rye Brook, Melville and New York, New York (Westchester,
Suffolk and New York Counties), Hamilton, New Jersey (Mercer County), Providence, Rhode Island (Providence County),
Portsmouth, New Hampshire (Rockingham County) and Boston, Massachusetts (Suffolk County). Customers Bank also
provides liquidity to the mortgage market nationwide through the operation of its loans to mortgage banking companies. At
December 31, 2015, Customers had total assets of $8.4 billion, including loans, net of the allowance for loan losses (including
held-for-sale loans) of $7.2 billion, total deposits of $5.9 billion, and shareholders’ equity of $0.6 billion.
Customers' strategic plan is to become a leading regional bank holding company through organic growth and value-added
acquisitions. Customers differentiates itself from its competitors through its focus on exceptional customer service supported by
state of the art technology. The primary customers of Customers Bank are privately held businesses, business customers, not-
for-profit organizations, and consumers. Customers Bank also focuses on certain low-cost specialty lending areas such as
multi-family/commercial real estate lending and lending to mortgage banking businesses. The Bank’s lending activities are
funded in part by deposits from its branch model, which seeks higher deposit levels per branch than a typical bank, combined
with lower branch operating expenses, without sacrificing exceptional customer service. Customers also creates franchise value
through its disciplined approach to acquisitions, both in terms of identifying targets and structuring transactions. Enterprise risk
management is an important part of the strategies Customers employs.
Customers also launched BankMobile as a key strategic initiative in January 2015, recognizing the product delivery flexibility
demanded by the millennial generation and the low cost of the smart phone delivery channel. BankMobile refers to Customers'
efforts to build a full service bank that is accessible to our customers anywhere and anytime through the customer's smartphone
or other web-enabled device. BankMobile provides a nationwide deposit-aggregation platform. BankMobile focuses on the
aggregation of low-cost deposits and currently offers no fee banking, lines of credits to qualified customers, no overdraft fees,
higher than average interest rate on savings, and access to 55,000 (and if the customer makes a monthly direct deposit over
400,000) ATMs across the U.S. Customers believes that by consolidating BankMobile with the Disbursements business to be
obtained from Higher One, Inc., with approximately 2.0 million student deposit customers, targeted for second quarter 2016,
Customers will be uniquely positioned to become the graduating students "bank for life" and service each graduate's financial
needs throughout their life. Successful execution of the BankMobile strategy, including its consolidation with Higher One's
Disbursements business, will greatly accelerate BankMobile's ability to achieve profitability. BankMobile's revenues are largely
derived from interchange charges paid by the product selling vendor and user based fees for specific activities (such as lost card
replacement) and net interest income on assets funded by the aggregated deposits.
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The management team of Customers consists of experienced banking executives led by its Chairman and Chief Executive
Officer, Jay Sidhu, who joined Customers in June 2009. Mr. Sidhu brings over 40 years of banking experience, including 20
years as the Chief Executive Officer and Chairman of Sovereign Bancorp. In addition to Mr. Sidhu, a number of the members
of the current management team have experience working together at Sovereign with Mr. Sidhu. Many other team members
who have joined Customers management team have significant experience helping build and lead other banking organizations.
Combined, the Customers management team has significant experience in building a banking organization, completing and
integrating mergers and acquisitions, and developing valuable community and business relationships in its core markets.
Background and History
Customers Bancorp was incorporated in Pennsylvania in April 2010 to facilitate a reorganization into a bank holding company
structure pursuant to which Customers Bank became a wholly owned subsidiary of Customers Bancorp (the “Reorganization”)
on September 17, 2011. Pursuant to the Reorganization, all of the issued and outstanding shares of Voting Common Stock and
Class B Non-Voting Common Stock of Customers Bank were exchanged on a one-for-three basis for shares of Voting Common
Stock and Class B Non-Voting Common Stock, respectively, of Customers Bancorp. Customers Bancorp’s corporate
headquarters are located at 1015 Penn Avenue, Wyomissing, Pennsylvania 19610. The main telephone number is
(610) 933-2000.
The deposits of Customers Bank, which was chartered as New Century Bank in 1994, are insured by the Federal Deposit
Insurance Corporation. Customers Bank’s home office is located at 99 Bridge Street, Phoenixville, Pennsylvania 19460. The
main telephone number is (610) 933-2000.
Executive Summary
Customers' Markets
Market Criteria
Customers looks to grow organically as well as through selective acquisitions in its current and prospective markets. Customers
believes that there is significant opportunity to both enhance its presence in its current markets and enter new complementary
markets that meet its objectives. Customers focuses on markets that it believes are characterized by some or all of the
following:
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Population density;
• Concentration of business activity;
• Attractive deposit bases;
•
Significant market share held by large banks;
• Advantageous competitive landscape that provides opportunity to achieve meaningful market presence;
• Lack of consolidation in the banking sector and corresponding opportunities for add-on transactions;
•
Potential for economic growth over time; and
• Management experience in the applicable markets.
Current Markets
Customers' target market is broadly defined as extending from the greater Washington, D.C. area to Boston, Massachusetts
roughly following Interstate 95. As of December 31, 2015, Customers had bank branches or limited purpose offices (“LPOs”)
in the following locations:
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Market
Berks County, PA
Boston, Massachusetts
Mercer County, NJ
New York, NY
Philadelphia-Southeastern PA
Portsmouth, NH
Providence, RI
Suffolk County, NY
Westchester County, NY
Offices
Type
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Branch
LPO
Branch
LPO
Branch/LPO
LPO
LPO
LPO
Branch/LPO
Customers believes its target market has highly attractive demographic, economic and competitive dynamics that are consistent
with its objectives and favorable to executing its organic growth and acquisition strategies.
Prospective Markets
The organic growth strategy of Customers focuses on expanding market share in its existing and contiguous markets by
generating deposits, loan and fee based services through its Concierge Banking® high-touch personalized service supported by
state of the art technology for the Bank’s commercial, consumer, not-for-profit, and specialized lending markets. While
Customers has not acquired any banks since 2011, its bank acquisition strategy is focused on undervalued and troubled
community banks in Pennsylvania, New Jersey, New York, Maryland, Virginia and New England, where such acquisitions
further Customers' objectives and meet its critical success factors. Customers will also consider other acquisitions that will
contribute banking business, such as the pending acquisition of the disbursement business of Higher One, Inc. As Customers
evaluates potential acquisition and asset purchase opportunities, it believes there are many banking institutions that continue to
face credit challenges, capital constraints and liquidity issues and that lack the scale and management expertise to manage the
increasing regulatory burden.
Competitive Strengths
• Experienced and respected management team. An integral element of the business strategy of Customers is to
capitalize on and leverage the prior experience of its executive management team. The management team is led
by Chairman and Chief Executive Officer, Jay Sidhu, who is the former Chief Executive Officer and Chairman of
Sovereign Bancorp. In addition to Mr. Sidhu, a number of the members of the current management team of
Customers have experience working together at Sovereign with Mr. Sidhu, including Richard Ehst, President and
Chief Operating Officer, as well as Warren Taylor, President of BankMobile. During their tenure at Sovereign,
these individuals established a track record of producing strong financial results, integrating acquisitions,
managing risk, working with regulators and achieving organic growth and expense control. Team leaders
Timothy Romig, Regional Chief Lending Officer, Steve Issa, New England Marketing President and Chief
Lending Officer, and George Maroulis, Head of Private and Commercial Banking - New York, head the New
Jersey and Pennsylvania, New England, and New York commercial lending areas, respectively, with 32, 39, and
24 years of experience, respectively. Ken Keiser, Director of Multi-Family and Investment Commercial Real
Estate Lending, leads the commercial real estate and multi-family lending group and brings more than 39 years
of experience including oversight of the Mid-Atlantic commercial real estate group at Sovereign. In addition, the
residential lending group, which includes mortgage loans to individuals and commercial loans (warehouse
facilities) to residential mortgage originators, is led by Glenn Hedde, President of Warehouse Lending who brings
more than 25 years of experience in this sector. This team has significant experience in successfully building a
banking organization as well as existing valuable community and business relationships in our core markets.
• Unique Asset and Deposit Generation Strategies. Customers focuses on local market lending combined with
relatively low-risk specialty lending segments. Local market asset generation provides various types of business
lending products and consumer lending products, such as mortgage loans and home equity loans. Customers has
also established a multi-family and commercial real estate product line that is focused on the Mid-Atlantic region,
particularly New York City. The strategy is to focus on refinancing existing loans with conservative underwriting
and to keep costs low. Through the multi-family and commercial real estate product, Customers earns interest and
fee income and generates commercial deposits. Customers also maintains a specialty lending business,
commercial loans to mortgage originators, which is a national business where the Bank provides liquidity to non-
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depository mortgage companies to fund their mortgage pipelines and meet other business needs. Through the
loans to mortgage bankers business, Customers earns interest and fee income and generates core deposits.
• BankMobile Strategy. Customers launched BankMobile as a key strategic initiative in January 2015, recognizing
the product delivery flexibility demanded by the millennial generation and the low cost of the smart phone
delivery channel. BankMobile refers to Customers' efforts to build a full service bank that is accessible to our
customers anywhere and anytime through the customer's smartphone or other web-enabled device. BankMobile
provides a nationwide deposit-aggregation platform. BankMobile focuses on the aggregation of low-cost
deposits and currently offers no fee banking, lines of credits to qualified customers, no overdraft fees, higher than
average interest rate on savings, and access to 55,000 (and if the customer makes a monthly direct deposit over
400,000) ATMs across the U.S. Customers believes that by consolidating BankMobile with the Disbursements
business to be obtained from Higher One, Inc., with approximately 2.0 million student deposit customers,
targeted for second quarter 2016, Customers will be uniquely positioned to become the graduating students "bank
for life" and service each graduate's financial needs throughout their life. Successful execution of the
BankMobile strategy, including its consolidation with Higher One's Disbursements business, will greatly
accelerate BankMobile's ability to achieve profitability. BankMobile's revenues are largely derived from
interchange charges paid by the product selling vendor and user based fees for specific activities (such as lost
card replacement) and net interest income on assets funded by the aggregated deposits.
• Attractive risk profile. Customers has sought to maintain high asset quality and moderate credit risk by using
conservative underwriting standards and early identification of potential problem assets. Customers has also
formed a special assets department to manage the covered assets portfolio and review other classified and non-
performing assets. As of December 31, 2015, only $10.8 million, or 0.15%, of the Bank's total loan portfolio was
non performing.
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Superior Community Banking Model. Customers expects to drive organic growth by employing its Concierge
Banking® strategy, which provides specific relationship managers or private bankers for all customers, delivering
an appointment banking approach available 12 hours a day, seven days a week. This allows Customers to provide
services in a personalized, convenient and expeditious manner. This approach, coupled with superior technology,
including remote account opening, remote deposit capture, mobile banking and the first fee free mobile first
digital bank, BankMobile, results in a competitive advantage over larger institutions, which management believes
contributes to the profitability of its franchise and allows the Bank to generate core deposits. The “high-tech,
high-touch,” model requires less staff and smaller branch locations to operate, thereby significantly reducing
operating costs.
• Acquisition Expertise. The depth of Customers' management team and their experience working together and
successfully completing acquisitions provides unique insight in identifying and analyzing potential markets and
acquisition targets. The experience of Customers' team, which includes the acquisition and integration of over 35
institutions, as well as numerous asset and branch acquisitions, provides a substantial advantage in pursuing and
consummating future acquisitions. Additionally, management believes Customers' strengths in structuring
transactions to limit its risk, its experience in the financial reporting and regulatory process related to troubled
bank acquisitions, and its ongoing risk management expertise, particularly in problem loan workouts, collectively
enable it to capitalize on the potential of the franchises it acquires. With Customers' depth of operational
experience in connection with completing merger and acquisition transactions, it expects to be able to integrate
and reposition acquired franchises cost-efficiently with a minimum disruption to customer relationships.
Customers believes its ability to operate efficiently is enhanced by its centralized risk management structure, its access to
attractive labor and real estate costs in its markets, and an infrastructure that is unencumbered by legacy systems. Furthermore,
Customers anticipates additional expense synergies from the integration of its acquisitions, which it believes will enhance its
financial performance.
Segments
Customers has one reportable segment, “Community Banking.” All of Customers' activities are interrelated, and each activity is
dependent and assessed based on how each of the activities supports the others. For example, lending is dependent upon the
ability of Customers to fund itself with deposits and borrowings while managing interest rate and credit risk. Accordingly, all
significant operating decisions are based upon analysis of Customers as one segment or unit.
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Products
Customers offers a broad range of traditional loan and deposit banking products and financial services, and more recently non-
traditional products and services through the successful Phase 1 launch of BankMobile in January 2015, to its commercial and
consumer customers. Customers offers an array of lending products to cater to its customers’ needs, including small business
loans, mortgage warehouse loans, multi-family and commercial real estate loans, equipment loans, residential mortgage loans
and other consumer loans. Customers also offers traditional deposit products, including commercial and consumer checking
accounts, non-interest-bearing demand accounts, money market deposit accounts, savings accounts and time deposit accounts
and cash management services. Prior to January 2015, deposit products were available to customers only through branches of
Customers Bank. With the successful launch of BankMobile, Customers is able to provide fee free banking to millennials,
middle class American families and underserved consumers throughout the United States.
Lending Activities
Customers Bank focuses its lending efforts on the following lending areas:
• Commercial Lending – includes Business Banking (commercial and industrial lending), Small and Middle
Market Business Banking, including small business administration (SBA) loans, Multi-family and Commercial
Real Estate lending, and commercial loans to mortgage originators; and
• Consumer Lending – local market mortgage and home equity lending.
Commercial Lending
The Bank’s commercial lending is divided into four distinct groups: Business Banking, Small and Middle Market Business
Banking, Multi-family and Commercial Real Estate Lending, and Mortgage Banking Lending. This grouping is designed to
allow for greater resource deployment, higher standards of risk management, strong asset quality, lower interest rate risk and
higher productivity levels.
The commercial lending group focuses on companies with annual revenues ranging from $1.0 million to $50.0 million, which
typically have credit requirements between $0.5 million and $10.0 million.
The small and middle market business banking platform originates loans, including SBA loans, through the branch network
sales force and a team of dedicated Small Business relationship managers. The support administration of the platform for this
lending activity is centralized including risk management, product management, marketing, performance tracking and overall
strategic planning. Credit and sales training has been established for the sales force, ensuring that the Bank has small business
experts in place providing appropriate financial solutions to the small business owners in its communities. A division approach
focuses on industries that offer high asset quality and are deposit rich to drive profitability.
The goal of the Bank’s multi-family lending group is to build a portfolio of high-quality multi-family and commercial real
estate loans within its covered markets, while cross selling its other products and services. This business line primarily focuses
on refinancing existing loans, using conservative underwriting. The primary collateral for these loans is a first-lien mortgage on
the multi-family property, plus an assignment of all leases related to such property. During the years ended December 31, 2015
and 2014, the Bank originated approximately $1.3 billion and $1.5 billion, respectively, of multi-family loans.
The goal of commercial loans to mortgage originators is to provide liquidity to mortgage companies. The loans are
predominately short-term facilities used by mortgage companies to fund their pipelines from closing of individual mortgage
loans until their sale into the secondary market. Most of the individual mortgage loans that collateralize our commercial loans
are insured or guaranteed by the U.S. government through one of their programs such as FHA, VA, or are conventional loans
eligible for sale to Fannie Mae and Freddie Mac. The Bank is currently expanding its product offerings to mortgage banks to
meet a wider array of business needs. During the years ended December 31, 2015 and 2014, the Bank funded $29.9 billion and
$18.1 billion of mortgage loans, respectively, to mortgage originators and warehouses.
As of December 31, 2015 and 2014, the Bank had $6.9 billion and $5.3 billion, respectively, in commercial loans outstanding,
composing approximately 94.6% and 92.5%, respectively, of its total loan portfolio, which includes loans held for sale. During
the years ended December 31, 2015 and 2014, the Bank originated $0.9 billion and $0.8 billion, respectively, of commercial
loans, exclusive of multi-family loan originations and loans to mortgage originators and warehouses.
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Consumer Lending
The Bank provides home equity and residential mortgage loans to customers. Underwriting standards for home equity lending
are conservative and lending is offered to solidify customer relationships and grow relationship revenues in the long term. This
lending is important in the Bank’s efforts to grow total relationship revenues for its consumer households. These areas also
support the Bank's commitment to lower and moderate income families in its market area. The Bank plans to expand its product
offerings in real estate secured consumer lending.
Beginning in 2013, Customers Bank launched a community outreach program in Philadelphia to encourage a higher percentage
of homeownership in urban communities. As part of this program, the Bank is offering an “Affordable Mortgage Product”. This
community outreach program is penetrating the underserved population, especially in low-and moderate income
neighborhoods. As part of this commitment, a loan production office was opened at Progress Plaza, 1501 North Broad Street,
Philadelphia, PA. The program includes homebuyer seminars that prepare potential homebuyers for homeownership by
teaching money management and budgeting skills, including the financial responsibilities that come with having a mortgage
and owning a home. The “Affordable Mortgage Product” is offered throughout Customers Bank’s CRA assessment areas.
As of December 31, 2015 and 2014, the Bank had $391.7 million and $432.2 million, respectively, in consumer loans
outstanding, composing 5.4% and 7.5%, respectively, of the Bank’s total loan portfolio, which includes loans held for sale.
During the years ended December 31, 2015 and 2014, the Bank originated $63.0 million and $77.0 million of consumer loans,
respectively. As of December 31, 2015 and 2014, consumer loans included a balance of $72.7 million and $102.9 million,
respectively, of residential loans acquired from Flagstar in January 2014.
Private Banking
Beginning in 2013, Customers Bank introduced a Private Banking model for its commercial clients in the major markets within
its geographic footprint. This unique model provides unparalleled service to customers through an in-market team of
experienced private bankers. Acting as a single-point-of-contact for all the banking needs of the Bank’s commercial clients,
these private bankers will deliver the whole bank – not only to its clients, but to their families, their management teams, and
their employees, as well. With a world-class suite of sophisticated cash management products, these private bankers will
deliver on Customers Bank’s “high-tech, high-touch” strategy and provide real value to its mid-market commercial clients.
Customers Bank opened its first private banking representative office in Manhattan in second quarter 2013, and eventually, all
of its markets will be served by private bankers.
Deposit Products and Other Funding Sources
Customers Bank offers a variety of deposit products to its customers, including checking accounts, savings accounts, money
market deposit accounts and other deposit accounts, including fixed-rate, fixed-maturity retail time deposits ranging in terms
from 30 days to five years, individual retirement accounts, and non-retail time deposits consisting of jumbo certificates greater
than or equal to $100,000. Using its high touch supported by high tech model, the Bank has experienced significantly higher
above average growth in core deposits in all of its markets. Customers Bank also utilizes wholesale deposit products, money
market and certificates of deposit obtained through listing services and borrowings from the FHLB as a source of funding.
These funding sources offer attractive funding costs in comparison to traditional sources of funding given the low interest rate
environment.
Financial Products and Services
In addition to traditional banking activities, Customers Bank provides other financial services to its customers, including:
mobile phone banking, internet banking, wire transfers, electronic bill payment, lock box services, remote deposit capture
services, courier services, merchant processing services, cash vault, controlled disbursements, positive pay and cash
management services (including account reconciliation, collections and sweep accounts). In January 2015, the Bank
successfully launched BankMobile, America's first mobile platform based full service consumer bank. BankMobile had over
100,000 new checking accounts at December 31, 2015.
Competition
Customers Bank competes with other financial institutions for deposit and loan business. Competitors include other
commercial banks, savings banks, savings and loan associations, insurance companies, securities brokerage firms, credit
unions, finance companies, mutual funds, money market funds, and certain government agencies. Financial institutions
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compete principally on the quality of the services rendered, interest rates offered on deposit products, interest rates charged on
loans, fees and service charges, the convenience of banking office locations and hours of operation, and in the consideration of
larger commercial borrowers, lending limits.
Many competitors are significantly larger than Customers Bank, and have significantly greater financial resources, personnel
and locations from which to conduct business. In addition, Customers Bank is subject to regulation, while certain of its
competitors are not. Non-regulated companies face relatively few barriers to entry into the financial services industry.
Customers Bank’s larger competitors enjoy greater name recognition and greater resources to finance wide ranging advertising
campaigns. Customers Bank competes for business principally on the basis of high-quality, personal service to customers,
customer access to Customers Bank’s decision makers, and competitive interest and fee structure. Customers Bank also strives
to provide maximum convenience of access to services by employing innovative delivery vehicles such as internet banking,
and the convenience of Concierge Banking®.
Customers Bank’s current market is primarily served by large national and regional banks, with a few larger institutions
capturing more than 50% of the deposit market share. Customers Bank’s large competitors primarily utilize expensive, branch-
based models to sell products to consumers and small businesses, which requires our larger competitors to price their products
with wider margins and charge more fees to justify their higher expense base. While maintaining physical branch locations
remains an important component of Customers Bank’s strategy, Customers Bank utilizes an operating model with fewer and
less expensive locations, thereby lowering overhead costs and allowing for greater pricing flexibility.
Employees
As of December 31, 2015, Customers Bancorp had 517 full-time equivalent employees.
Available Information
Customers Bancorp’s internet website address is www.customersbank.com. Information on Customers Bancorp’s website is not
part of this Annual Report on Form 10-K. Investors can obtain copies of Customers Bancorp’s annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, on Customers Bancorp’s website (accessible
under “About Us” – “Investor Relations” – “SEC Filings”) as soon as reasonably practicable after Customers Bancorp has filed
such materials with, or furnished them to, the Securities and Exchange Commission (“SEC”). Customers Bancorp will also
furnish a paper copy of such filings free of charge upon request. Investors can also read and copy any materials filed by
Customers Bancorp with the SEC at the SEC’s Public Reference Room which is located at 100 F Street, NE, Washington, DC
20549. Information about the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
Customers Bancorp’s filings can also be accessed at the SEC’s internet website: www.sec.gov.
SUPERVISION AND REGULATION
GENERAL
Customers Bancorp is subject to extensive regulation, examination and supervision by the Pennsylvania Department of
Banking and Securities and, as a member of the Federal Reserve System, by the Federal Reserve Board. Federal and state
banking laws and regulations govern, among other things, the scope of a bank’s business, the investments a bank may make,
the reserves against deposits a bank must maintain, terms of deposit accounts, loans a bank makes, the interest rates it charges
and collateral it takes, the activities of a bank with respect to mergers and consolidations and the establishment of branches.
PENNSYLVANIA BANKING LAWS
Pennsylvania banks that are Federal Reserve members may establish new branch offices only after approval by the
Pennsylvania Department of Banking and Securities and the Board of Governors of the Federal Reserve System (the “Federal
Reserve Board”). Approval by these regulators can be subject to a variety of factors, including the convenience and needs of
the community, whether the institution is sufficiently capitalized and well managed, issues of safety and soundness, the
institution’s record of meeting the credit needs of its community, whether there are significant supervisory concerns with
respect to the institution or affiliated organizations, and whether any financial or other business arrangement, direct or indirect,
involving bank “insiders” (directors, officers, employees and 10%-or-greater shareholders) which involves terms and
conditions more favorable to the insiders than would be available in a comparable transaction with unrelated parties.
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Under the Pennsylvania Banking Code, Customers Bank is permitted to branch throughout Pennsylvania. Pennsylvania law
also provides Pennsylvania state-chartered banks elective parity with the power of national banks, federal thrifts, and state-
chartered institutions in other states as authorized by the FDIC, subject to a required notice to the Pennsylvania Department of
Banking and Securities. The Pennsylvania Banking Code also imposes restrictions on payment of dividends, as well as
minimum capital requirements.
On October 24, 2012, Pennsylvania enacted three laws known as the “Banking Law Modernization Package,” all of which
became effective on December 24, 2012. The intended goal of the law, which applies to Customers Bank, is to modernize
Pennsylvania’s banking laws and to reduce regulatory burden at the state level where possible, given the increased regulatory
demands at the federal level as described below.
The law also permits banks to disclose formal enforcement actions initiated by the Pennsylvania Department of Banking and
Securities, clarifies that the Department has examination and enforcement authority over subsidiaries as well as affiliates of
regulated banks and bolsters the Department’s enforcement authority over its regulated institutions by clarifying its ability to
remove directors, officers and employees from institutions for violations of laws or orders or for any unsafe or unsound practice
or breach of fiduciary duty. Changes to existing law also allow the Department to assess civil money penalties of up to $25,000
per violation.
The law also sets a new standard of care for bank officers and directors, applying the same standard that exists for non-banking
corporations in Pennsylvania. The standard is one of performing duties in good faith, in a manner reasonably believed to be in
the best interests of the institutions and with such care, including reasonable inquiry, skill and diligence, as a person of ordinary
prudence would use under similar circumstances. Directors may rely in good faith on information, opinions and reports
provided by officers, employees, attorneys, accountants, or committees of the board, and an officer may not be held liable
simply because he or she served as an officer of the institution.
Interstate Branching. Federal law allows the Federal Reserve and FDIC, and the Pennsylvania Banking Code allows the
Pennsylvania Department of Banking and Securities, to approve an application by a state banking institution to acquire
interstate branches. For more information on federal law, see the discussion under “Federal Banking Laws – Interstate
Branching” that follows.
Pennsylvania banking laws authorize banks in Pennsylvania to acquire existing branches or branch de novo in other states, and
also permits out-of-state banks to acquire existing branches or branch de novo in Pennsylvania.
In April 2008, Banking Regulators in the States of New Jersey, New York, and Pennsylvania entered into a Memorandum of
Understanding (the “Interstate MOU”) to clarify their respective roles, as home and host state regulators, regarding interstate
branching activity on a regional basis pursuant to the Riegle-Neal Amendments Act of 1997. The Interstate MOU establishes
the regulatory responsibilities of the respective state banking regulators regarding bank regulatory examinations and is intended
to reduce the regulatory burden on state-chartered banks branching within the region by eliminating duplicative host state
compliance exams.
Under the Interstate MOU, the activities of branches Customers established in New Jersey or New York would be governed by
Pennsylvania state law to the same extent that federal law governs the activities of the branch of an out-of-state national bank in
such host states. Issues regarding whether a particular host state law is preempted are to be determined in the first instance by
the Pennsylvania Department of Banking and Securities. In the event that the Pennsylvania Department of Banking and
Securities and the applicable host state regulator disagree regarding whether a particular host state law is pre-empted, the
Pennsylvania Department of Banking and Securities and the applicable host state regulator would use their reasonable best
efforts to consider all points of view and to resolve the disagreement.
FEDERAL BANKING LAWS
Interstate Branching. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (called the “Interstate Act”),
among other things, permits bank holding companies to acquire banks in any state. A bank may also merge with a bank in
another state. Interstate acquisitions and mergers are subject, in general, to certain concentration limits and state entry rules
relating to the age of the Bank. Under the Interstate Act, the responsible federal regulatory agency is permitted to approve the
acquisition of less than all of the branches of an insured bank by an out-of-state bank or bank holding company without the
acquisition of an entire bank, only if the law of the state in which the branch is located permits. Under the Interstate Act,
branches of state-chartered banks that operate in other states are covered by the laws of the chartering state, rather than the host
state. The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) created a more permissive
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interstate branching regime by permitting banks to establish branches de novo in any state if a bank chartered by such state
would have been permitted to establish the branch. For more information on interstate branching under Pennsylvania law, see
“Pennsylvania Banking Laws – Interstate Branching” above.
Prompt Corrective Action. Federal banking law mandates certain “prompt corrective actions,” which Federal banking agencies
are required to take, and certain actions which they have discretion to take, based upon the capital category into which a
Federally regulated depository institution falls. Regulations have been adopted by the Federal bank regulatory agencies setting
forth detailed procedures and criteria for implementing prompt corrective action in the case of any institution that is not
adequately capitalized. Under the rules, an institution will be deemed to be “adequately capitalized” or better if it exceeds the
minimum Federal regulatory capital requirements. However, it will be deemed “undercapitalized” if it fails to meet the
minimum capital requirements, “significantly undercapitalized” if it has a common equity tier 1 risk-based capital ratio that is
less than 3.0%, or has a total risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital ratio that is less than
3.0%, or a leverage ratio that is less than 3.0%, and “critically undercapitalized” if the institution has a ratio of tangible equity
to total assets that is equal to or less than 2.0%. The rules require an undercapitalized institution to file a written capital
restoration plan, along with a performance guaranty by its holding company or a third party. In addition, an undercapitalized
institution becomes subject to certain restrictions including a prohibition on the payment of dividends, a limitation on asset
growth and expansion, and in certain cases, a limitation on the payment of bonuses or raises to senior executive officers, and a
prohibition on the payment of certain “management fees” to any “controlling person.” Institutions that are classified as
undercapitalized are also subject to certain additional supervisory actions, including increased reporting burdens and regulatory
monitoring, a limitation on the institution’s ability to make acquisitions, open new branch offices, or engage in new lines of
business, obligations to raise additional capital, restrictions on transactions with affiliates, and restrictions on interest rates paid
by the institution on deposits. In certain cases, bank regulatory agencies may require replacement of senior executive officers or
directors, or sale of the institution to a willing purchaser. If an institution is deemed to be “critically undercapitalized” and
continues in that category for four quarters, the statute requires, with certain narrowly limited exceptions, that the institution be
placed in receivership.
Safety and Soundness; Regulation of Bank Management. The Federal Reserve Board possesses the power to prohibit a bank
from engaging in any activity that would be an unsafe and unsound banking practice and in violation of the law. Moreover,
Federal law enactments have expanded the circumstances under which officers or directors of a bank may be removed by the
institution’s Federal supervisory agency; restricted and further regulated lending by a bank to its executive officers, directors,
principal shareholders or related interests thereof; restricted management personnel of a bank from serving as directors or in
other management positions with certain depository institutions whose assets exceed a specified amount or which have an
office within a specified geographic area; and restricted management personnel from borrowing from another institution that
has a correspondent relationship with the bank for which they work.
Capital Rules. Federal banking agencies have issued certain “risk-based capital” guidelines, which supplemented existing
capital requirements. In addition, the Federal Reserve Board imposes certain “leverage” requirements on member
banks. Banking regulators have authority to require higher minimum capital ratios for an individual bank or bank holding
company in view of its circumstances.
The risk-based capital guidelines require all banks and bank holding companies to maintain capital levels in compliance with
“risk-based capital” ratios. In these ratios, the on-balance sheet assets and off balance sheet exposures are assigned a risk-
weight based upon the perceived and historical risk of incurring a loss of principal from that exposure. For periods ending prior
January 1, 2015 the first is a minimum ratio of total capital (“Tier 1” and “Tier 2” capital) to risk-weighted assets equal to
8.0%, and the second is a minimum ratio of “Tier 1” capital to risk-weighted assets equal to 4.0%. Assets are assigned to five
risk categories, with higher levels of capital being required for the categories perceived as representing greater risk. In making
the calculation, certain intangible assets must be deducted from the capital base. The risk-based capital rules are designed to
make regulatory capital requirements more sensitive to differences in risk profiles among banks and bank holding companies
and to minimize disincentives for holding liquid assets.
The risk-based capital rules also may consider interest rate risk. Institutions with interest rate risk exposure above a normal
level would be required to hold extra capital in proportion to that risk. The Bank currently monitors and manages its assets and
liabilities for interest rate risk, and management believes that the interest rate risk rules which have been implemented and
proposed will not materially adversely affect its operations.
The Federal Reserve Board’s “leverage” ratio rules require member banks which are rated the highest in the composite areas of
capital, asset quality, management, earnings and liquidity to maintain a ratio of “Tier 1” capital to “adjusted total assets” of not
less than 3.0%. For banks which are not the most highly rated, the minimum “leverage” ratio will range from 4.0% to 5.0%, or
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higher at the discretion of the Federal Reserve Board, and is required to be at a level commensurate with the nature of the level
of risk of the Bancorp's condition and activities.
For purposes of the capital requirements, “Tier 1” or “core” capital is defined to include common shareholders’ equity and
certain noncumulative perpetual preferred stock and related surplus. “Tier 2” or “qualifying supplementary” capital is defined
to include a bank’s allowance for loan losses up to 1.25% of risk-weighted assets, plus certain types of preferred stock and
related surplus, certain “hybrid capital instruments” and certain term subordinated debt instruments.
New Capital Rules. On July 2, 2013, the Federal Reserve approved final rules that substantially amend the regulatory risk-
based capital rules applicable to the Bancorp and the Bank. The FDIC and the OCC have subsequently approved these rules.
The final rules were adopted following the issuance of proposed rules by the Federal Reserve in June 2012 and implement the
“Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. “Basel III” refers to two consultative
documents released by the Basel Committee on Banking Supervision in December 2009, the rules text released in December
2010, and loss absorbency rules issued in January 2011, which include significant changes to bank capital, leverage and
liquidity requirements.
The rules include new risk-based capital and leverage ratios, which are being phased in from 2015 to 2019, and refine the
definition of what constitutes “capital” for purposes of calculating those ratios. Effective January 1, 2015, the new minimum
capital level requirements applicable to the Bancorp and the Bank under the final rules are:
(i) a new common equity Tier 1 capital ratio of 4.5%;
(ii) a Tier 1 Risk based capital ratio of 6% (increased from 4%);
(iii) a Total Risk based capital ratio of 8% (unchanged from rules in effect prior to January 1, 2015); and
(iv) a Tier 1 leverage ratio of 4% for all institutions.
The final rules also establish a “capital conservation buffer” above the new regulatory minimum capital requirements, which
must consist entirely of common equity Tier 1 capital.
The capital conservation buffer will be phased-in over four years beginning on January 1, 2016, as follows: the maximum
buffer will be 0.625% of risk-weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter.
Effective January 1, 2016, the new minimum capital level requirements applicable to the Bancorp and the Bank under the final
rules are:
(i) a common equity Tier 1 capital ratio of 5.125%;
(ii) a Tier 1 Risk based capital ratio of 6.625%;
(iii) a Total Risk based capital ratio of 8.625%; and
(iv) a Tier 1 leverage ratio of 4.625% for all institutions.
Considering the capital conservation buffer, to avoid limitations on certain actions or activities, banks will be required to
maintain the following ratios beginning in 2019:
(i) a common equity Tier 1 capital ratio of 7.0%;
(ii) a Tier 1 Risk Based capital ratio of 8.5%;
(iii) a Total Risk based capital ratio of 10.5%; and
(iv) a Tier 1 leverage ratio of 6.5% for all institutions.
Under the final rules, institutions are subject to limitations on paying dividends, engaging in share repurchases, and paying
discretionary bonuses if its capital level falls below the minimum capital level plus buffer amount. These limitations establish a
maximum percentage of eligible retained income that could be utilized for such actions.
Basel III provided discretion for regulators to impose an additional buffer, the “countercyclical buffer,” of up to 2.5% of
common equity Tier 1 capital to take into account the macro-financial environment and periods of excessive credit growth.
However, the final rules permit the countercyclical buffer to be applied only to “advanced approach banks” (i.e., banks with
$250 billion or more in total assets or $10 billion or more in total foreign exposures), which currently excludes the Bancorp and
the Bank. The final rules also implement revisions and clarifications consistent with Basel III regarding the various components
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of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer
qualify as Tier 1 capital, some of which will be phased out over time. However, the final rules provide that small depository
institution holding companies with less than $15 billion in total assets as of December 31, 2009 (which includes the Bancorp)
will be able to permanently include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to
May 19, 2010 in additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature.
In addition, the final rules provide for smaller banking institutions (less than $250 billion in consolidated assets) an opportunity
to make a one-time election to opt out of including most elements of accumulated other comprehensive income in regulatory
capital. Importantly, the opt-out excludes from regulatory capital not only unrealized gains and losses on available-for-sale debt
securities, but also accumulated net gains and losses on cash-flow hedges and amounts attributable to defined benefit
postretirement plans. Customers Bank selected the opt-out election in its March 31, 2015 Call Report.
The final rules also contain revisions to the prompt corrective action framework, which is designed to place restrictions on
insured depository institutions, including the Bank, if their capital levels begin to show signs of weakness. These revisions took
effect on January 1, 2015. Under the prompt corrective action requirements, which are designed to complement the capital
conservation buffer, insured depository institutions will be required to meet the following increased capital level requirements
in order to qualify as “well capitalized:”
(i) a new common equity Tier 1 capital ratio of 6.5%;
(ii) a Tier 1 Risk based capital ratio of 8% (increased from 6%);
(iii) a Total Risk based capital ratio of 10% (unchanged from rules in effect prior to January 1, 2015); and
(iv) a Tier 1 leverage ratio of 5% (increased from 4%).
The final rules set forth certain changes for the calculation of risk-weighted assets, which were required to be utilized as of
January 1, 2015. The standardized approach final rule utilizes an increased number of credit risk exposure categories and risk
weights, and also addresses:
(i) an alternative standard of creditworthiness consistent with Section 939A of the Dodd-Frank Act;
(ii) revisions to recognition of credit risk mitigation;
(iii) rules for risk weighting of equity exposures and past due loans;
(iv) revised capital treatment for derivatives and repo-style transactions; and
(v) disclosure requirements for top-tier banking organizations with $50 billion or more in total assets that are not subject
to the “advance approach rules” that apply to banks with greater than $250 billion in consolidated assets.
As of December 31, 2015 and 2014, management believed that the Bank and Bancorp met all capital adequacy requirements to
which they were subject. For additional information on Customers' regulatory ratios, refer to “NOTE 18 – REGULATORY
MATTERS.”
Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank bill was enacted by Congress on July 15, 2010,
and was signed into law by President Obama on July 21, 2010. Among many other provisions, the legislation:
•
•
•
•
established the Financial Stability Oversight Council, a federal agency acting as the financial system’s systemic
risk regulator with the authority to review the activities of significant bank holding companies and non-bank
financial firms, to make recommendations and impose standards regarding capital, leverage, conflicts and other
requirements for financial firms and to impose regulatory standards on certain financial firms deemed to pose a
systemic threat to the financial health of the U.S. economy;
created a new Consumer Financial Protection Bureau within the U.S. Federal Reserve, which has substantive
rule-making authority over a wide variety of consumer financial services and products, including the power to
regulate unfair, deceptive, or abusive acts or practices;
permitted state attorneys general and other state enforcement authorities broader power to enforce consumer
protection laws against banks;
authorized federal regulatory agencies to ban compensation arrangements at financial institutions that give
employees incentives to engage in conduct that could pose risks to the nation’s financial system;
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•
•
•
•
•
•
granted the U.S. government resolution authority to liquidate or take emergency measures with regard to troubled
financial institutions, such as bank holding companies, that fall outside the existing resolution authority of the
Federal Deposit Insurance Corporation;
gave the FDIC substantial new authority and flexibility in assessing deposit insurance premiums, which may
result in increased deposit insurance premiums for us in the future;
increased the deposit insurance coverage limit for insurable deposits to $250,000 generally, and removes the limit
entirely for transaction accounts;
permitted banks to pay interest on business demand deposit accounts;
extended the national bank lending (or loans-to-one-borrower) limits to other institutions;
prohibited banks subject to enforcement action such as a memorandum of understanding from changing their
charter without the approval of both their existing charter regulator and their proposed new charter regulator; and
•
imposed new limits on asset purchase and sale transactions between banks and their insiders.
Many of these provisions are subject to further rule making and to the discretion of regulatory bodies, including Customers
Bank’s primary federal banking regulator, the Federal Reserve. It is not possible to predict at this time the extent to which
regulations authorized or mandated by the Dodd-Frank Act will impose requirements or restrictions on Customers Bank in
addition to or different from the provisions summarized above.
Deposit Insurance Assessments. Customers Bank’s deposits are insured by the FDIC up to the limits set forth under applicable
law and are subject to deposit insurance premium assessments. The FDIC imposes a risk-based deposit premium assessment
system, which was amended pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “Act”). Under this system, the
amount of FDIC assessments paid by an individual insured depository institution, like Customers Bank, is based on the level of
perceived risk incurred in its activities. The FDIC places a depository institution in one of four risk categories determined by
reference to its capital levels and supervisory ratings. In addition, in the case of those institutions in the lowest risk category, the
FDIC further determines its assessment rates based on certain specified financial ratios.
On February 7, 2011, the FDIC adopted a final rule modifying the risk-based assessment system and setting initial base
assessment rates beginning April 1, 2011, ranging from 2.5 to 45 basis points of Tier I capital.
In addition to deposit insurance assessments, banks are subject to assessments to pay the interest on Financing Corporation
bonds. The Financing Corporation was created by Congress to issue bonds to finance the resolution of failed thrift institutions.
The FDIC sets the Financing Corporation assessment rate every quarter.
Community Reinvestment Act. Under the Community Reinvestment Act of 1977 (“CRA”), the record of a bank holding
company and its subsidiary banks must be considered by the appropriate Federal banking agencies, including the Federal
Reserve Board, in reviewing and approving or disapproving a variety of regulatory applications including approval of a branch
or other deposit facility, office relocation, a merger and certain acquisitions. Federal banking agencies have demonstrated an
increased readiness to deny applications based on unsatisfactory CRA performance. The Federal Reserve Board is required to
assess our record to determine if we are meeting the credit needs of the community (including low and moderate
neighborhoods) that we serve. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 amended the CRA to
require, among other things, that the Federal Reserve Board make publicly available an evaluation of the Bank’s record of
meeting the credit needs of its entire community including low- and moderate-income neighborhoods. This evaluation includes
a descriptive rating (outstanding, satisfactory, needs to improve, or substantial noncompliance) and a statement describing the
basis for the rating.
Consumer Protection Laws. Customers Bank is subject to a variety of consumer protection laws, including the Truth in Lending
Act, the Truth in Savings Act adopted as part of the Federal Deposit Insurance Corporation Improvement Act of 1991
(“FDICIA”), the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, the Electronic Funds Transfer Act, the
Real Estate Settlement Procedures Act and the regulations adopted thereunder. In the aggregate, compliance with these
consumer protection laws and regulations involves substantial expense and administrative time on the part of Customers.
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Bank Holding Company Regulation
As a bank holding company, Customers Bancorp is also subject to additional regulation.
The Bank Holding Company Act requires the Bancorp to secure the prior approval of the Federal Reserve Board before it owns
or controls, directly or indirectly, more than five percent (5%) of the voting shares or substantially all of the assets of any
bank. It also prohibits acquisition by the Bancorp of more than five percent (5%) of the voting shares of, or interest in, or all or
substantially all of the assets of, any bank located outside of the state in which a current bank subsidiary is located unless such
acquisition is specifically authorized by laws of the state in which such bank is located. A bank holding company is prohibited
from engaging in or acquiring direct or indirect control of more than five percent (5%) of the voting shares of any company
engaged in non-banking activities unless the Federal Reserve Board, by order or regulation, has found such activities to be so
closely related to banking or managing or controlling banks as to be a proper incident thereto. In making this determination, the
Federal Reserve Board considers whether the performance of these activities by a bank holding company would offer benefits
to the public that outweigh possible adverse effects. Applications under the Bank Holding Company Act and the Change in
Control Act are subject to review, based upon the record of compliance of the applicant with the CRA.
The Bancorp is required to file an annual report with the Federal Reserve Board and any additional information that the Federal
Reserve Board may require pursuant to the Bank Holding Company Act. Further, under Section 106 of the 1970 amendments to
the Bank Holding Company Act and the Federal Reserve Board’s regulations, a bank holding company and its subsidiaries are
prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or provision of credit or
provision of any property or services. The so-called “anti-tie-in” provisions state generally that a bank may not extend credit,
lease, sell property or furnish any service to a customer on the condition that the customer obtains additional credit or service
from Customers Bank, or on the condition that the customer not obtain other credit or service from a competitor.
The Federal Reserve Board permits bank holding companies to engage in non-banking activities so closely related to banking
or managing or controlling banks as to be a proper incident thereto. A number of activities are authorized by Federal Reserve
Board regulation, while other activities require prior Federal Reserve Board approval. The types of permissible activities are
subject to change by the Federal Reserve Board.
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Item 1A.
Risk Factors
Risks Related to the Bancorp’s Banking Operations
If our allowance for loan losses is insufficient to absorb losses in our loan portfolio, our earnings could decrease.
Lending money is a substantial part of our business, and each loan carries a certain risk that it will not be repaid in accordance
with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other
things:
•
•
•
•
•
•
the financial condition and cash flows of the borrower and/or the project being financed;
the changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan;
the discount on the loan at the time of its acquisition and capital, which could have regulatory implications;
the duration of the loan;
the credit history of a particular borrower; and
changes in economic and industry conditions.
At December 31, 2015, the Bancorp’s allowance for loan losses totaled $35.6 million, which represents 0.65% of total loans
held for investment. Management makes various assumptions and judgments about the collectibility of our loan portfolio,
including the creditworthiness of our borrowers and loans covered under the loss sharing agreements that did not exhibit
evidence of deterioration in credit quality on the acquisition date and the probability of making payment, as well as the value of
real estate and other assets serving as collateral for the repayment of many of our loans. Loans covered under the loss sharing
agreements totaled $13.8 million at December 31, 2015. The period to submit losses under the FDIC loss sharing agreements
for non-single family loans expired in third quarter 2015. The period to submit losses under the FDIC loss sharing agreements
for single family loans expires in third quarter 2017. Unless terminated earlier, the final maturity of the FDIC loss sharing
agreements occurs in third quarter 2020.
In determining the amount of the allowance for loan losses, significant factors considered include loss experience in particular
segments of the portfolio, trends and absolute levels of classified and criticized loans, trends and absolute levels in delinquent
loans, trends in risk ratings, trends in industry and Customers charge-offs by particular segments and changes in existing
general economic and business conditions affecting our lending areas and the national economy. If our assumptions are
incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in
additions to the allowance.
Management reviews and re-estimates the allowance for loan losses quarterly. Additions to our allowance for loan losses as a
result on management's review and estimate could materially decrease net income. Our regulators, as an integral part of their
examination process, periodically review our allowance for loan losses and may require us to increase our allowance for loan
losses by recognizing additional provisions for loan losses charged to expense, or to decrease our allowance for loan losses by
recognizing loan charge-offs, net of recoveries. Any such additional provisions for loan losses or charge-offs, as required by
these regulatory agencies, could have a material adverse effect on our financial condition and results of operations.
Our emphasis on commercial, multi-family/commercial real estate and mortgage warehouse lending may expose us to
increased lending risks.
We intend to continue emphasizing the origination of commercial loans and specialty loans, including loans to mortgage
banking businesses. Commercial loans, including multi-family and commercial real estate loans, can expose a lender to risk of
non-payment and loss because repayment of the loans often depends on the successful operation of a business or property and
the borrower’s cash flows. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers
compared to one- to four-family residential mortgage loans. In addition, we may need to increase our allowance for loan losses
in the future to account for an increase in probable credit losses associated with such loans. Also, we expect that many of our
commercial borrowers will have more than one loan outstanding with us. Consequently, an adverse development with respect
to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development
with respect to a one- to four-family residential mortgage loan.
As a lender to mortgage banking businesses, we provide financing to mortgage bankers by purchasing, subject to resale under a
master repurchase agreement, the underlying residential mortgages on a short-term basis pending the ultimate sale of the
mortgages to investors. We are subject to the risks associated with such lending, including, but not limited to, the risks of fraud,
bankruptcy and possible default by the borrower, closing agents, and the residential borrower on the underlying mortgage, any
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of which could result in credit losses. The risk of fraud associated with this type of lending includes, but is not limited to,
settlement process risks, the risk of financing nonexistent loans or fictitious mortgage loan transactions, or the risk that
collateral delivered is fraudulent or non-existent, creating a risk of loss of the full amount financed on the underlying residential
mortgage loan, or in the settlement processes. As discussed in Note 21 – “LOSS CONTINGENCY”, in March 2013, a
suspected fraud was discovered in the Bank’s held-for-sale loan portfolio. Additional fraudulent transactions could have a
material adverse effect on our financial condition and results of operations.
Our lending to mortgage businesses is a significant part of our assets and earnings. This business is subject to cyclicality of the
mortgage lending business, and volumes are likely to decline if interest rates increase, generally. A decline in the rate of growth,
volume or profitability of this business unit, or a loss of its leadership could adversely affect our results of operations and
financial condition.
As of December 31, 2015 and 2014, the Bank had $6.9 billion and $5.3 billion, respectively, in commercial loans outstanding,
composing approximately 94.6% and 92.5%, respectively, of its total loan portfolio, which includes loans held for sale.
Decreased origination, volume and pricing decisions of competitors may adversely affect our profitability.
The Bank currently operates a residential mortgage banking business but plans to expand our origination, sale, and servicing of
residential mortgage loans in the future. The Bank also began selling recent multi-family loan originations to third parties in the
third quarter of 2014. Changes in market interest rates and pricing decisions by our loan competitors may adversely affect
demand for our residential mortgage and multi-family loan products, the revenue realized on the sale of loans and revenues
received from servicing such loans for others, and ultimately reduce our net income. New regulations, increased regulatory
reviews, and/or changes in the structure of the secondary mortgage markets which we would utilize to sell mortgage loans or
other rule changes that could affect the multi-family resale market may be introduced and may increase costs and make it more
difficult to operate a residential mortgage origination business or sell multi-family loans.
Federal Home Loan Bank of Pittsburgh may not pay dividends or repurchase capital stock in the future.
On December 23, 2008, the Federal Home Loan Bank of Pittsburgh (“FHLB”) announced that it would voluntarily suspend the
payment of dividends and the repurchase of excess capital stock until further notice. The FHLB announced at that time that it
expected its ability to pay dividends and add to retained earnings to be significantly curtailed due to low short-term interest
rates, an increased cost of maintaining liquidity, other than temporary impairment charges, and constrained access to debt
markets at attractive rates. While the FHLB resumed payment of dividends and capital stock repurchases in 2012, capital stock
repurchases from member banks are reviewed on a quarterly basis by the FHLB, and there is no guarantee that such dividends
and capital stock repurchases will continue in the future. As of December 31, 2015, the Bank held $78.9 million of FHLB
capital stock.
The fair value of our investment securities can fluctuate due to market conditions. Adverse economic performance can lead
to adverse security performance and other-than-temporary impairment.
As of December 31, 2015, the fair value of our investment securities portfolio was approximately $560.3 million. We have
historically followed a conservative investment strategy, with concentrations in securities that are backed by government
sponsored enterprises. In the future, we may seek to increase yields through more aggressive strategies, which may include a
greater percentage of corporate securities, structured credit products or non-agency mortgage backed securities. Factors beyond
our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the
fair value of these securities. These factors include, but are not limited to, rating agency actions in respect of the securities,
defaults by the issuer or with respect to the underlying securities, and changes in market interest rates and continued instability
in the capital markets. Any of these factors, among others, could cause other-than-temporary impairments and realized and/or
unrealized losses in future periods and declines in other comprehensive income, which could have a material adverse effect on
us. The process for determining whether impairment of a security is other-than-temporary usually requires complex, subjective
judgments about the future financial performance and liquidity of the issuer and any collateral underlying the security in order
to assess the probability of receiving all contractual principal and interest payments on the security.
Changes to estimates and assumptions made by management in preparing financial statements could adversely affect the
Bancorp’s business, operating results, reported assets and liabilities, financial condition, and capital levels.
Changes to estimates and assumptions made by management in connection with the preparation of the Bancorp’s consolidated
financial statements could adversely affect the reported amounts of assets and liabilities and the reported amounts of income
and expenses. The preparation of the Bancorp’s consolidated financial statements requires management to make certain critical
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accounting estimates and assumptions that could affect the reported amounts of assets and liabilities and the reported amounts
of income and expense during the reporting periods. In the event the covered assets perform better than originally estimated at
the time of acquisition, the Bancorp could be required to reimburse all, or a portion of, its discounted purchase price to the
FDIC. Further information regarding the FDIC loss sharing receivable and clawback liability, and other accounting policies
subject to significant judgment and estimates, is included in “Management’s Discussion and Analysis - Critical Accounting
Policies.” Changes to management’s assumptions or estimates could materially and adversely affect Customers' business,
operating results, reported assets and liabilities, financial condition, and capital levels.
Changes in accounting standards and policies can be difficult to predict and can materially impact how we record and
report our financial results.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of
operations. From time to time, the FASB or the SEC changes the financial accounting and reporting standards or the policies
that govern the preparation of our financial statements. These changes can be difficult to predict and can materially impact how
we record and report our financial condition and results of operations. We could be required to apply new or revised guidance
retrospectively, which may result in the revision of prior period financial statements by material amounts. The implementation
of new or revised accounting guidance could have a material adverse effect on our financial results or net worth. Notably, the
FASB is currently considering changes to the framework for estimating the allowance for loan and lease losses which could
significantly alter the current estimate as well as other elements of the U.S. banking model.
Downgrades in U.S. Government and federal agency securities could adversely affect Customers Bancorp and the Bank.
The long-term impact of the downgrade of the U.S. Government and federal agencies from an AAA to an AA+ credit rating is
still uncertain. However, in addition to causing economic and financial market disruptions, the downgrade, and any future
downgrades and/or failures to raise the U.S. debt limit if necessary in the future, could, among other things, materially
adversely affect the market value of the U.S. and other government and governmental agency securities owned by Customers
Bank, the availability of those securities as collateral for borrowing, and our ability to access capital markets on favorable
terms, as well as have other material adverse effects on the operation of our business and our financial results and condition. In
particular, it could increase interest rates and disrupt payment systems, money markets, and long-term or short-term fixed
income markets, adversely affecting the cost and availability of funding, which could negatively affect profitability. Also, the
adverse consequences as a result of the downgrade could extend to the borrowers of the loans the Bank makes and, as a result,
could adversely affect its borrowers’ ability to repay their loans.
We may not be able to maintain consistent earnings or profitability.
Although we made a profit for the years of 2011 through 2015, there can be no assurance that we will be able to remain
profitable in future periods, or, if profitable, that our overall earnings will remain consistent or increase in the future. Our
earnings also may be reduced by increased expenses associated with increased assets, such as additional employee
compensation expense, and increased interest expense on any liabilities incurred or deposits solicited to fund increases in
assets. If earnings do not grow proportionately with our assets or equity, our overall profitability may be adversely affected.
Continued or worsening general business and economic conditions could materially and adversely affect us.
Our business and operations are sensitive to general business and economic conditions in the United States. If the U.S.
economy experiences worsening conditions such as a recession, we could be materially and adversely affected. Weak economic
conditions may be characterized by deflation, instability in debt and equity capital markets, a lack of liquidity and/or depressed
prices in the secondary market for mortgage loans, increased delinquencies on loans, residential and commercial real estate
price declines and lower home sales and commercial activity. Adverse changes in any of these factors could be detrimental to
our business. Our business is also significantly affected by monetary and related policies of the U.S. federal government, its
agencies and government-sponsored entities. Adverse changes in economic factors or U.S. government policies could have a
negative effect on Customers Bancorp.
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The geographic concentration in the Northeast and Mid-Atlantic region makes our business susceptible to downturns in the
local economies and depressed banking markets, which could materially and adversely affect us.
Our loan and deposit activities are largely based in the Northeast and Mid-Atlantic regions. As a result, our financial
performance depends upon economic conditions in this region. This region experienced deteriorating local economic conditions
in the past economic cycle and a downturn in the regional real estate market could harm our financial condition and results of
operations because of the geographic concentration of loans within this region and because a large percentage of the loans are
secured by real property. If there is decline in real estate values, the collateral value for our loans will decrease and our
probability of incurring losses will increase as the ability to recover on defaulted loans by selling the underlying real estate will
be lessened.
Additionally, Customers has made a significant investment in commercial real estate loans. Often in a commercial real estate
transaction, repayment of the loan is dependent on the property generating sufficient rental income to service the loan.
Economic conditions may affect the tenant’s ability to make rental payments on a timely basis, and may cause some tenants not
to renew their leases, each of which may impact the debtor’s ability to make loan payments. Further, if expenses associated
with commercial properties increase dramatically, the tenant’s ability to repay, and therefore the debtor’s ability to make timely
loan payments, could be adversely affected. All of these factors could increase the amount of non-performing loans, increase
our provision for loan losses and reduce our net income.
Our business is highly susceptible to credit risk.
As a lender, we are exposed to the risk that our customers will be unable to repay their loans according to the contractual terms
and that the collateral securing the payment of their loans (if any) may not be sufficient to assure repayment. The risks inherent
in making any loan include risks with respect to the ability of borrowers to repay their loans and, if applicable, the period of
time over which the loan is repaid, risks relating to proper loan underwriting and guidelines, risks resulting from changes in
economic and industry conditions, risks inherent in dealing with individual borrowers and risks resulting from uncertainties as
to the future value of collateral. Similarly, we have credit risk embedded in our securities portfolio. Our credit standards,
procedures and policies are designed to reduce the risk of credit losses to a low level, but may not prevent us from incurring
substantial credit losses.
Additionally, we may restructure originated or acquired loans if we believe the borrowers are experiencing problems servicing
the debt pursuant to current terms and we believe the borrower is likely to fully repay their restructured obligations. We may
also be subject to legal or regulatory requirements for restructured loans. With respect to restructured loans, we may grant
concessions to borrowers experiencing financial difficulties in order to facilitate repayment of the loan by (1) reduction of the
stated interest rate for the remaining life of the loan to lower than the current market rate for new loans with similar risk or
(2) extension of the maturity date.
We depend on our executive officers and key personnel to implement our strategy and could be harmed by the loss of their
services.
We believe that the implementation of our strategy will depend in large part on the skills of our executive management team
and our ability to motivate and retain these and other key personnel. Accordingly, the loss of service of one or more of our
executive officers or key personnel could reduce our ability to successfully implement our growth strategy and materially and
adversely affect us. Leadership changes will occur from time to time, and if significant resignations occur, we may not be able
to recruit additional qualified personnel. We believe our executive management team possesses valuable knowledge about the
banking industry and that their knowledge and relationships would be very difficult to replicate. Although our Chief Executive
Officer, President, and Chief Financial Officer have entered into employment agreements with us, it is possible that they may
not complete the term of their employment agreement or may choose not to renew it upon expiration.
Our customers also rely on us to deliver personalized financial services. Our strategic model is dependent upon relationship
managers and private bankers who act as a customer’s point of contact to us. The loss of the service of these individuals could
undermine the confidence of our customers in our ability to provide such personalized services. We need to continue to attract
and retain these individuals and to recruit other qualified individuals to ensure continued growth. In addition, competitors may
recruit these individuals in light of the value of the individuals’ relationships with their customers and communities and we may
not be able to retain such relationships absent the individuals. In any case, if we are unable to attract and retain our relationship
managers and private bankers, and recruit individuals with appropriate skills and knowledge to support our business, our
growth strategy, business, financial condition and results of operations may be adversely affected.
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Our success also depends on the experience of our branch managers and lending officers and on their relationships with the
customers and communities they serve. The loss of these key personnel could negatively impact our banking operations. The
loss of key senior personnel, or the inability to recruit and retain qualified personnel in the future, could have a material adverse
effect on us.
We face significant competition from other financial institutions and financial services providers, which may materially and
adversely affect us.
Commercial and consumer banking is highly competitive. Our markets contain a large number of community and regional
banks as well as a significant presence of the country’s largest commercial banks. We compete with other state and national
financial institutions, including savings and loan associations, savings banks and credit unions, for deposits and loans. In
addition, we compete with financial intermediaries, such as consumer finance companies, mortgage banking companies,
insurance companies, securities firms, mutual funds and several government agencies, as well as major retailers, in providing
various types of loans and other financial services. Some of these competitors may have a long history of successful operations
in our markets, greater ties to local businesses and more expansive banking relationships, as well as better established depositor
bases. Competitors may also have greater resources and access to capital and may possess other advantages such as operating
more ATMs and conducting extensive promotional and advertising campaigns or operating a more developed Internet platform.
Competitors may also exhibit a greater tolerance for risk and behave more aggressively with respect to pricing in order to
increase their market share.
The financial services industry could become even more competitive as a result of legislative, regulatory and technological
changes and continued consolidation. Increased competition among financial services companies due to the recent
consolidation of certain competing financial institutions may adversely affect our ability to market our products and services.
Technological advances have lowered barriers to entry and made it possible for banks to compete in our market without a retail
footprint by offering competitive rates, as well as non-banks to offer products and services traditionally provided by banks. Our
ability to compete successfully depends on a number of factors, including, among others:
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the ability to develop, maintain and build upon long-term customer relationships based on high quality, personal
service, effective and efficient products and services, high ethical standards and safe and sound assets;
the scope, relevance and competitive pricing of products and services offered to meet customer needs and
demands;
the ability to provide customers with maximum convenience of access to services and availability of banking
representatives;
the ability to attract and retain highly qualified employees to operate our business;
the ability to expand our market position;
customer access to our decision makers, and customer satisfaction with our level of service; and
the ability to operate our business effectively and efficiently.
Failure to perform in any of these areas could significantly weaken our competitive position, which could materially and
adversely affect us.
Like other financial services institutions, our asset and liability structures are monetary in nature. Such structures are
affected by a variety of factors, including changes in interest rates, which can impact the value of financial instruments held
by us.
Like other financial services institutions, we have asset and liability structures that are essentially monetary in nature and are
directly affected by many factors, including domestic and international economic and political conditions, broad trends in
business and finance, legislation and regulation affecting the national and international business and financial communities,
monetary and fiscal policies, inflation, currency values, market conditions, the availability and terms (including cost) of short-
term or long-term funding and capital, the credit capacity or perceived creditworthiness of customers and counterparties and the
level and volatility of trading markets. Such factors can impact customers and counterparties of a financial services institution
and may impact the value of financial instruments held by a financial services institution.
Our earnings and cash flows largely depend upon the level of our net interest income, which is the difference between the
interest income we earn on loans, investments and other interest earning assets, and the interest we pay on interest bearing
liabilities, such as deposits and borrowings. Because different types of assets and liabilities may react differently and at
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different times to market interest rate changes, changes in interest rates can increase or decrease our net interest income. When
interest-bearing liabilities mature or reprice more quickly than interest earning assets in a period, an increase in interest rates
would reduce net interest income. Similarly, when interest earning assets mature or reprice more quickly, and because the
magnitude of repricing of interest earning assets is often greater than interest bearing liabilities, falling interest rates would
reduce net interest income.
Accordingly, changes in the level of market interest rates affect our net yield on interest earning assets and liabilities, loan and
investment securities portfolios and our overall results. Changes in interest rates may also have a significant impact on any
future loan origination revenues. Changes in interest rates also have a significant impact on the carrying value of a significant
percentage of the assets, both loans and investment securities, on our balance sheet. We may incur debt in the future and that
debt may also be sensitive to interest rates and any increase in interest rates could materially and adversely affect us. Interest
rates are highly sensitive to many factors beyond our control, including general economic conditions and policies of various
governmental and regulatory agencies, particularly the Federal Reserve. Adverse changes in the Federal Reserve’s interest rate
policies or other changes in monetary policies and economic conditions could materially and adversely affect us.
We are dependent on our information technology and telecommunications systems and third-party servicers, and systems
failures, interruptions or breaches of security could have a material adverse effect on us.
Our business is highly dependent on the successful and uninterrupted functioning of our information technology and
telecommunications systems and third-party servicers. We outsource many of our major systems, such as data processing, loan
servicing and deposit processing systems. The failure of these systems, or the termination of a third-party software license or
service agreement on which any of these systems is based, could interrupt our operations. Because our information technology
and telecommunications systems interface with and depend on third-party systems, we could experience service denials if
demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If significant, sustained
or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result
in a loss of customer business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which
could have a material adverse effect on us.
In addition, we provide our customers with the ability to bank remotely, including online, over the Internet and over the
telephone. The secure transmission of confidential information over the Internet and other remote channels is a critical element
of remote banking. Our network could be vulnerable to unauthorized access, computer viruses, phishing schemes and other
security breaches. We may be required to spend significant capital and other resources to protect against the threat of security
breaches and computer viruses, or to alleviate problems caused by security breaches or viruses. To the extent that our activities
or the activities of our customers involve the storage and transmission of confidential information, security breaches and
viruses could expose us to claims, regulatory scrutiny, litigation and other possible liabilities. Any inability to prevent security
breaches or computer viruses could also cause existing customers to lose confidence in our systems and could materially and
adversely affect us.
Additionally, financial products and services have become increasingly technology-driven. Our ability to meet the needs of our
customers competitively, and in a cost-efficient manner, is dependent on the ability to keep pace with technological advances
and to invest in new technology as it becomes available. Certain competitors may have greater resources to invest in
technology and may be better equipped to market new technology-driven products and services. The ability to keep pace with
technological change is important, and the failure to do so could have a material adverse impact on our business and therefore
on our financial condition and results of operations.
Loss of, or failure to adequately safeguard, confidential or proprietary information may adversely affect the Bancorp’s
operations, net income or reputation.
The Bancorp regularly collects, processes, transmits and stores significant amounts of confidential information regarding its
customers, employees and others. This information is necessary for the conduct of the Bancorp’s business activities, including
the ongoing maintenance of deposit, loan, investment management and other account relationships for our customers, and
receiving instructions and affecting transactions for those customers and other users of the Bancorp’s products and services. In
addition to confidential information regarding its customers, employees and others, the Bancorp compiles, processes, transmits
and stores proprietary, non-public information concerning its own business, operations, plans and strategies. In some cases, this
confidential or proprietary information is collected, compiled, processed, transmitted or stored by third parties on behalf of the
Bancorp.
Information security risks have generally increased in recent years because of the proliferation of new technologies and the
increased sophistication and activities of perpetrators of cyber-attacks. A failure in or breach of the Bancorp’s operational or
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information security systems, or those of the Bancorp’s third-party service providers, as a result of cyber-attacks or information
security breaches or due to employee error, malfeasance or other disruptions could adversely affect our business, result in the
disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and/or cause losses.
As a result, cyber security and the continued development and enhancement of the controls and processes designed to protect
the Bancorp’s systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority
for the Bancorp.
If this confidential or proprietary information were to be mishandled, misused or lost, the Bancorp could be exposed to
significant regulatory consequences, reputational damage, civil litigation and financial loss. Mishandling, misuse or loss of this
confidential or proprietary information could occur, for example, if the confidential or proprietary information were
erroneously provided to parties who are not permitted to have the information, either by fault of the systems or employees of
the Bancorp, or the systems or employees of third parties which have collected, compiled, processed, transmitted or stored the
information on the Bancorp’s behalf, where the information is intercepted or otherwise inappropriately taken by third parties or
where there is a failure or breach of the network, communications or information systems which are used to collect, compile,
process, transmit or store the information.
Although the Bancorp employs a variety of physical, procedural and technological safeguards to protect this confidential and
proprietary information from mishandling, misuse or loss, these safeguards do not provide absolute assurance that mishandling,
misuse or loss of the information will not occur, or that if mishandling, misuse or loss of the information did occur, those events
would be promptly detected and addressed. Additionally, as information security risks and cyber threats continue to evolve, the
Bancorp may be required to expend additional resources to continue to enhance its information security measures and/or to
investigate and remediate any information security vulnerabilities.
Our directors and executive officers can influence the outcome of shareholder votes and, in some cases, shareholders may
not have the opportunity to evaluate and affect the investment decision regarding a potential investment or acquisition
transaction.
As of December 31, 2015, the directors and executive officers of Customers Bancorp as a group owned a total of 1,722,606
shares of Voting Common Stock and exercisable options and warrants to purchase up to an additional 1,028,605 shares of
Voting Common Stock, which potentially gives them, as a group, the ability to control approximately 9.85% of the issued and
outstanding Voting Common Stock. In addition, directors of Customers Bank who are not directors of Customers Bancorp own
an additional 23,124 shares of Voting Common Stock and exercisable warrants to purchase up to an additional 8,240 shares of
Voting Common Stock, which if combined with the directors and officers of Customers Bancorp, potentially gives them, as a
group, the ability to control approximately 9.96% of the issued and outstanding Voting Common Stock. We believe ownership
of stock causes directors and officers to have the same interests as shareholders, but it also gives them the ability to vote as
shareholders for matters that are in their personal interest, which may be contrary to the wishes of other shareholders.
Shareholders will not necessarily be provided with an opportunity to evaluate the specific merits or risks of one or more target
institutions. Any decision regarding a potential investment or acquisition transaction will be made by our board of directors.
Except in limited circumstances as required by applicable law, consummation of an acquisition will not require the approval of
holders of Voting Common Stock. Accordingly, the shareholder may not have an opportunity to evaluate and affect the
investment decision regarding potential investment or acquisition transactions.
We intend to engage in acquisitions of other businesses from time to time, including our pending acquisition of certain
assets from Higher One. These acquisitions may not produce revenue or earnings enhancements or cost savings at levels, or
within timeframes, originally anticipated and may result in unforeseen integration difficulties.
We regularly evaluate opportunities to strengthen our current market position by acquiring and investing in banks and in other
complementary businesses, or opening new branches, and when appropriate opportunities arise, subject to regulatory approval,
we plan to engage in acquisitions of other businesses and in opening new branches. Such transactions could, individually or in
the aggregate, have a material effect on our operating results and financial condition, including short and long-term liquidity.
Our acquisition activities could be material to our business. For example, we could issue additional shares of Voting Common
Stock in a purchase transaction, which could dilute current shareholders’ value or ownership interest. These activities could
require us to use a substantial amount of cash, other liquid assets and/or incur debt. In addition, if goodwill recorded in
connection with acquisitions were determined to be impaired, then we would be required to recognize a charge against our
earnings, which could materially and adversely affect our results of operations during the period in which the impairment was
recognized. Our acquisition activities could involve a number of additional risks, including the risks of:
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incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating the
terms of potential transactions, resulting in our attention being diverted from the operation of our existing
business;
using inaccurate estimates and judgments to evaluate credit, operations, management and market risks with
respect to the target institution or assets;
being potentially exposed to unknown or contingent liabilities of banks and businesses we acquire;
being required to expend time and expense to integrate the operations and personnel of the combined businesses;
experiencing higher operating expenses relative to operating income from the new operations;
creating an adverse short-term effect on our results of operations;
losing key employees and customers as a result of an acquisition that is poorly received; and
incurring significant problems relating to the conversion of the financial and customer data of the entity being
acquired into our financial and customer product systems.
Additionally, in evaluating potential acquisition opportunities we may seek to acquire failed banks through FDIC-assisted
acquisitions. While the FDIC may, in such acquisitions, provide assistance to mitigate certain risks, such as sharing in exposure
to loan losses, and providing indemnification against certain liabilities, of the failed institution, we may not be able to
accurately estimate our potential exposure to loan losses and other potential liabilities, or the difficulty of integration, in
acquiring such institutions.
Depending on the condition of any institutions or assets that are acquired, any acquisition may, at least in the near term,
materially adversely affect our capital and earnings and, if not successfully integrated following the acquisition, may continue
to have such effects. We cannot assure you that we will be successful in overcoming these risks or any other problems
encountered in connection with pending or potential acquisitions. Our inability to overcome these risks could have an adverse
effect on levels of reported net income, return on equity and return on assets, and the ability to achieve our business strategy
and maintain market value.
Our acquisitions generally will require regulatory approvals, and failure to obtain them would restrict our growth.
We intend to complement and expand our business by pursuing strategic acquisitions of community banking franchises and
other businesses. Generally, any acquisition of target financial institutions, banking centers or other banking assets by us may
require approval by, and cooperation from, a number of governmental regulatory agencies, possibly including the Federal
Reserve, the OCC and the FDIC, as well as state banking regulators. In acting on applications, federal banking regulators
consider, among other factors:
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the effect of the acquisition on competition;
the financial condition, liquidity, results of operations, capital levels and future prospects of the applicant and the
bank(s) involved;
the quantity and complexity of previously consummated acquisitions;
the managerial resources of the applicant and the bank(s) involved;
the convenience and needs of the community, including the record of performance under the Community
Reinvestment Act (“CRA”);
the effectiveness of the applicant in combating money laundering activities; and
the extent to which the acquisition would result in greater or more concentrated risks to the stability of the United
States banking or financial system.
Such regulators could deny our application based on the above criteria or other considerations, which could restrict our growth,
or the regulatory approvals may not be granted on terms that are acceptable to us. For example, we could be required to sell
banking centers as a condition to receiving regulatory approvals, and such a condition may not be acceptable to us or may
reduce the benefit of any acquisition.
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The success of future transactions will depend on our ability to successfully identify and consummate acquisitions of
banking franchises that meet our investment objectives. Because of the intense competition for acquisition opportunities
and the limited number of potential targets, we may not be able to successfully consummate acquisitions on attractive terms,
or at all, that are necessary to grow our business.
Our acquisition history should be viewed in the context of the recent opportunities available to us as a result of the confluence
of our access to capital at a time when market dislocations of historical proportions resulted in attractive asset acquisition
opportunities. As conditions change, we may prove to be unable to execute our acquisition strategy, which could materially and
adversely affect us. The success of future transactions will depend on our ability to successfully identify and consummate
transactions with target banking franchises that meet our investment objectives. There are significant risks associated with our
ability to identify and successfully consummate these acquisitions. There are a limited number of acquisition opportunities, and
we expect to encounter intense competition from other banking organizations competing for acquisitions and also from other
investment funds and entities looking to acquire financial institutions. Many of these entities are well established and have
extensive experience in identifying and consummating acquisitions directly or through affiliates. Many of these competitors
possess ongoing banking operations with greater financial, technical, human and other resources and access to capital than we
do, which could limit the acquisition opportunities we pursue. Our competitors may be able to achieve greater cost savings,
through consolidating operations or otherwise, than we could. These competitive limitations give others an advantage in
pursuing certain acquisitions. In addition, increased competition may drive up the prices for the acquisitions we pursue and
make the other acquisition terms more onerous, which would make the identification and successful consummation of those
acquisitions less attractive to us. Competitors may be willing to pay more for acquisitions than we believe are justified, which
could result in us having to pay more for them than we prefer or to forego the opportunity. As a result of the foregoing, we may
be unable to successfully identify and consummate acquisitions on attractive terms, or at all, that are necessary to grow our
business.
We will generally establish the pricing of transactions and the capital structure of banking franchises to be acquired by us on
the basis of financial projections for such banking franchises. In general, projected operating results will be based on the
judgment of our management team. In all cases, projections are only estimates of future results that are based upon assumptions
made at the time that the projections are developed and the projected results may vary significantly from actual results. General
economic, political and market conditions can have a material adverse impact on the reliability of such projections. In the event
that the projections made in connection with our acquisitions, or future projections with respect to new acquisitions, are not
accurate, such inaccuracies could materially and adversely affect us.
We are subject to certain risks related to FDIC-assisted acquisitions.
The success of past FDIC-assisted acquisitions, and any FDIC-assisted acquisitions in which we may participate in the future,
will depend on a number of factors, including our ability to:
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fully integrate, and to integrate successfully, the branches acquired into bank operations;
limit the outflow of deposits held by new customers in the acquired branches and to successfully retain and
manage interest-earning assets (loans) acquired in FDIC-assisted acquisitions;
retain existing deposits and to generate new interest-earning assets in the geographic areas previously served by
the acquired banks;
effectively compete in new markets in which we did not previously have a presence;
successfully deploy the cash received in the FDIC-assisted acquisitions into assets bearing sufficiently high yields
without incurring unacceptable credit or interest rate risk;
control the incremental non-interest expense from the acquired branches in a manner that enables us to maintain a
favorable overall efficiency ratio;
retain and attract the appropriate personnel to staff the acquired branches; and
earn acceptable levels of interest and non-interest income, including fee income, from the acquired bank.
As with any acquisition involving a financial institution, particularly one involving the transfer of a large number of bank
branches (as is often the case with FDIC-assisted acquisitions), there may be higher than average levels of service disruptions
that would cause inconveniences or potentially increase the effectiveness of competing financial institutions in attracting our
customers. Integrating the acquired branches could present unique challenges and opportunities because of the nature of the
transactions. Integration efforts will also likely divert our management’s attention and resources. It is not known whether we
will be able to integrate acquired branches successfully, and the integration process could result in the loss of key employees,
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the disruption of ongoing business or inconsistencies in standards, controls, procedures and policies that adversely affect our
ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the
FDIC-assisted acquisitions. We may also encounter unexpected difficulties or costs during integration that could materially
adversely affect our earnings and financial condition. Additionally, we may be unable to compete effectively in the market
areas previously served by the acquired branches or to manage any growth resulting from FDIC-assisted acquisitions
effectively.
Our willingness and ability to grow acquired branches following FDIC-assisted acquisitions depend on several factors, most
importantly the ability to retain certain key personnel that we hire or transfer in connection with FDIC-assisted acquisitions.
Our failure to retain these employees could adversely affect the success of FDIC-assisted acquisitions and our future growth.
Our ability to continue to receive benefits of our Loss Sharing Agreements with the FDIC is conditioned upon compliance
with certain requirements under the Purchase and Assumption Agreements.
Pursuant to the Purchase and Assumption Agreements we signed in connection with our FDIC-assisted acquisitions of USA
Bank and ISN Bank (“Purchase and Assumption Agreements”), we are the beneficiary of loss sharing arrangements with the
FDIC (the “Loss Sharing Agreements”) that call for the FDIC to fund a portion of its losses on a majority of the assets acquired
in connection with the transactions. Our ability to recover a portion of losses and retain the loss sharing protection is subject to
compliance with certain requirements imposed on us in the Purchase and Assumption Agreements. The requirements of the
Loss Sharing Agreements relate primarily to loan servicing standards concerning the assets covered by the Loss Sharing
Agreements (the “Covered Assets”), as well as obtaining the consent of the FDIC to engage in certain corporate transactions
that may be deemed under the agreements to constitute a transfer of the loss sharing benefits. For example, FDIC approval will
be required for any merger we undertake that would result in the pre-merger shareholders of such entity owning less than sixty-
six and two/thirds percent (66.66%) of the equity of the surviving entity.
As the loan servicing standards evolve, we may experience difficulties in complying with the requirements of the Loss Sharing
Agreements, which could result in Covered Assets losing some or all of their loss sharing coverage. In accordance with the
terms of the Loss Sharing Agreements, we are subject to audits by the FDIC through its designated agent. The required terms of
the Loss Sharing Agreements are extensive and failure to comply with any of the guidelines could result in a specific asset or
group of assets losing their loss sharing coverage.
In such instances in which the consent of the FDIC is required under the Purchase and Assumption Agreements, the FDIC may
withhold its consent to such transactions or may condition its consent on terms that we do not find acceptable. There can be no
assurance that the FDIC will grant its consent or condition its consent on terms that we find acceptable. If the FDIC does not
grant its consent to a transaction we would like to pursue, or conditions its consent on terms that we do not find acceptable, this
may cause us not to engage in a corporate transaction that might otherwise benefit shareholders or to pursue such a transaction
without obtaining the FDIC’s consent, which could result in termination of the Loss Sharing Agreements with the FDIC.
Loans covered under the loss sharing agreements totaled $13.8 million at December 31, 2015. The period to submit losses
under the FDIC loss sharing agreements for non-single family loans expired in third quarter 2015. The period to submit losses
under the FDIC loss sharing agreements for single family loans expires in third quarter 2017. Unless terminated earlier, the
final maturity of the FDIC loss sharing agreements occurs in third quarter 2020.
FDIC-assisted acquisition opportunities may not become available and increased competition may make it more difficult for
us to bid on failed bank transactions on terms considered to be acceptable.
Our near-term business strategy includes consideration of potential acquisitions of failing banks that the FDIC plans to place in
receivership. The FDIC may not place banks that meet our strategic objectives into receivership. Failed bank transactions are
attractive opportunities in part because of loss sharing arrangements with the FDIC that limit the acquirer’s downside risk on
the purchased loan portfolio and, apart from our assumption of deposit liabilities, we have significant discretion as to the non-
deposit liabilities that we assume. In addition, assets purchased from the FDIC are marked to their fair value and in many cases
there is little or no addition to goodwill arising from an FDIC-assisted acquisition. The bidding process for failing banks could
become very competitive, and the increased competition may make it more difficult for us to bid on terms we consider to be
acceptable. Further, all FDIC-assisted acquisitions would require us to obtain applicable regulatory approval.
Some institutions we could acquire may have distressed assets and there can be no assurance that we will be able to realize
the value predicted from these assets or that we will make sufficient provision for future losses in the value of, or accurately
estimate the future write-downs taken in respect of, these assets.
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Loan portfolios and other assets acquired in transactions may experience increases in delinquencies and losses in the loan
portfolios, or in amounts that exceed initial forecasts developed during the due diligence investigation prior to acquiring those
institutions. In addition, asset values may be impaired in the future due to factors that cannot currently be predicted, including
deterioration in economic conditions and subsequent declines in collateral values and credit quality indicators. Any of these
events could adversely affect the financial condition, liquidity, capital position and value of institutions acquired and of our
business as a whole. Further, as a registered bank holding company, if we acquire bank subsidiaries, they may become subject
to cross-guaranty liability under applicable banking law. If we do so and any of the foregoing adverse events occur with respect
to one subsidiary, they may adversely affect other subsidiaries. Asset valuations are estimates of value and there is no certainty
that we will be able to sell assets of target institutions at the estimated value, even if it is determined to be in our best interests
to do so. The institutions we may target may have substantial amounts of asset classes for which there is currently limited or no
marketability.
As a result of an investment or acquisition transaction, we may be required to take write-downs or write-offs, restructuring
and impairment or other charges that could have a significant negative effect on our financial condition and results of
operations.
We conduct due diligence investigations of target institutions we intend to acquire. Due diligence is time consuming and
expensive due to the operations, accounting, finance and legal professionals who must be involved in the due diligence process.
Even if extensive due diligence is conducted on a target institution with which we may be combined, this diligence may not
reveal all material issues that may affect a particular target institution, and factors outside our control, or the control of the
target institution, may later arise. If, during the diligence process, we fail to identify issues specific to a target institution or the
environment in which the target institution operates, we may be forced to later write down or write off assets, restructure
operations or incur impairment or other charges that could result in reporting losses. These charges may also occur if we are not
successful in integrating and managing the operations of the target institution with which we combine. In addition, charges of
this nature may cause us to violate net worth or other covenants to which we may be subject as a result of assuming preexisting
debt held by a target institution or by virtue of obtaining debt financing.
Resources could be expended in considering or evaluating potential investment or acquisition transactions that are not
consummated, which could materially and adversely affect subsequent attempts to locate and acquire or merge with another
business.
We anticipate that the investigation of each specific target institution and the negotiation, drafting and execution of relevant
agreements, disclosure documents and other instruments will require substantial management time and attention and substantial
costs for accountants, attorneys and others. If a decision is made not to complete a specific investment or acquisition
transaction, the costs incurred up to that point for the proposed transaction likely would not be recoverable. Furthermore, even
if an agreement is reached relating to a specific target institution, we may fail to consummate the investment or acquisition
transaction for any number of reasons, including those beyond our control. Any such event will result in a loss of the related
costs incurred, and could result in additional costs or expenses, which could materially and adversely affect subsequent
attempts to locate and acquire or merge with another institution and our reported earnings.
If we do not open new branches as planned, or do not achieve targeted profitability on new branches, earnings may be
reduced.
Customers Bank is interested in opening or acquiring four to six new branches annually for the next several years in and around
our target markets of southeastern Pennsylvania, New Jersey, New York, Maryland, Connecticut, Virginia and Delaware. Our
ability to open or acquire branches is subject to regulatory approvals. We cannot predict whether the banking regulators will
agree with our growth plans or if or when they will provide the necessary branch approvals. Numerous factors contribute to the
performance of a new branch, such as the ability to select a suitable location, competition, our ability to hire and retain
qualified personnel, and the effectiveness of our marketing strategy. It takes time for a new branch to generate significant
deposits and loan volume to offset expenses, some of which, like salaries and occupancy expense, are relatively fixed costs.
The initial cost, including capital asset purchases, for each new branch to open would be in a range of approximately $200,000
to $250,000. Additionally, there can be no assurance that any of these new branches will ever become profitable. During the
period of time before a branch can become profitable, operating a branch will negatively impact net income.
To the extent that we are unable to increase loans through organic loan growth, we may be unable to successfully
implement our growth strategy, which could materially and adversely affect us.
In addition to growing our business through strategic acquisitions, we also intend to grow our business through organic loan
growth. While loan growth has been strong and our loan balances have increased over the past three fiscal years, much of the
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loan growth came from multi-family and commercial real estate lending. If the bank is unsuccessful with diversifying its loan
originations or if we do not grow the existing business lines, our results of operations and financial condition could be
negatively impacted.
We may not be able to effectively manage our growth.
Our future operating results and financial condition depend to a large extent on our ability to successfully manage our growth.
Our growth has placed, and it may continue to place, significant demands on our operations and management. Whether through
additional acquisitions or organic growth, our current plan to expand our business is dependent upon our ability to:
•
•
continue to implement and improve our operational, credit underwriting and administration, financial, accounting,
enterprise risk management and other internal and disclosure controls and processes and our reporting systems and
procedures in order to manage a growing number of client relationships;
comply with changes in, and an increasing number of, laws, rules and regulations, including those of any national
securities exchange on which any of our securities become listed;
•
scale our technology and other systems’ platforms;
• maintain and attract appropriate staffing;
•
•
operate profitable or raise capital; and
support our asset growth with adequate deposits, funding and liquidity while maintaining our net interest margin and
meeting our customers’ and regulators’ liquidity requirements.
We may not successfully implement improvements to, or integrate, our management information and control systems, credit
underwriting and administration, internal and disclosure controls, and procedures and processes in an efficient or timely manner
and may discover deficiencies in existing systems and controls. In particular, our controls and procedures must be able to
accommodate an increase in loan volume in various markets and the infrastructure that comes with new banking centers and
banks. Our growth strategy may divert management from our existing business and may require us to incur additional
expenditures to expand our administrative and operational infrastructure and, if we are unable to effectively manage and grow
our banking franchise, including to the satisfaction of our regulators, we could be materially and adversely affected. In addition,
if we are unable to manage our current and future expansion in our operations, we may experience compliance, operational and
regulatory problems and delays, have to slow our pace of growth or even stop our market and product expansion, or have to
incur additional expenditures beyond current projections to support such growth, any one of which could materially and
adversely affect us. If we experience difficulties with the development of new business activities or the integration process of
acquired businesses, the anticipated benefits of any particular acquisition may not be realized fully, or at all, or may take longer
to realize than expected. Additionally, we may be unable to recognize synergies, operating efficiencies and/or expected benefits
within expected timeframes and cost projections, or at all. We also may not be able to preserve the goodwill of an acquired
financial institution. Our growth could lead to increases in our legal, audit, administrative and financial compliance costs,
which could materially and adversely affect us.
If our techniques for managing risk are ineffective, we may be exposed to material unanticipated losses.
In order to manage the significant risks inherent in our business, we must maintain effective policies, procedures and systems
that enable us to identify, monitor and control our exposure to material risks, such as credit, operational, legal and reputational
risks. Our risk management methods may prove to be ineffective due to their design, their implementation or the degree to
which we adhere to them, or as a result of the lack of adequate, accurate or timely information or otherwise. If our risk
management efforts are ineffective, we could suffer losses that could have a material adverse effect on our business, financial
condition or results of operations. In addition, we could be subject to litigation, particularly from our customers, and sanctions
or fines from regulators. Our techniques for managing the risks we face may not fully mitigate the risk exposure in all
economic or market environments, including exposure to risks that we might fail to identify or anticipate.
We are dependent upon maintaining an effective system of internal controls to provide reasonable assurance that
transactions and activities are conducted in accordance with established policies and procedures and are all captured and
reported in the financial statements. Failure to comply with the system of internal controls may result in events or losses
which could adversely affect Customers' operations, net income, financial condition, reputation, and compliance with laws
and regulations.
Customers' system of internal controls, including internal controls over financial reporting, is an important element of our risk
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management framework. Management regularly reviews and seeks to improve Customers’ internal controls, including annual
review of key policies and procedures, and annual review and testing of key internal controls over financial reporting. Any
system of internal controls, however well designed and operated, is based in part on certain assumptions and expectations of
employee conduct and can only provide reasonable, not absolute, assurance that the objectives of the internal control structure
are met. Any failure or circumvention of Customers’ controls and procedures, or failure to comply with regulations related to
controls and procedures, could have a material adverse effect on the Customers’ operations, net income, financial condition,
reputation and compliance with laws and regulations.
We may not be able to meet the cash flow requirements of our loan funding obligations, deposit withdrawals, or other
business needs and fund our asset growth unless we maintain sufficient liquidity.
Customers Bank must maintain sufficient liquidity to fund its balance sheet growth in order to successfully grow our revenues,
make loans and to repay deposit and other liabilities as these mature or are drawn. This liquidity can be gathered in both
wholesale and non-wholesale funding markets. Our asset growth over the past few years has been funded with various forms of
deposits and wholesale funding, including brokered and wholesale time deposits, FHLB advances, and Federal funds line
borrowings. Total wholesale deposits including brokered deposits were 42.1% and 35.3% of total deposits as of December 31,
2015 and 2014, respectively. Our gross loan to deposit ratio was 122.7% at December 31, 2015 and 126.8% at December 31,
2014 and our loan to deposit ratios excluding the mortgage warehouse portfolio funded by short term FHLB borrowings were
93.0% and 97.4% as of December 31, 2015 and 2014, respectively. Wholesale funding can cost more than deposits generated
from our traditional branch system and customer relationships and is subject to certain practical limits such as our liquidity
policy limits, our available collateral for FHLB borrowings capacity and Federal funds line limits with our lenders.
Additionally, regulators consider wholesale funding beyond certain points to be imprudent and might suggest that future asset
growth be reduced or halted. In the absence of appropriate levels and mix of funding, we might need to reduce earning asset
growth through the reduction of current production, sales of loans and/or the sale of participation interests in future and current
loans. This might reduce our future growth and net income.
The amount loaned to us is generally dependent on the value of the eligible collateral pledged and our financial condition.
These lenders could reduce the percentages loaned against various collateral categories, eliminate certain types of collateral and
otherwise modify or even terminate their loan programs, if further disruptions in the capital markets occur. Any change or
termination of our borrowings from the FHLB or correspondent banks could have an adverse effect on our profitability and
financial condition, including liquidity.
We may not be able to develop and retain a strong core deposit base and other low-cost, stable funding sources.
Customers Bank depends on checking, savings and money market deposit account balances and other forms of customer
deposits as a primary source of funding for our lending activities. We expect that our future loan growth will largely depend on
our ability to retain and grow a strong, low-cost deposit base. Because 39.7% of our deposit base as of December 31, 2015 was
time deposits, it may prove harder to maintain and grow our deposit base than would otherwise be the case, especially since
many of these deposits currently pay interest at above-market rates. As of December 31, 2015, $1.8 billion, or 76.6%, of our
total time deposits are scheduled to mature through December 31, 2016. We are working to transition certain of our customers
to lower cost traditional bank deposits as higher cost funding, such as time deposits, mature. If interest rates increase, whether
due to changes in inflation, monetary policy, competition or other factors, we would expect to pay higher interest rates on
deposits, which would increase our funding costs and compress our net interest margin. We may not succeed in moving our
deposits to lower yielding savings and transactions products, which could materially and adversely affect us. In addition, with
concerns about bank failures over the past several years and the end of the FDIC’s non-interest transaction deposit guarantee
program on December 31, 2012, customers, particularly those who may maintain deposits in excess of insured limits, have
become concerned about the extent to which their deposits are insured by the FDIC. Our customers may withdraw deposits to
ensure that their deposits with us are fully insured, and may place excess amounts in other institutions or make investments that
are perceived as being more secure and/or higher yielding. Further, even if we are able to maintain and grow our deposit base,
deposit balances can decrease when customers perceive alternative investments, such as the stock market, will provide a better
risk/return tradeoff. If customers move money out of bank deposits, we could lose a relatively low cost source of funds,
increasing our funding costs and reducing our net interest income and net income. Additionally, any such loss of funds could
result in lower loan originations and growth, which could materially and adversely affect our results of operations and financial
condition, including liquidity.
Our “high-touch” personalized service banking model may be replicated by competitors.
We expect to drive organic growth by employing our Concierge Banking® strategy, which provides specific relationship
managers or private bankers for all customers. Many of our competitors provide similar services and others may replicate our
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model. Our competitors may have greater resources than we do and may be able to provide similar services more quickly,
efficiently and extensively. To the extent others replicate our model, we could lose what we view as a competitive advantage,
and our financial condition and results of operations may be adversely affected.
Competitors’ technology-driven products and services and improvements to such products and services may adversely affect
our ability to generate core deposits through mobile banking.
Our organic growth strategy focuses on, among other things, expanding market share through our “high-tech” model, which
includes remote account opening, remote deposit capture and mobile banking. These technological advances, such as
BankMobile, are intended to allow the Bank to generate additional core deposits at a lower cost than generating deposits
through opening and operating branch locations. Some of our competitors may have greater resources to invest in technology
and may be better equipped to market new technology-driven products and services. This may result in limiting, reducing or
otherwise adversely affecting our growth strategy in this area and our access to deposits through mobile banking. In addition, to
the extent we fail to keep pace with technological changes, or incur respectively large expenses to implement technological
changes, our business, financial condition and results of operations may be adversely affected.
We may suffer losses due to minority investments in other financial institutions or related companies.
From time to time, we may make or consider making minority investments in other financial institutions or technology
companies in the financial services business. If we do so, we may not be able to influence the activities of companies in which
we invest, and may suffer losses due to these activities. Investments in foreign companies could pose additional risks as a result
of distance, language barriers and potential lack of information (for example, foreign institutions, including foreign financial
institutions, may not be obligated to provide as much information regarding their operations as those in the United States). Our
investment in Religare Enterprises Limited (or Religare), which is a diversified financial services company in India, represents
such an investment. There is no assurance of Religare’s ability to operate at a level of profitability sufficient to support our
investment. These and other factors may result in lower-than-expected returns, or a loss, on our investment in Religare. We do
not expect to receive any dividends on our investment in Religare securities. In addition, our investment in Religare may not
have the market liquidity needed to realize a gain or avoid losses on our investment and any dispositions of our Religare
common stock may be limited or delayed by market conditions or the need for regulatory or other approvals in India, and the
value of our investment will be subject to fluctuations in the currency exchange rates between the Indian rupee and the United
States dollar. On December 31, 2013, we announced that our investment in Religare would be capped at $23.0 million (4.1
million common shares). We had the ability to purchase warrants to acquire up to an additional $28.0 million of Religare stock
but decided not to acquire the warrants or otherwise increase our holdings of Religare stock. Our current holdings represent
approximately 2.3% of current outstanding Religare shares.
We will be required to hold capital for United States bank regulatory purposes to support our investment in Religare
securities.
Under the newly adopted U.S. capital adequacy rules, which became effective as of January 1, 2015, we have to hold risk based
capital based on the amount of Religare common stock we own. Based upon the implementation of the final U.S. capital
adequacy rules, these investments are potentially subject to risk weighting of 300% of the amount of the investment; however,
to the extent future aggregated carrying value of certain equity exposures exceed 10% of the Bancorp's then total capital, risk
weightings of 300% may apply. Any capital that is required to be used to support our Religare investment will not be available
to support our United States operations or Customers Bank, if needed.
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Risks Relating to the Regulation of Our Industry
The implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 may have a material
adverse effect on our business.
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(which we refer to as the “Dodd-Frank Act”), which imposes significant regulatory and compliance changes. The key effects of
the Dodd-Frank Act on our business are:
•
•
•
•
•
•
•
•
changes to regulatory capital requirements;
exclusion of hybrid securities, including trust preferred securities, issued on or after May 19, 2010 from tier 1
capital;
creation of new government regulatory agencies (such as the Financial Stability Oversight Council, which will
oversee systemic risk, and the Consumer Financial Protection Bureau, which will develop and enforce rules for
bank and non-bank providers of consumer financial products);
potential limitations on federal preemption;
changes to deposit insurance assessments;
regulation of debit interchange fees we earn;
changes in retail banking regulations, including potential limitations on certain fees we may charge; and
changes in regulation of consumer mortgage loan origination and risk retention.
In addition, the Dodd-Frank Act restricts the ability of banks to engage in certain proprietary trading or to sponsor or invest in
private equity or hedge funds. The Dodd-Frank Act also contains provisions designed to limit the ability of insured depository
institutions, their holding companies and their affiliates to conduct certain swaps and derivatives activities and to take certain
principal positions in financial instruments.
Some provisions of the Dodd-Frank Act became effective immediately upon its enactment. Many provisions, however, still
require regulations to be promulgated by various federal agencies in order to be implemented, some of which have been
proposed by the applicable federal agencies. The provisions of the Dodd-Frank Act may have unintended effects, which will
not be clear until implementation. The changes resulting from the Dodd-Frank Act could limit our business activities, require
changes to certain of our business practices, impose upon us more stringent capital, liquidity and leverage requirements or
otherwise materially and adversely affect us. These changes may also require us to invest significant management attention and
resources to evaluate and make any changes necessary to comply with new statutory and regulatory requirements. Failure to
comply with the new requirements could also materially and adversely affect us. Any changes in the laws or regulations or their
interpretations could be materially adverse to investors in our Voting Common Stock. For a more detailed description of the
Dodd-Frank Act, see “Supervision and Regulation – Changes in Laws, Regulations or Policies and the Dodd-Frank Act.”
New regulations could adversely impact our earnings due to, among other things, increased compliance costs or costs due to
noncompliance.
The Consumer Financial Protection Bureau issued a rule, effective as of January 14, 2014, designed to clarify for lenders how
they can avoid monetary damages under the Dodd-Frank Act, which would hold lenders accountable for ensuring a borrower’s
ability to repay a mortgage. Loans that satisfy this “qualified mortgage” safe-harbor will be presumed to have complied with
the new ability-to-repay standard. Under the Consumer Financial Protection Bureau’s rule, a “qualified mortgage” loan must
not contain certain specified features, including but not limited to: (i) excessive upfront points and fees (those exceeding 3% of
the total loan amount, less “bona fide discount points” for prime loans); (ii) interest-only payments; (iii) negative-amortization;
and (iv) terms longer than 30 years. Also, to qualify as a “qualified mortgage,” a borrower’s total monthly debt service-to-
income ratio may not exceed 43%. Lenders must also verify and document the income and financial resources relied upon to
qualify the borrower for the loan and underwrite the loan based on a fully amortizing payment schedule and maximum interest
rate during the first five years, taking into account all applicable taxes, insurance and assessments. The Consumer Financial
Protection Bureau’s rule on qualified mortgages could limit our ability or desire to make certain types of loans or loans to
certain borrowers, or could make it more expensive and/or time consuming to make these loans, which could adversely impact
our growth or profitability.
Additionally, on December 10, 2013, five financial regulatory agencies, including our primary federal regulator, the Federal
Reserve, adopted final rules (the “Final Rules”) implementing the so-called Volcker Rule embodied in Section 13 of the Bank
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Holding Company Act, which was added by Section 619 of the Dodd-Frank Act. The Final Rules prohibit banking entities
from, among other things, (1) engaging in short-term proprietary trading for their own accounts, and (2) having certain
ownership interests in and relationships with hedge funds or private equity funds (“covered funds”). The Final Rules are
intended to provide greater clarity with respect to both the extent of those primary prohibitions and of the related exemptions
and exclusions. The Final Rules also require each regulated entity to establish an internal compliance program that is consistent
with the extent to which it engages in activities covered by the Volcker Rule, which must include (for the largest entities)
making regular reports about those activities to regulators. Community banks, such as Customers, have been afforded some
relief under the Final Rules. If such banks are engaged only in exempted proprietary trading, such as trading in U.S.
government, agency, state and municipal obligations, they are exempt entirely from compliance program requirements.
Moreover, even if a community bank engages in proprietary trading or covered fund activities under the rule, they need only
incorporate references to the Volcker Rule into their existing policies and procedures. The Final Rules were effective April 1,
2014, but the conformance period has been extended from its statutory end date of July 21, 2014 until July 21, 2016, and the
Federal Reserve has announced its intention to further extend the conformance period until July 21, 2017. Management is
currently evaluating the Final Rules, which are lengthy and detailed.
We operate in a highly regulated environment and the laws and regulations that govern our operations, corporate
governance, executive compensation and accounting principles, or changes in them, or our failure to comply with them,
could materially and adversely affect us.
We are subject to extensive regulation, supervision, and legislation that govern almost all aspects of our operations. Intended to
protect customers, depositors and the FDIC’s Deposit Insurance Fund (the “DIF”) and not our shareholders, these laws and
regulations, among other matters, prescribe minimum capital requirements, impose limitations on our business activities, limit
the dividends or distributions that we can pay, restrict the ability of our subsidiary bank to engage in transactions with the the
Bancorp, and impose certain specific accounting requirements on us that may be more restrictive and may result in greater or
earlier charges to earnings or reductions in our capital than GAAP. Compliance with laws and regulations can be difficult and
costly, and changes to laws and regulations often impose additional compliance costs, and may make certain products
impermissible or uneconomic. Our failure to comply with these laws and regulations, even if the failure follows good faith
effort or reflects a difference in interpretation, could subject us to restrictions on our business activities, reputational harm, fines
and other penalties, any of which could materially and adversely affect us. Further, any new laws, rules and regulations could
make compliance more difficult or expensive and also materially and adversely affect us.
Our use of third party vendors and our other ongoing third party business relationships are subject to increasing regulatory
requirements and attention.
We regularly use third party vendors as part of our business and have other ongoing business relationships with other third
parties. These types of third party relationships are subject to increasingly demanding regulatory requirements and attention by
federal banking regulators. Regulation requires us to perform enhanced due diligence, perform ongoing monitoring and control
our third party vendors and other ongoing third party business relationships. In certain cases we may be required to renegotiate
our agreements with these vendors to meet these enhanced requirements, which could increase our costs. We expect that our
regulators will hold us responsible for deficiencies in our oversight and control of our third party relationships and in the
performance of the parties with which we have these relationships. As a result, if our regulators conclude that we have not
exercised adequate oversight and control over our third party vendors or other ongoing third party business relationships or that
such third parties have not performed appropriately, we could be subject to enforcement actions, including civil money
penalties or other administrative or judicial penalties or fines as well as requirements for customer remediation, any of which
could have a material adverse effect our business, financial condition or results of operations.
We are subject to numerous laws and governmental regulations and to regular examinations by our regulators of our
business and compliance with laws and regulations, and our failure to comply with such laws and regulations or to
adequately address any matters identified during our examinations could materially and adversely affect us.
Federal banking agencies regularly conduct comprehensive examinations of our business, including our compliance with
applicable laws, regulations and policies applicable to the Bancorp and the Bank. Examination reports and ratings (which often
are not publicly available) and other aspects of this supervisory framework can materially impact the conduct, organic and
acquisition growth, and profitability of our business. Our regulators have extensive discretion in their supervisory and
enforcement activities and may impose a variety of remedial actions, conditions or limitations on our business operations if, as
a result of an examination, they determined that our financial condition, capital resources, asset quality, earnings prospects,
management, liquidity or other aspects of any of our operations had become unsatisfactory, or that the Bancorp or its
management was in violation of any law, regulation or policy. Examples of those actions, conditions or limitations include
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enjoining “unsafe or unsound” practices, requiring affirmative actions to correct any conditions resulting from any asserted
violation of law, issuing administrative orders that can be judicially enforced, directing increases in our capital, assessing civil
monetary penalties against our officers or directors, removing officers and directors and, if a conclusion was reached that the
offending conditions cannot be corrected or there is an imminent risk of loss to depositors, terminating our deposit insurance.
Other actions, formal or informal, that may be imposed could restrict our growth, including regulatory denials to expand
branches, relocate, add subsidiaries and affiliates, expand into new financial activities or merge with or purchase other financial
institutions. The timing of these examinations, including the timing of the resolution of any issues identified by our regulators
in the examinations and the final determination by them with respect to the imposition of any remedial actions, conditions or
limitations on our business operations, is generally not within our control. We also could suffer reputational harm in the event
of any perceived or actual noncompliance with certain laws and regulations. If we become subject to such regulatory actions,
we could be materially and adversely affected.
Other litigation and regulatory actions, including possible enforcement actions, could subject us to significant fines,
penalties, judgments or other requirements resulting in increased expenses or restrictions on our business activities.
Our business is subject to increased litigation and regulatory risks as a result of a number of factors, including the highly
regulated nature of the financial services industry and the focus of state and federal prosecutors on banks and the financial
services industry generally. This focus has only intensified since the recent financial crisis, with regulators and prosecutors
focusing on a variety of financial institution practices and requirements. We may, from time to time, be the subject of
subpoenas, requests for information, reviews, investigations and proceedings (both formal and informal) by governmental
agencies regarding our business. Legal or regulatory actions may subject us to substantial compensatory or punitive damages,
significant fines, penalties, obligations to change our business practices or other requirements resulting in increased expenses,
diminished income and damage to our reputation. Our involvement in any such matters, even if the matters are ultimately
determined in our favor, could also cause significant harm to our reputation and divert management attention from the
operation of our business. Further, any settlement, consent order or adverse judgment in connection with any formal or informal
proceeding or investigation by government agencies may result in litigation, investigations or proceedings as other litigants and
government agencies begin independent reviews of the same activities. As a result, the outcome of legal and regulatory actions
could be material to our business, results of operations, financial condition and cash flows depending on, among other factors,
the level of our earnings for that period, and could have a material adverse effect on our business, financial condition or results
of operations.
The FDIC’s restoration plan and the related increased assessment rate could materially and adversely affect us.
The FDIC insures deposits at FDIC-insured depository institutions up to applicable limits. The amount of a particular
institution’s deposit insurance assessment is based on that institution’s risk classification under an FDIC risk-based assessment
system. An institution’s risk classification is assigned based on its capital levels and the level of supervisory concern the
institution poses to its regulators. Market developments have significantly depleted the DIF of the FDIC and reduced the ratio
of reserves to insured deposits. As a result of recent economic conditions and the enactment of the Dodd-Frank Act, the FDIC
has increased the deposit insurance assessment rates and thus raised deposit insurance premiums for insured depository
institutions. If these increases are insufficient for the DIF to meet its funding requirements, there may need to be further special
assessments or increases in deposit insurance premiums. We are generally unable to control the amount of premiums that we
are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay
even higher FDIC premiums than the recently increased levels. Any future additional assessments, increases or required
prepayments in FDIC insurance premiums may materially and adversely affect us, including by reducing our profitability or
limiting our ability to pursue certain business opportunities.
The Federal Reserve may require us to commit capital resources to support our subsidiary banks.
As a matter of policy, the Federal Reserve, which examines us and our subsidiaries, expects a bank holding company to act as a
source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank.
Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections
into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for
failure to commit resources to such a subsidiary bank. In addition, the Dodd-Frank Act directs the federal bank regulators to
require that all companies that directly or indirectly control an insured depository institution serve as a source of strength for
the institution. Under this requirement, we could be required to provide financial assistance to Customers Bank or any other
subsidiary banks we may own in the future should they experience financial distress.
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A capital injection may be required at times when we do not have the resources to provide it and therefore we may be required
to borrow the funds or raise additional equity capital from third parties. Any loans by a holding company to its subsidiary bank
are subordinate in right of payment to deposits and to certain other indebtedness of the subsidiary bank. In the event of a bank
holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank
regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any
such commitment will be entitled to a priority of payment over the claims of the holding company’s general unsecured
creditors, including the holders of its indebtedness. Any financing that must be done by the holding company in order to make
the required capital injection may be difficult and expensive and may not be available on attractive terms, or at all, which likely
would have a material adverse effect on us.
The short-term and long-term impact of the new regulatory capital standards and the forthcoming new capital rules on U.S.
banks is uncertain.
On September 12, 2010, the Basel Committee on Banking Supervision, announced an agreement to a strengthened set of capital
requirements for internationally active banking organizations in the United States and around the world, known as Basel III.
Basel III narrows the definition of capital, introduces requirements for minimum Tier 1 common capital, increases requirements
for minimum Tier 1 capital and total risk-based capital, and changes risk-weighting methodologies. Basel III is scheduled to be
phased in over time until fully phased in by January 1, 2019.
On July 2, 2013, the Federal Reserve adopted a final rule regarding new capital requirements pursuant to Basel III. These rules,
which became effective on January 1, 2015 for community banks, increase the required amount of regulatory capital that we
must hold and failure to comply with the capital rules will lead to limitations on the dividend payments to us by Customers
Bank and other elective distributions.
Various provisions of the Dodd-Frank Act increase the capital requirements of bank holding companies, such as Customers
Bancorp, and non-bank financial companies that are supervised by the Federal Reserve. The leverage and risk-based capital
ratios of these entities may not be lower than the leverage and risk-based capital ratios for insured depository institutions. The
Basel III changes and other regulatory capital requirements will likely result in generally higher regulatory capital standards for
the Bank and the Bancorp.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering
statutes and regulations.
The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept
and Obstruct Terrorism Act of 2001 (the “PATRIOT Act”) and other laws and regulations require financial institutions, among
other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency
transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the U.S. Treasury
Department to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of
those requirements, and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators,
as well as the U.S. Department of Justice, Drug Enforcement Administration, and Internal Revenue Service. There is also
increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control (the “OFAC”). If our policies,
procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that we have
already acquired or may acquire in the future are deficient, we would be subject to liability, including fines and regulatory
actions (such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with
certain aspects of our business plan, including our acquisition plans), which could materially and adversely affect us. Failure to
maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious
reputational consequences for us.
Federal, state and local consumer lending laws may restrict our ability to originate certain mortgage loans or increase our
risk of liability with respect to such loans and could increase our cost of doing business.
Federal, state and local laws have been adopted that are intended to eliminate certain lending practices considered “predatory.”
These laws prohibit practices such as steering borrowers away from more affordable products, selling unnecessary insurance to
borrowers, repeatedly refinancing loans and making loans without a reasonable expectation that the borrowers will be able to
repay the loans irrespective of the value of the underlying property. It is our policy not to make predatory loans, but these laws
create the potential for liability with respect to our lending and loan investment activities. They increase our cost of doing
business and, ultimately, may prevent us from making certain loans and cause us to reduce the average percentage rate or the
points and fees on loans that we do make.
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Loans that we make through certain federal programs are dependent on the federal government’s continuation and support
of these programs and on our compliance with their requirements.
We participate in various U.S. government agency guarantee programs, including programs operated by the Small Business
Administration. We are responsible for following all applicable U.S. government agency regulations, guidelines and policies
whenever we originate loans as part of these guarantee programs. If we fail to follow any applicable regulations, guidelines or
policies associated with a particular guarantee program, any loans we originate as part of that program may lose the associated
guarantee, exposing us to credit risk we would not otherwise be exposed to or underwritten as part of our origination process
for U.S. government agency guaranteed loans, or result in our inability to continue originating loans under such programs. The
loss of any guarantees for loans we have extended under U.S. government agency guarantee programs or the loss of our ability
to participate in such programs could have a material adverse effect on our business, financial condition or results of
operations.
Reviews performed by the Internal Revenue Service and State Taxing Authorities for the fiscal years that remain open for
investigation may result in a change to income taxes recorded in our consolidated financial statements and adversely affect
our results of operations.
The Bancorp and its subsidiaries are subject to U.S. federal income tax as well as income tax of various states primarily in the
mid-Atlantic region of the United States. Years that remain open for potential review by (1) the Internal Revenue Service are
2012 through 2014, and (2) state taxing authorities are 2010 through 2014. The results of these reviews could result in
increased recognition of income tax expense in our consolidated financial statements as well as possible fines and penalties.
Our financial results may be adversely affected by changes in U.S. and non-U.S. tax and other laws and regulations.
The U.S. Congress and the Administration have indicated an interest in reforming the U.S. corporate income tax code. Possible
approaches include lowering the 35 percent corporate tax rate, modifying the taxation of income earned outside the U.S. and
limiting or eliminating various other deductions, tax credits and/or other tax preferences. Also, the Governor of New York has
issued a proposal to reform the New York state corporate income tax. It is not possible at this time to quantify either the one-
time impacts from the remeasurement of deferred tax assets and liabilities that might result upon tax reform enactment or the
ongoing impacts reform proposals might have on income tax expense.
The Federal Reserve and FDIC took regulatory enforcement action against one of our business partners, which has
subjected us to regulatory inquiry and potential regulatory enforcement action, which may result in liabilities adversely
affecting our business, financial conditions and/or results of operations, or in reputational harm.
Since August 2013, Customers Bank has provided deposit accounts and services to college students through a third party,
Higher One, Inc. (“Higher One”), which has relationships with colleges and universities in the United States, using Higher
One’s technological services. Because Higher One is not a bank, it must partner with one or more banks to provide deposit
accounts and services to students. Higher One and one of Higher One’s former bank partners (the “predecessor bank”),
announced in May 2014 that the Board of Governors of the Federal Reserve notified them that certain disclosures and operating
processes of these entities may have violated certain laws and regulations and may result in penalties and restitution. In May
2014, the Federal Reserve also informed Customers Bank, as one of Higher One’s bank partners, that it was recommending a
regulatory enforcement action be initiated against Customers Bank based on the same allegations.
In July 2014, the predecessor bank referenced above, which no longer is a partner with Higher One, entered into a consent
order to cease and desist with the Federal Reserve Board pursuant to which it agreed to pay a total of $3.5 million in civil
money penalties and an additional amount that it may be required to pay in restitution to students in the event Higher One is
unable to pay the restitution obligations, if any, imposed on Higher One (“back-up restitution”). Customers Bank believes that
the circumstances of its relationship with Higher One and the student customers are different than the relationship between the
predecessor bank and Higher One and the student customers.
In December 2015, Higher One entered into consent orders with both the Federal Reserve Board and the FDIC. Under the
consent order with the Federal Reserve Board, Higher One agreed to pay $2.2 million in civil money penalties, and $24 million
in restitution to students. Under the consent order with the FDIC, Higher One agreed to pay an additional $2.2 million in civil
money penalties, and $31 million in restitution to students. In addition, a third partner bank, which is regulated by the FDIC,
also entered into a consent order to cease and desist with the FDIC pursuant to which it agreed to pay $1.8 million in civil
money penalties and an additional amount in restitution to students in the event Higher One is unable to meet its restitution
obligation.
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Customers Bank believes that it identified key critical alleged compliance deficiencies within 30 days of first accepting
deposits through its relationship with Higher One, and caused such deficiencies to be remediated within approximately 120
days. In addition, Customers Bank understands that the total amount of fees that Higher One collected from students who
opened accounts at Customers Bank during the relevant time period is substantially less than the total fees that Higher One
collected from students who opened deposit accounts at the other partner banks during the relevant time period. In addition, as
Higher One has agreed to pay the restitution, and has deposited such monies to pay the required restitution, Customers does not
expect that backup restitution will be required.
Nonetheless, the Federal Reserve or other regulatory agencies that supervise us may determine that Customers Bank has
responsibility for the violations of certain laws and regulations in connection with its relationship with Higher One and the
student customers and may take regulatory action against Customers Bank that could include, among other things, entry into a
consent order to cease and desist and civil money penalties. If any of the regulatory actions described herein were to occur, or if
any other regulatory actions were to be taken against us, alone or in combination, such regulatory actions could have an adverse
effect on our business or financial condition. We are currently in discussions with the Federal Reserve regarding these matters
and at this time cannot predict the outcome of those discussions, including the amount of any civil money penalties or
restitution that we might be required to pay. However, based on these discussions and information currently available to us
regarding Higher One and the predecessor banks, we currently do not believe that any penalties or customer restitution for
which we may ultimately be responsible would have a material adverse effect on our business or financial condition.
We will be subject to heightened regulatory requirements if we exceed $10 billion in assets.
Based on our current total assets and growth strategy, we do not anticipate our bank’s total assets to exceed $10 billion in the
near future, however, our bank’s total assets ultimately could exceed that level. The Dodd-Frank Act and its implementing
regulations impose various additional requirements on bank holding companies with $10 billion or more in total assets,
including compliance with portions of the Federal Reserve’s enhanced prudential oversight requirements and annual stress
testing requirements. In addition, banks with $10 billion or more in total assets are primarily examined by the Consumer
Financial Protection Bureau (“CFPB”) with respect to various federal consumer financial protection laws and regulations.
Currently, our bank is subject to regulations adopted by the CFPB, but the Federal Reserve is primarily responsible for
examining our bank’s compliance with consumer protection laws and those CFPB regulations. As a relatively new agency with
evolving regulations and practices, there is uncertainty as to how the CFPB’s examination and regulatory authority might
impact our business.
Compliance with these requirements may necessitate that we hire additional compliance or other personnel, design and
implement additional internal controls, or incur other significant expenses, any of which could have a material adverse effect on
our business, financial condition or results of operations. Compliance with the annual stress testing requirements, part of which
must be publicly disclosed, may also be misinterpreted by the market generally or our customers and, as a result, may adversely
affect our stock price or our ability to retain our customers or effectively compete for new business opportunities. To ensure
compliance with these heightened requirements when effective, our regulators may require us to fully comply with these
requirements or take actions to prepare for compliance even before our or our bank’s total assets equal or exceed $10 billion.
As a result, we may incur compliance-related costs before we might otherwise be required, including if we do not continue to
grow at the rate we expect or at all. Our regulators may also consider our preparation for compliance with these regulatory
requirements when examining our operations generally or considering any request for regulatory approval we may make, even
requests for approvals on unrelated matters.
Risks Relating to Our Securities
Risks Relating to Our Voting Common Stock
The trading volume in our common stock is less than that of other larger financial services companies.
Although the shares of our common stock are listed on the New York Stock Exchange, the trading volume in our common stock
is less than that of other larger financial services companies. A public trading market having the desired characteristics of depth,
liquidity and orderliness depends upon the presence in the marketplace of willing buyers and sellers of our Voting Common
Stock at any given time, which presence will be dependent upon the individual decisions of investors, over which we have no
control. Illiquidity of the stock market, or in the trading of our common stock on the New York Stock Exchange, could have a
material adverse effect on the value of your shares, particularly if significant sales of our Voting Common Stock, or the
expectation of significant sales, were to occur.
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We do not expect to pay cash dividends on our Voting Common Stock in the foreseeable future, and our ability to pay
dividends is subject to regulatory limitations.
We have not historically declared nor paid cash dividends on our Voting Common Stock and we do not expect to do so in the
near future. Any future determination relating to dividend policy will be made at the discretion of our board of directors and
will depend on a number of factors, including earnings and financial condition, liquidity and capital requirements, the general
economic and regulatory climate, ability to service any equity or debt obligations senior to the Voting Common Stock, and
other factors deemed relevant by the board of directors. We must be current in the payment of dividends payable to holders of
our Series C and Series D Preferred Stock before any dividends can be paid on our common stock.
In addition, as a bank holding company, we are subject to general regulatory restrictions on the payment of cash dividends.
Federal bank regulatory agencies have the authority to prohibit bank holding companies from engaging in unsafe or unsound
practices in conducting their business, which depending on the financial condition and liquidity of the holding company at the
time, could include the payment of dividends. Further, various federal and state statutory provisions limit the amount of
dividends that our bank subsidiaries can pay to us as its holding company without regulatory approval. See “Market Price of
Common Stock and Dividends – Dividends on Voting Common Stock” below for further detail regarding restrictions on our
ability to pay dividends.
We may issue additional shares of our common stock in the future which could adversely affect the value or voting power of
the Voting Common Stock.
Actual or anticipated issuances or sales of substantial amounts of our common stock in the future could cause the value of our
Voting Common Stock to decline significantly and make it more difficult for us to sell equity or equity-related securities in the
future at a time and on terms that we deem appropriate. The issuance of any shares of our common stock in the future also
would, and equity-related securities could, dilute the percentage ownership interest held by shareholders prior to such issuance.
Actual issuances of our Voting Common Stock could also significantly dilute the voting power of the Voting Common Stock. In
2013, we issued 6,791,514 shares of Voting Common Stock in a public offering, as adjusted for a 2014 10% stock dividend.
We have also made grants of restricted stock units and stock options with respect to shares of Voting Common Stock and Class
B Non-Voting Common Stock to our directors and certain employees. We may also issue further equity-based awards in the
future. As such shares are issued upon vesting and as such options may be exercised and the underlying shares are or become
freely tradeable, the value or voting power of our Voting Common Stock may be adversely affected and our ability to sell more
equity or equity-related securities could also be adversely affected.
Except for 627,673 warrants held by certain investors at December 31, 2015, we are not required to issue any additional equity
securities to existing holders of our Voting Common Stock on a preemptive basis. Therefore, additional common stock
issuances, directly or through convertible or exchangeable securities, warrants or options, will generally dilute the holdings of
our existing holders of Voting Common Stock and such issuances or the perception of such issuances may reduce the market
price of our Voting Common Stock. Our outstanding preferred stock has preference on distribution payments, periodically or
upon liquidation, which could eliminate or otherwise limit our ability to make distributions to holders of our Voting Common
Stock. Because our decision to issue debt or equity securities or incur other borrowings in the future will depend on market
conditions and other factors beyond our control, the amount, timing, nature or success of our future capital raising efforts is
uncertain. Thus, holders of our Voting Common Stock bear the risk that our future issuances of debt or equity securities or our
incurrence of other borrowings will negatively affect the value of our Voting Common Stock.
Future issuances of debt securities, which would rank senior to our Voting Common Stock upon our liquidation, and future
issuances of equity securities, which would dilute the holdings of our existing holders of Voting Common Stock and may be
senior to our Voting Common Stock for the purposes of making distributions, periodically or upon liquidation, may
negatively affect the market price of our Voting Common Stock.
In the future, we may issue debt or equity securities or incur other borrowings. Upon our liquidation, holders of our debt
securities and other loans and preferred stock will receive a distribution of our available assets before holders of our Voting
Common Stock. If we incur debt in the future, our future interest costs could increase, and adversely affect our liquidity, cash
flows and results of operations.
Provisions in our articles of incorporation and bylaws may inhibit a takeover of us, which could discourage transactions
that would otherwise be in the best interests of our shareholders and could entrench management.
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Provisions of our articles of incorporation and bylaws, and applicable provisions of Pennsylvania law and the federal Change in
Bank Control Act may delay, inhibit or prevent someone from gaining control of our business through a tender offer, business
combination, proxy contest or some other method even though some of our shareholders might believe a change in control is
desirable. They might also increase the costs of completing a transaction in which we acquire another financial services
business, merge with another financial institution, or sell our business to another financial institution. These increased costs
could reduce the value of the shares held by our shareholders upon completion of these types of transactions.
Shareholders may be deemed to be acting in concert or otherwise in control of us and our bank subsidiaries, which could
impose prior approval requirements and result in adverse regulatory consequences for such holders.
We are a bank holding company regulated by the Federal Reserve. Any entity (including a “group” composed of natural
persons) owning 25% or more of a class of our outstanding shares of voting stock, or a lesser percentage if such holder or
group otherwise exercises a “controlling influence” over us, may be subject to regulation as a “bank holding company” in
accordance with the Bank Holding Company Act of 1956, as amended (the “BHCA”). In addition, (1) any bank holding
company or foreign bank with a U.S. presence is required to obtain the approval of the Federal Reserve under the BHCA to
acquire or retain 5% or more of a class of our outstanding shares of voting stock, and (2) any person other than a bank holding
company may be required to obtain prior regulatory approval under the Change in Bank Control Act to acquire or retain 10% or
more of our outstanding shares of voting stock. Any shareholder that is deemed to “control” the Company for bank regulatory
purposes would become subject to prior approval requirements and ongoing regulation and supervision. Such a holder may be
required to divest amounts equal to or exceeding 5% of the voting shares of investments that may be deemed incompatible with
bank holding company status, such as an investment in a company engaged in non-financial activities. Regulatory
determination of “control” of a depository institution or holding company is based on all of the relevant facts and
circumstances. Potential investors are advised to consult with their legal counsel regarding the applicable regulations and
requirements.
Our common stock owned by holders determined by a bank regulatory agency to be acting in concert would be aggregated for
purposes of determining whether those holders have control of a bank or bank holding company. Each shareholder obtaining
control that is a “company” would be required to register as a bank holding company. “Acting in concert” generally means
knowing participation in a joint activity or parallel action towards the common goal of acquiring control of a bank or a parent
company, whether or not pursuant to an express agreement. The manner in which this definition is applied in individual
circumstances can vary and cannot always be predicted with certainty. Many factors can lead to a finding of acting in concert,
including where: (i) the shareholders are commonly controlled or managed; (ii) the shareholders are parties to an oral or written
agreement or understanding regarding the acquisition, voting or transfer of control of voting securities of a bank or bank
holding company; (iii) the shareholders each own stock in a bank and are also management officials, controlling shareholders,
partners or trustees of another company; or (iv) both a shareholder and a controlling shareholder, partner, trustee or
management official of such shareholder own equity in the bank or bank holding company.
The FDIC’s policy statement imposing restrictions and criteria on private investors in failed bank acquisitions will apply to
us and our investors.
On August 26, 2009, the FDIC issued a policy statement imposing restrictions and criteria on private investors in failed bank
acquisitions. The policy statement is broad in scope and both complex and potentially ambiguous in its application. In most
cases it would apply to an investor with more than 5% of the total voting power of an acquired depository institution or its
holding company, but in certain circumstances it could apply to investors holding fewer voting shares. The policy statement
will be applied to us if we make additional failed bank acquisitions from the FDIC or if the FDIC changes its interpretation of
the policy statement or determines at some future date that it should be applied because of our circumstances.
Investors subject to the policy statement could be prohibited from selling or transferring their interests for three years. They
also would be required to provide the FDIC with information about the investor and all entities in the investor’s ownership
chain, including information on the size of the capital fund or funds, its diversification, its return profile, its marketing
documents, and its management team and business model. Investors owning 80% or more of two or more banks or savings
associations would be required to pledge their proportionate interests in each institution to cross-guarantee the FDIC against
losses to the Deposit Insurance Fund.
Under the policy statement, the FDIC also could prohibit investment through ownership structures involving multiple
investment vehicles that are owned or controlled by the same parent company. Investors that directly or indirectly hold 10% or
more of the equity of a bank or savings association in receivership also would not be eligible to bid to become investors in the
deposit liabilities of that failed institution. In addition, an investor using ownership structures with entities that are domiciled in
bank secrecy jurisdictions would not be eligible to own a direct or indirect interest in an insured depository institution unless
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the investor’s parent company is subject to comprehensive consolidated supervision as recognized by the Federal Reserve and
the investor enters into certain agreements with the U.S. bank regulators regarding access to information, maintenance of
records and compliance with U.S. banking laws and regulations. If the policy statement applies, we (including any failed bank
we acquire) could be required to maintain a ratio of Tier 1 common equity to total assets of at least 10% for a period of 3 years,
and thereafter maintain a capital level sufficient to be well capitalized under regulatory standards during the remaining period
of ownership of the investors. Bank subsidiaries also may be prohibited from extending any new credit to investors that own at
least 10% of our equity.
Risks Relating to Our Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C and Our Fixed-to-Floating
Rate Non-Cumulative Perpetual Preferred Stock, Series D
The shares of Series C Preferred Stock and Series D Preferred Stock are equity securities and are subordinate to our
existing and future indebtedness.
The shares of Series C and Series D Preferred Stock are equity interests in Customers Bancorp and do not constitute
indebtedness of Customers Bancorp or any of our subsidiaries, and rank junior to all of Customer Bancorp’s and our
subsidiaries’ existing and future indebtedness and other non-equity claims with respect to assets available to satisfy claims
against us, including claims in the event of Customer Bancorp’s liquidation. If we are forced to liquidate our assets to pay our
creditors, we may not have sufficient funds to pay amounts due on any or all of the Series C and Series D Preferred Stock then
outstanding.
We may not pay dividends on the shares of Series C Preferred Stock and Series D Preferred Stock.
Dividends on the shares of Series C and Series D Preferred Stock are payable only if declared by our board of directors or a
duly authorized committee of the board. As a bank holding company, we are subject to general regulatory restrictions on the
payment of cash dividends. Federal bank regulatory agencies have the authority to prohibit bank holding companies from
engaging in unsafe or unsound practices in conducting their business, which depending on the financial condition and liquidity
of the holding company at the time, could include the payment of dividends. Further, various federal and state statutory
provisions limit the amount of dividends that our bank subsidiaries can pay to us as its holding company without regulatory
approval.
Dividends on the shares of Series C Preferred Stock and Series D Preferred Stock are non-cumulative.
Dividends on the shares of Series C and Series D Preferred Stock are payable only when, as and if authorized and declared by
our board of directors or a duly authorized committee of the board. Consequently, if our board of directors or a duly authorized
committee of the board does not authorize and declare a dividend for any dividend period, holders of the Series C and Series D
Preferred Stock will not be entitled to receive any such dividend, and such unpaid dividend will cease to accrue or be payable.
If we do not declare and pay dividends on the Series C and Series D Preferred Stock, the market prices of the shares of Series C
and Series D Preferred Stock may decline.
Our ability to pay dividends on the shares of Series C Preferred Stock and Series D Preferred is dependent on dividends and
distributions we receive from our subsidiaries, which are subject to regulatory and other limitations.
Our principal source of cash flow is dividends from Customers Bank. We cannot assure you that Customers Bank will, in any
circumstances, pay dividends to us. If Customers Bank fails to make dividend payments or other permitted distributions to us,
and sufficient cash is not otherwise available, we may not be able to make dividend payments on the Series C and Series D
Preferred Stock. Various federal and state statutes, regulations and rules limit, directly or indirectly, the amount of dividends
that our banking and other subsidiaries may pay to us without regulatory approval. In particular, dividend and other
distributions from Customers Bank to us would require notice to or approval of the applicable regulatory authority. There can
be no assurances that we would receive such approval.
In addition, our right to participate in any distribution of assets of any of our subsidiaries upon the subsidiary’s liquidation or
otherwise, and, as a result, the ability of a holder of Series C or Series D Preferred Stock to benefit indirectly from such
distribution, will be subject to the prior claims of preferred equity holders and creditors of that subsidiary, except to the extent
that any of our claims as a creditor of such subsidiary may be recognized. As a result, shares of the Series C and Series D
Preferred Stock are effectively subordinated to all existing and future liabilities and any preferred equity of our subsidiaries.
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Holders of Series C Preferred Stock and Series D Preferred Stock should not expect us to redeem their shares when they
first becomes redeemable at our option or on any particular date thereafter, and our ability to redeem the shares will be
subject to the prior approval of the Federal Reserve.
Our Series C and Series D Preferred Stock are perpetual equity securities, meaning that the Series C and Series D Preferred
Stock have no maturity date or mandatory redemption date and the shares are not redeemable at the option of the holders
thereof. Any determination we make at any time to propose a redemption of the Series C or Series D Preferred Stock will
depend upon a number of factors, including our evaluation of our capital position, the composition of our shareholders’ equity
and general market conditions at that time. In addition, our right to redeem the Series C and Series D Preferred Stock is subject
to any limitations established by the Federal Reserve. Under the Federal Reserve’s risk-based capital guidelines applicable to
bank holding companies, any redemption of the Series C or Series D Preferred Stock is subject to prior approval of the Federal
Reserve. There can be no assurance that the Federal Reserve will approve any such redemption.
We may be able to redeem the Series C Preferred Stock and Series D Preferred Stock before their initial redemption dates
upon a “regulatory capital treatment event.”
We may be able to redeem the Series C and Series D Preferred Stock before their respective initial redemption dates, in whole
but not in part, upon the occurrence of certain events involving the capital treatment of the Series C and Series D Preferred
Stock, as applicable. In particular, upon our determination in good faith that an event has occurred that would constitute a
“regulatory capital treatment event,” with respect to a particular series of the preferred stock, we may redeem that particular
series of securities in whole but not in part upon the prior approval of the Federal Reserve.
Holders of Series C Preferred stock and Series D Preferred Stock have limited voting rights.
Holders of Series C and Series D Preferred Stock have no voting rights with respect to matters that generally require the
approval of voting shareholders. However, holders of Series C and Series D Preferred Stock will have the right to vote in the
event of non-payments of dividends under certain circumstances, with respect to authorizing classes or series of preferred stock
senior to the Series C or Series D Preferred Stock, as applicable, and with respect to certain fundamental changes in the terms
of the Series C or Series D Preferred Stock, as applicable, or as otherwise required by law.
General market conditions and unpredictable factors could adversely affect market prices for the Series C Preferred Stock
and Series D Preferred Stock.
There can be no assurance regarding the market prices for either the Series C or Series D Preferred Stock. A variety of factors,
many of which are beyond our control, could influence the market prices, including:
• whether we declare or fail to declare dividends on the series of preferred stock from time to time;
•
our operating performance, financial condition and prospects, or the operating performance financial
condition and prospects of our competitors;
real or anticipated changes in the credit ratings (if any) assigned to the Series C or Series D Preferred Stock
or our other securities;
our creditworthiness;
changes in interest rates and expectations regarding changes in rates;
our issuance of additional preferred equity;
the market for similar securities;
developments in the securities, credit and housing markets, and developments with respect to financial
institutions generally; and
economic, financial, corporate, securities market, geopolitical, regulatory or judicial events that affect us, the
banking industry or the financial markets generally.
•
•
•
•
•
•
•
The Series C Preferred Stock and Series D Preferred Stock may not have an active trading market.
Although the shares of Series C and Series D Preferred Stock are listed on the New York Stock Exchange, an active trading
market may not be established or maintained for the shares and transaction costs could be high. As a result, the difference
between bid and asked prices in any secondary market could be substantial.
The Series C Preferred Stock and D Preferred Stock may be junior or equal in rights and preferences to preferred stock we
may issue in the future.
40
Table of Contents
Our Series C Preferred Stock and Series D Preferred Stock rank equally. Although we do not currently have outstanding
preferred stock that ranks senior to the Series C and Series D Preferred Stock, the Series C and Series D Preferred Stock may
rank junior to other preferred stock we may issue in the future that by its terms is expressly senior in rights and preferences to
the Series C and Series D Preferred Stock, although the affirmative vote or consent of the holders of at least two-thirds of all
outstanding shares of the affected class of preferred stock is required to issue any shares of stock ranking senior in rights and
preferences to such class. Any preferred stock that ranks senior to the Series C or Series D Preferred Stock in the future would
have priority in payment of dividends and the making of distributions in the event of any liquidation, dissolution or winding up
of Customers Bancorp. Additional issuances by us of preferred stock ranking equally with Series C and Series D Preferred
Stock do not generally require the approval of holders of Series C or Series D Preferred Stock.
Risks Relating to Our Debt Securities
Our 6.375% Senior Notes and 4.625% Senior Notes contain limited covenants.
The terms of our 6.375% Senior Notes and 4.625% Senior Notes generally do not prohibit us from incurring additional debt or
other liabilities. If we incur additional debt or liabilities, our ability to pay our obligations on the 6.375% Senior Notes and
4.625% Senior Notes could be adversely affected. In addition, the terms of our 6.375% Senior Notes and 4.625% Senior Notes
do not require us to maintain any financial ratios or specific levels of net worth, revenues, income, cash flows or liquidity and,
accordingly, do not protect holders of those notes in the event that we experience material adverse changes in our financial
condition or results of operations. Holders of the 6.375% Senior Notes and 4.625% Senior Notes also have limited protection in
the event of a highly leveraged transaction, reorganization, default under our existing indebtedness, restructuring, merger or
similar transaction.
Our ability to make interest and principal payments on the 6.375% Senior Notes and 4.625% Senior Notes is dependent on
dividends and distributions we receive from our subsidiaries, which are subject to regulatory and other limitations.
Our principal source of cash flow is dividends from Customers Bank. We cannot assure you that Customers Bank will, in any
circumstances, pay dividends to us. If Customers Bank fails to make dividend payments to us, and sufficient cash is not
otherwise available, we may not be able to make interest and principal payments on the 6.375% Senior Notes and 4.625%
Senior Notes. Various federal and state statutes, regulations and rules limit, directly or indirectly, the amount of dividends that
our banking and other subsidiaries may pay to us without regulatory approval. In particular, dividend and other distributions
from Customers Bank to us would require notice to or approval of the applicable regulatory authority. There can be no
assurances that we would receive such approval.
In addition, our right to participate in any distribution of assets of any of our subsidiaries upon the subsidiary’s liquidation or
otherwise, and, as a result, the ability of a holder of 6.375% Senior Notes and 4.625% Senior Notes to benefit indirectly from
such distribution, will be subject to the prior claims of preferred equity holders and creditors of that subsidiary, except to the
extent that any of our claims as a creditor of such subsidiary may be recognized. As a result, the 6.375% Senior Notes and
4.625% Senior Notes are effectively subordinated to all existing and future liabilities and any preferred equity of our
subsidiaries.
We may not be able to generate sufficient cash to service our debt obligations, including our obligations under the 6.375%
Senior Notes and 4.625% Senior Notes.
Our ability to make payments on and to refinance our indebtedness, including the 6.375% Senior Notes and 4.625% Senior
Notes, will depend on our financial and operating performance, including dividends payable to us from Customers Bank, which
are subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our
control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the
principal, premium, if any, and interest on our indebtedness, including the notes.
If our cash flows and capital resources, and dividends from Customers Bank, are insufficient to fund our debt service
obligations, we may be unable to provide new loans, other products or to fund our obligations to existing customers and
otherwise implement our business plans. As a result, we may be unable to meet our scheduled debt service obligations. In the
absence of sufficient operating results and resources, we could face substantial liquidity problems and might be required to
dispose of material assets or operations to meet our debt service and other obligations, or seek to restructure our indebtedness,
including the notes. We may not be able to consummate these transactions, and these proceeds may not be adequate to meet our
debt service obligations then due.
41
Table of Contents
The 6.375% Senior Notes and 4.625% Senior Notes are our unsecured obligations. The 6.375% Senior Notes and 4.625%
Senior Notes will rank equal in right of payment with all of our secured and unsecured senior indebtedness and will rank senior
in right of payment to all of our subordinated indebtedness. Although the 6.375% Senior Notes and 4.625% Senior Notes are
“senior notes,” they will be effectively subordinate to all liabilities of our subsidiaries, including secured indebtedness.
The 6.375% Senior Notes and 4.625% Senior Notes may not have an active trading market.
Although the 6.375% Senior Notes are listed on the New York Stock Exchange, an active trading market may not be
established or maintained for those notes and transaction costs could be high. The 4.625% Senior Notes are not listed on any
securities exchange and there is no active trading market for these notes. In addition to the other factors described below, the
lack of a trading market for the 4.625% Senior Notes may adversely affect the holder’s ability to sell the notes and the prices at
which the notes may be sold.
The prices realizable from sales of the 6.375% Senior Notes and 4.625% Senior Notes in any secondary market also will be
affected by the supply and demand of the notes, the interest rate, the ranking and a number of other factors, including:
•
•
•
•
•
yields on U.S. Treasury obligations and expectations about future interest rates;
actual or anticipated changes in our financial condition or results, including our levels of indebtedness;
general economic conditions and expectations regarding the effects of national policies;
investors’ views of securities issued by both holding companies and similar financial service firms; and
the market for similar securities.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
The table below summarizes our leased branch and limited purpose and administrative office properties, by county and state, as
of December 31, 2015. We do not currently own any real property.
County
Berks (1)
Bucks
Chester (2)
Delaware
Westchester
Mercer
State
PA
PA
PA
PA
NY
NJ
Leased
4
3
3
2
1
1
14
Bank Branches
42
Table of Contents
County
Berks (3)
Bucks (6)
Chester (2)
Delaware (7)
Lancaster (14)
Philadelphia (8)
Fairfax (9)
Mercer (4)
Morris (14)
New York (10)
Westchester (5)
Suffolk (13)
Providence (11)
Rockingham (15)
Suffolk (12)
Limited Purpose and Administrative Offices
State
Leased
PA
PA
PA
PA
PA
PA
VA
NJ
NJ
NY
NY
NY
RI
NH
MA
3
1
2
1
1
1
1
2
1
1
2
1
1
1
1
20
(2)
(1)
Includes the full service branch at 1001 Penn Avenue, Wyomissing, PA as well as three branches acquired through the
Berkshire Bancorp, Inc. acquisition. The lease expirations range from 2017 to 2021.
Includes the corporate headquarters of Customers Bank and a full service branch located in a freestanding building at 99
Bridge St., Phoenixville, PA 19460, wherein we lease approximately 31,054 square feet on 4 floors. The lease on this
location expires in 2023. Also includes the lease of 5,523 square feet of property at 513 Kimberton Road in
Phoenixville, PA where we maintain a full service commercial bank branch and corporate offices. The lease on this
location expires in 2019.
Includes the corporate headquarters of Customers Bancorp and a full service branch located at 1015 Penn Avenue,
Wyomissing, PA. The leased space covers a total of 23,719 square feet. This lease expires in 2020. Also, includes the
leased administrative offices for the corporate lending group which is housed within the Exeter branch location,
expiring in 2021, and an administrative offices for Company personnel in Shillington, PA, expiring in 2018.
(4) We lease 7,327 square feet of space in Hamilton, NJ from which we conduct our mortgage warehouse activities. The
(3)
(5)
(6)
(7)
(8)
(9)
lease on this location expires in 2019.
Represents administrative offices for Customers personnel. The leases at these locations expire in 2019 and 2022.
Represents administrative office for Customers personnel. The lease on this location expires in 2017.
Represents administrative office for Customers personnel. The lease on this location expires in 2018.
Represents limited purpose office for Customers personnel. The lease on this location expires in 2023.
Represents limited purpose office. The space is currently sublet to a third party. The lease on this location expires in
2019.
(10) Represents limited purpose office for Customers personnel. The lease on this location expires in 2020.
(11) Represents limited purpose office for Customers personnel. The lease on this location expires in 2021.
(12) Represents limited purpose office for Customers personnel. The lease on this location expires in 2019.
(13) Represents limited purpose office for Customers personnel. The lease on this location expires in 2025.
(14) Represents administrative office for Customers personnel. The lease on this location expires in 2016.
(15) Represents limited purpose office for Customers personnel. The lease on this location expires in 2018.
The Bank branch locations, which range in size from approximately 1,800 to 3,900 square feet, have leases on these locations
which expire between 2017 and 2023.
The total minimum cash lease payments for our current branches, administrative offices and mortgage warehouse lending
locations amount to approximately $325,000 per month.
43
Table of Contents
Item 3.
Legal Proceedings
On August 7, 2013, the Bancorp received a letter from the Federal Reserve Bank of Philadelphia (“Reserve Bank”) of its
determination, in connection with its consumer compliance and Community Reinvestment Act examinations of the Bank for the
period of 2011 and 2012, to make a referral to the Department of Justice. The Reserve Bank informed us that it made the
referral based on its belief that Customers Bank has not complied with certain provisions of the Equal Credit Opportunity Act
(“ECOA”), Fair Housing Act (“FHA”) and Regulation B with regard to the City of Philadelphia. Customers Bank received
notification as of September 24, 2013 that the Department of Justice has initiated an investigation of the Bancorp under the
ECOA and FHA.
On August 22, 2014, the Department of Justice informed the Bancorp that it had completed its review and that the
circumstances of this matter did not require enforcement action by the Department of Justice at this time. The matter has been
referred back to the Federal Reserve. The Federal Reserve has advised us that it will not issue a formal enforcement action with
regard to this matter.
Item 4.
Mine Safety Disclosures
Not Applicable.
PART II
Item 5.
Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Trading Market for Voting Common Stock
Since December 30, 2014, the common stock of Customers Bancorp has been listed for quotation on the New York Stock
Exchange under the symbol “CUBI.” The common stock of Customers Bancorp was listed for quotation on the Nasdaq Global
Select Market under the symbol “CUBI” from May 16, 2013 through December 29, 2014.
Market Price of Voting Common Stock
The chart below displays the high and low closing sale prices of the common stock of the Bancorp as reported on the Nasdaq
Global Select Market and New York Stock Exchange (effective December 30, 2014) between May 16, 2013 and February 20,
2015.
2015
Fourth quarter
Third quarter
Second quarter
First quarter
2014
Fourth quarter
Third quarter
Second quarter
First quarter
High
Low
$
31.00
$
29.02
27.49
24.65
$
20.16
$
20.66
21.25
20.03
24.30
22.51
24.05
17.96
17.10
17.71
18.25
17.27
44
Table of Contents
As of February 19, 2016, there were 475 shareholders of record and 26,935,953 shares outstanding of Customers Bancorp's
Voting Common Stock.
Dividends on Voting Common Stock
Customers Bancorp historically has not paid any cash dividends on its shares of common stock. Customers Bancorp does not
expect to do so in the forseeable future.
Any future determination relating to dividend policy will be made at the discretion of Customers Bancorp’s board of directors
and will depend on a number of factors, including earnings and financial condition, liquidity and capital requirements, the
general economic and regulatory climate, ability to service any equity or debt obligations senior to the Voting Common Stock,
including obligations to pay dividends to the holders of the Bancorp's issued and outstanding shares of preferred stock, and
other factors deemed relevant by the board of directors.
In addition, as a bank holding company, Customers Bancorp is subject to general regulatory restrictions on the payment of cash
dividends. Federal bank regulatory agencies have the authority to prohibit bank holding companies from engaging in unsafe or
unsound practices in conducting their business, which depending on the financial condition and liquidity of the holding
company at the time, could include the payment of dividends. Further, various federal and state statutory provisions limit the
amount of dividends that bank subsidiaries can pay to their parent holding company without regulatory approval. Generally,
subsidiaries are prohibited from paying dividends when doing so would cause them to fall below the regulatory minimum
capital levels, and limits exist on paying dividends in excess of net income for specified periods.
Beginning January 1, 2015, the ability to pay dividends and the amounts that can be paid, will be limited to the extent the bank
capital ratios do not exceed the minimum required levels plus 250 basis points, as these requirements are phased in through
January 1, 2019. See "Item 1, Business- Federal Banking Laws" for more information relating to restrictions on the Bank's
ability to pay dividends to the Bancorp and the Bancorp's payment of dividends.
45
Table of Contents
Issuer Purchases of Equity Securities
On November 26, 2013, the Bancorp’s Board of Directors authorized a stock repurchase plan in which the Bancorp could
acquire up to 5% of its current outstanding shares at prices not to exceed a 20% premium over the then current book value. The
repurchase program has no expiration date but may be suspended, modified or discontinued at any time, and the Bancorp has
no obligation to repurchase any amount of its common stock under the program. There were no common stock repurchases
during 2015.
EQUITY COMPENSATION PLANS
The following table provides certain summary information as of December 31, 2015 concerning our compensation plans
(including individual compensation arrangements) under which shares of our common stock may be issued.
Number of Securities
to be Issued upon
Number of Securities
Remaining
Available for Future Issuance
Exercise of
Weighted-Average
Issuance Under Equity
Outstanding Options,
Exercise Price of
Compensation Plans
Warrants, and
Outstanding Options
(Excluding Securities Reflected
Rights (#)
($) (2)
in the First Column) (#)
Plan Category
Equity Compensation Plans
Approved by Security Holders (1)
4,605,025
$
14.33
2,895,784 (3)
Equity Compensation Plans Not
Approved by Security Holders
N/A
N/A
N/A
(1) Includes shares of common stock that may be issued upon the exercise of awards granted or rights accrued under the
Amended and Restated Customers Bancorp, Inc. 2004 Incentive Equity and Deferred Compensation Plan, Customers Bancorp,
Inc. 2010 Stock Option Plan, the Bonus Recognition and Retention Program ("BRRP"), and Customers Banorp, Inc. Amended
and Restated 2014 Employee Stock Purchase Plan.
(2) Does not include restricted stock units and stock awards for which, by definition, there exists no exercise price.
(3) Does not include securities available for future issuance under the BRRP as there is no specific number of shares reserved
under this plan. By its terms, the plan limits the award of restricted stock units to the amount of the cash bonuses paid to the
participants in the BRRP.
Common Stock Performance Graph
The following graph compares the performance of our common stock over the period from December 31, 2012 to
December 31, 2015, to that of the total return index for the SNL Mid-Atlantic Bank Index, SNL U.S. Bank NASDAQ Index
and SNL U.S. Bank NYSE Index, assuming an investment of $100 on December 31, 2012. The SNL U.S. Bank NYSE Index
was added to the performance graph because the Bancorp changed the listing of its Voting Common Stock to the NYSE from
NASDAQ in December 2014. In calculating total annual shareholder return, reinvestment of dividends, if any, is assumed.
Customers Bancorp obtained the information contained in the performance graph from SNL Financial.
46
Table of Contents
The graph below is furnished under this Part II, Item 5 of this Form 10-K and shall not be deemed to be “soliciting material” or
to be “filed” with the Commission or subject to Regulation 14A or 14C, or to the liabilities of Section 18 of the Exchange Act
of 1934, as amended.
Total Return Performance
47
Table of Contents
Item 6.
Selected Financial Data
Customers Bancorp, Inc. and Subsidiaries
The following table presents Customers Bancorp’s summary consolidated financial data. Customers Bancorp derived the
balance sheet and income statement data for the years ended December 31, 2015, 2014, 2013, 2012, and 2011 from its audited
financial statements. The summary consolidated financial data should be read in conjunction with, and is qualified in their
entirety by, Customers Bancorp’s financial statements and the accompanying notes and the other information included
elsewhere in this Annual Report on Form 10-K. Certain amounts reported in this table have been reclassified to conform to the
2015 presentation. These reclassifications did not significantly impact Customers' financial position or results of operations.
2015
2014
2013
2012
2011 (1)
(dollars in thousands, except per share information)
For the Year ended December 31,
Interest income
Interest expense
Net interest income
Provision for loan losses
Total non-interest income
Total non-interest expense
Income before taxes
Income tax expense
Net income
Preferred stock dividends
Net income attributable to common
shareholders
Basic earnings per common share
Diluted earnings per common share
At Period End
Total assets
Cash and cash equivalents
Investment securities (2)
Loans held for sale (3)
Loans receivable
Allowance for loan losses
FDIC loss sharing receivable (4)
Deposits
Borrowings
Shareholders’ equity
Tangible common equity (5)
Selected Ratios and Share Data
Return on average assets
Return on average common equity
Common book value per share
Tangible book value per common share
(5)
Common shares outstanding
Net interest margin
Equity to assets
Tangible common equity to tangible assets
(5)
$ 249,850
$
190,427
$
128,156
$
53,560
196,290
20,566
27,717
114,946
88,495
29,912
58,583
2,493
38,504
151,923
14,747
25,126
98,914
63,388
20,174
43,214
—
24,301
103,855
2,236
22,703
74,024
50,298
17,604
32,694
—
$
93,814
21,761
72,053
14,270
28,958
50,651
36,090
12,272
23,818
—
56,090
43,214
32,694
23,818
2.09
1.96
1.62
1.55
1.34
1.30
1.61
1.57
61,245
22,464
38,781
7,495
11,469
36,886
5,869
1,835
4,034
—
3,990
0.36
0.35
$ 8,401,313
$ 6,825,370
$ 4,153,173
$ 3,201,234
$ 2,077,532
264,593
560,253
1,797,064
5,453,479
35,647
—
5,909,501
1,893,550
553,902
494,682
371,023
416,685
1,435,459
4,312,173
30,932
2,320
4,532,538
1,816,250
443,145
439,481
233,068
497,573
747,593
2,465,078
23,998
10,046
186,016
129,093
1,439,889
1,324,467
25,837
12,343
73,570
398,684
174,999
1,341,393
15,032
13,077
2,959,922
2,440,818
1,583,189
771,750
386,623
382,947
471,000
269,475
265,786
331,000
147,748
144,043
0.81%
11.82%
18.52
18.39
$
$
0.78%
10.39%
16.57
16.43
$
$
0.95%
9.49%
14.51
14.37
$
$
1.02%
12.69%
13.27
13.09
$
$
0.24%
3.04%
11.84
11.54
$
$
26,901,801
26,745,529
26,646,566
20,305,452
12,482,451
2.81%
6.59%
2.86%
6.49%
3.13%
9.31%
3.21%
8.42%
2.47%
7.11%
5.89%
6.44%
9.23%
8.31%
6.95%
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Table of Contents
Tier 1 leverage ratio – Customers Bank
Tier 1 leverage ratio – Customers Bancorp
Tier 1 risk-based capital ratio – Customers
Bank
Tier 1 risk-based capital ratio – Customers
Bancorp
Total risk-based capital ratio – Customers
Bank
Total risk-based capital ratio – Customers
Bancorp
7.30%
7.16%
7.39%
6.69%
10.81%
10.11%
7.74%
9.30%
7.11%
7.37%
8.62%
9.27%
13.33%
8.50%
9.66%
8.46%
8.39%
12.44%
10.23%
10.01%
10.85%
11.98%
14.11%
9.53%
10.78%
10.62%
11.09%
13.21%
11.26%
11.13%
Asset Quality
Non-performing loans
Non-performing loans to total loans
receivable
Non-performing loans to total loans
Other real estate owned
Non-performing assets
Non-performing assets to total assets
Allowance for loan losses to total loans
receivable
Allowance for loan losses to non-
performing loans
$
10,771
$
11,733
$
19,163
$
32,851
$
36,626
0.20%
0.15 %
5,057
$
15,828
$
0.27%
0.20%
0.78%
0.60%
2.48%
1.19%
$
15,371
27,104
12,265
31,428
$
8,114
$
40,965
2.73%
2.42%
13,482
50,108
0.19%
0.40%
0.76%
1.28%
2.41%
0.65%
0.72%
0.97%
1.95%
1.12%
330.95%
263.63%
125.23%
78.65%
41.04%
Net charge-offs
$
11,979
$
3,124
$
6,894
$
5,466
$
9,547
Net charge-offs to average total loans
receivable
0.26%
0.09%
0.37%
0.38%
1.20%
(1)
(2)
(3)
(4)
(5)
On September 17, 2011, Customers Bancorp completed its acquisition of Berkshire Bancorp, Inc. using the purchase
accounting method in accounting for the acquisition. The purchase method provides that all transactions after the
acquisition date are reflected in the acquirers’ financial accounting records.
Includes available-for-sale and held-to-maturity investment securities.
In 2015 and 2014, loans held for sale included $1,754,950 and $1,332,019 of mortgage warehouse loans at fair value,
respectively.
The FDIC loss sharing receivable, as of December 2015, is included in "Accrued interest payable and other liabilities"
net of the clawback liability.
Customers’ selected financial data contains non-GAAP financial measures calculated using non-GAAP amounts. These
measures include tangible common equity and tangible book value per common share and tangible common equity to
tangible assets. Management uses these non-GAAP measures to present historical periods comparable to the current
period presentation. In addition, management believes the use of these non-GAAP measures provides additional clarity
when assessing the Bancorp’s financial results and use of equity. These disclosures should not be viewed as substitutes
for results determined to be in accordance with U.S. GAAP, nor are they necessarily comparable to non-GAAP
performance measures that may be presented by other entities. Customers Bancorp calculates tangible common equity
by excluding intangible assets from total shareholders’ equity. Tangible book value per common share equals tangible
common equity divided by common shares outstanding.
49
Table of Contents
A reconciliation of shareholders’ equity to tangible common equity and other related amounts is set forth below.
Shareholders’ equity
Less: intangible assets
Less: preferred stock
Tangible common equity
Shares outstanding
Common book value per share
Less: effect of excluding intangible assets
Common tangible book value per share
Total assets
Less: intangible assets
Total tangible assets
2015
2014
2013
2012
2011
(in thousands, except per share data)
$
553,902
$
(3,651)
(55,569)
494,682
26,902
18.52
(0.13)
18.39
$
$
$
$
$
$
443,145
(3,664)
—
439,481
26,746
16.57
(0.14)
16.43
$
$
$
$
386,623
(3,676)
—
382,947
26,647
14.51
(0.14)
14.37
$
$
$
$
269,475
(3,689)
—
265,786
20,305
13.27
(0.18)
13.09
$
147,748
(3,705)
—
144,043
12,482
11.84
(0.30)
11.54
$
$
$
$ 8,401,313
(3,651)
$ 8,397,662
$ 6,825,370
(3,664)
$ 6,821,706
$ 4,153,173
(3,676)
$ 4,149,497
$ 3,201,234
(3,689)
$ 3,197,545
$ 2,077,532
(3,705)
$ 2,073,827
Equity to assets
Tangible common equity to tangible assets
6.59%
5.89%
6.49%
6.44%
9.31%
9.23%
8.42%
8.31%
7.11%
6.95%
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Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read this Management's Discussion and Analysis in conjunction with “Business – Executive Summary” and the
Bancorp’s consolidated financial statements and related notes for the year ended December 31, 2015. Certain amounts
reported in the 2014 and 2013 financial statements have been reclassified to conform to the 2015 presentation. These
reclassifications did not significantly impact Customers' financial position or results of operations.
Critical Accounting Policies
Customers has adopted various accounting policies that govern the application of accounting principles generally accepted in
the United States of America (U.S. GAAP) and that are consistent with general practices within the banking industry in the
preparation of its financial statements. Customers' significant accounting policies are described in “NOTE 3 - SIGNIFICANT
ACCOUNTING POLICIES AND BASIS OF PRESENTATION” to its audited financial statements.
Certain accounting policies involve significant judgments and assumptions by Customers that have a material impact on the
carrying value of certain assets and liabilities. Customers considers these accounting policies to be critical accounting
policies. The judgment and assumptions used are based on historical experience and other factors, which are believed to be
reasonable under the circumstances. Because of the nature of the judgments and assumptions management makes, actual results
could differ from these judgments and estimates, which could have a material impact on the carrying values of Customers'
assets and liabilities and results of operations.
The following is a summary of the policies Customers recognizes as involving critical accounting estimates: Allowance for
Loan Losses, Stock-Based Compensation, Unrealized Gains and Losses on Available for Sale Securities, Fair Value
Accounting, Accounting for Purchased-Credit-Impaired (PCI) Loans, FDIC Loss Sharing Receivable and Clawback Liability,
and Deferred Income Taxes.
Allowance for Loan Losses. Customers maintains an allowance for loan losses at a level management believes is sufficient to
absorb estimated credit losses incurred as of the report date. Management’s determination of the adequacy of the allowance is
based on periodic evaluations of the loan portfolio and other relevant factors. However, this evaluation is inherently subjective
as it requires significant estimates by management. Consideration is given to a variety of factors in establishing these estimates
including historical losses, peer and industry data, current economic conditions, the size and composition of the loan portfolio,
delinquency statistics, criticized and classified assets and impaired loans, results of internal loan reviews, borrowers’ perceived
financial and management strengths, the adequacy of underlying collateral, the dependence on collateral, or the strength of the
present value of future cash flows and other relevant factors. These factors may be susceptible to significant change. To the
extent actual outcomes differ from management estimates, additional provisions for loan losses may be required which may
adversely affect Customers' results of operations in the future.
Subsequent to acquisition of purchased-credit-impaired loans, estimates of cash flows expected to be collected are updated each
reporting period based on updated assumptions regarding default rates, loss severities, and other factors that are reflective of
current market conditions. Subsequent decreases in expected cash flows will generally result in a provision for loan losses.
Subsequent increases in expected cash flows result in a reversal of the provision for loan losses to the extent of prior charges.
Stock-Based Compensation. Customers recognizes compensation expense for share-based awards in accordance with ASC 718
Compensation – Stock Compensation. Expense related to stock option awards is based on the fair value of the option at the
grant date, with compensation expense recognized over the service period, which is usually the vesting period. For performance
based awards, compensation cost is recognized over the vesting period as long as it remains probable that the performance
conditions will be met. If the service or performance conditions are not met, Customers reverses previously recorded
compensation expense upon forfeiture. Customers utilizes the Black-Scholes option-pricing model to estimate the fair value of
each option on the date of grant. The Black-Scholes model takes into consideration the exercise price of the option, the
expected life of the option, the current price of the underlying stock and its expected volatility, expected dividends on the stock,
and the current risk-free interest rate for the expected life of the option. Customers' estimate of the fair value of a stock option
is based on expectations derived from its limited historical experience and may not necessarily equate to market value when
fully vested.
Unrealized Gains and Losses on Securities Available for Sale. Customers receives estimated fair values of debt securities from
independent valuation services and brokers. In developing these fair values, the valuation services and brokers use estimates of
cash flows based on historical performance of similar instruments in similar rate environments. Debt securities available for
sale consist primarily of mortgage-backed securities issued by U.S. government-sponsored agencies. Customers uses various
indicators in determining whether a security is other-than-temporarily impaired including, for debt securities, when it is
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probable that the contractual interest and principal will not be collected, or for equity securities, whether the market value is
below its cost for an extended period of time with low expectation of recovery. The debt securities are monitored for changes in
credit ratings because adverse changes in credit ratings could indicate a change in the estimated cash flows of the underlying
collateral or issuer.
For marketable equity securities, Customers considers the issuer’s financial condition, capital strength and near term prospects
to determine whether an impairment is temporary or other-than-temporary. Customers also considers the volatility of a
security’s price in comparison to the market as a whole and any recoveries or declines in fair value subsequent to the balance
sheet date. If management determines that the impairment is other-than-temporary, the entire amount of the impairment as of
the balance sheet date is recognized in earnings even if the decision to sell the security has not been made. The fair value of the
security becomes the new amortized cost basis of the investment and is not adjusted for subsequent recoveries in fair value.
The unrealized losses associated with available-for-sale debt securities were not considered to be other-than-temporarily
impaired as of December 31, 2015 and 2014 because the unrealized losses were related to changes in interest rates and did not
affect the expected cash flows of the underlying collateral or issuer. The unrealized losses associated with the equity
investments were also not considered other-than-temporarily impaired as of December 31, 2015 and 2014. Management
concluded that the decline in fair value was temporary and would recover by way of increases in market price or positive
changes in foreign currency exchange rates.
Fair Value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants, other than in a forced or liquidation sale as of the measurement date (also referred to
as an exit price). Management estimates the fair value of a financial instrument using a variety of valuation methods. When
financial instruments are actively traded and have quoted market prices, the quoted market prices are used for fair value. When
the financial instruments are not actively traded, other observable market inputs, such as quoted prices of securities with similar
characteristics, may be used, if available, to determine fair value. When observable market prices do not exist, Customers
estimates fair value using unobservable data. The valuation methods and inputs consider factors such as types of underlying
assets or liabilities, rates of estimated credit losses, interest rate or discount rate and collateral. The best estimate of fair value
involves assumptions including, but not limited to, various performance indicators, such as historical and projected default and
recovery rates, credit ratings, current delinquency rates, loan-to-value ratios and the possibility of obligor
refinancing. U.S. GAAP requires the use of fair values in determining the carrying values of certain assets and liabilities, as
well as for specific disclosures. The most significant uses of fair values include residential mortgage loans acquired subject to
an agreement to resell, residential mortgage loans originated with an intent to sell, available-for-sale investment securities,
derivative assets and liabilities, impaired loans and foreclosed property and the net assets acquired in business combinations.
For additional information, refer to “NOTE 19 – DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS.”
Purchased Credit-Impaired Loans
For certain acquired loans that have experienced a deterioration of credit quality, Customers follows the guidance contained in
ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. Purchased credit-impaired loans are loans
that were acquired in business combinations or asset purchases with evidence of credit deterioration since origination to the
date acquired and for which it is probable that all contractually required payments will not be collected are considered to be
credit impaired. Evidence of credit quality deterioration as of purchase dates may include information such as past-due and
non-accrual status, borrower credit scores and recent loan to value percentages.
The fair value of loans with evidence of credit deterioration is recorded net of a nonaccretable difference and, if appropriate, an
accretable yield. The difference between contractually required payments at acquisition and the cash flows expected to be
collected at acquisition is the nonaccretable difference, which is not included in the carrying amount of acquired loans.
Subsequent decreases in the estimated cash flows of the loan will generally result in a provision for loan losses. Subsequent to
acquisition, estimates of cash flows expected to be collected are updated each reporting period based on updated assumptions
regarding default rates, loss severities, and other factors that are reflective of current market conditions. Subsequent increases
in cash flows result in a reversal of the provision for loan losses to the extent of prior charges, or a reclassification of the
difference from nonaccretable to accretable with a positive impact on accretion of interest income in future periods. Further,
any excess of cash flows expected at the time of acquisition over the estimated fair value is referred to as the accretable yield
and is recognized in interest income over the remaining life of the loan when there is a reasonable expectation about the amount
and timing of those cash flows.
Purchased-credit-impaired loans acquired may be aggregated into one or more pools, provided that the loans have common risk
characteristics. A pool is then accounted for as a single asset with a single composite interest rate and an aggregate expectation
of cash flows. On a quarterly basis, the Bank re-estimates the total cash flows (both principal and interest) expected to be
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collected over the remaining life of each pool. These estimates incorporate assumptions regarding default rates, loss severities,
the amounts and timing of prepayments and other factors that reflect then-current market conditions. If the timing and/or
amounts of expected cash flows on purchased-credit-impaired loans were determined not to be reasonably estimable, no
interest would be accreted and the loans would be reported as non-accrual loans; however, when the timing and amounts of
expected cash flows for purchased-credit-impaired loans are reasonably estimable, interest is being accreted and the loans are
being reported as performing loans. Charge-offs are not recorded on purchased-credit-impaired loans until actual losses exceed
the estimated losses that were recorded as purchase accounting adjustments at acquisition date.
FDIC Loss Sharing Receivable and Clawback Liability for Loss Share Agreements. The majority of the loans and other real
estate assets acquired in an FDIC-assisted acquisition is covered under loss share agreements with the FDIC in which the FDIC
has agreed to reimburse the Bank for 80% of all losses incurred in connection with those assets. Management estimated the
amount that the Bank will receive from the FDIC under the loss share agreements that will result from losses incurred as the
Bank disposes of covered loans and other real estate assets and records the estimate as a receivable from the FDIC.
The FDIC loss sharing receivable is measured separately from the related covered assets because it is not contractually
embedded in the assets and is not transferable if the assets are sold. Management estimated the fair value of the FDIC loss
sharing receivable using the present value of cash flows related to the loss share agreements based on the expected
reimbursements for losses and the applicable loss share percentages.
The FDIC loss sharing receivable is reviewed quarterly and adjusted for changes in expected cash flows based on recent
performance and expectations for future performance of the covered portfolio. These adjustments are measured on the same
basis as the related covered loans and covered other real estate owned. Increases in estimated cash flows on the covered assets
will reduce the FDIC loss sharing receivable and decreases in estimated cash flows on the covered assets will increase the
FDIC loss sharing receivable. Increases to the FDIC loss sharing receivable resulting from reduced cash flow estimates on the
covered loans are recorded as a reduction to the provision for loan losses and decreases to the FDIC loss sharing receivable are
recorded either as an increase to the provision for loan losses (to the extent an increase in the FDIC receivable balance was
previously recorded as a reduction to the provision for loan losses) or recognized over the life of the loss share agreements.
Decreases in the valuations of covered other real estate owned are recorded net of the FDIC receivable balance resulting from
the valuation allowance as an increase to other real estate owned expense (a component of non-interest expense).
The FDIC loss sharing receivable balance will be reduced through a charge to the provision for loan losses, with no offsetting
reduction to the allowance for loan losses, as the period to submit losses under the FDIC loss sharing agreements approaches
expiration and the estimated losses in the covered loans have not yet emerged or been realized in a final disposition event. The
period to submit losses under the FDIC loss sharing agreements for non-single family loans expired in third quarter 2015. The
period to submit losses under the FDIC loss sharing agreements for single family loans expires in third quarter 2017. The final
maturity of the FDIC loss sharing agreements occurs in third quarter 2020.
As part of the FDIC loss sharing agreements, the Bank also assumed a liability to be paid within 45 days subsequent to the
maturity or termination of the loss sharing agreements that is contingent upon actual losses incurred over the life of the
agreements relative to expected losses and the consideration paid upon acquisition of the failed institutions ("the Clawback
Liability”). Due to cash received on the covered assets in excess of the original expectations of the FDIC, the Bank anticipates
that it will be required to pay the FDIC at the end of its loss sharing agreements. As of December 31, 2015, a clawback liability
of $2.3 million has been recorded. To the extent actual losses on the covered assets are less than estimated losses, the clawback
liability will increase. To the extent actual losses on the covered assets are more than the estimated losses, the clawback liability
will decrease.
The Bank presents the FDIC loss sharing receivable balance, net of the estimated clawback liability on the consolidated balance
sheet. As of December 31, 2015, the Bank expected to collect $0.2 million from the FDIC for estimated losses and
reimbursement of external costs, such as legal fees, real estate taxes and appraisal expenses, and estimated the clawback
liability due to the FDIC in 2020 at $2.3 million. The net amount of $2.1 million is included in "Accrued interest payable and
other liabilities " in the accompanying consolidated balance sheet.
Deferred Income Taxes. Customers provides for deferred income taxes on the liability method whereby tax assets are
recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences.
Temporary differences are the differences between the reported amounts of assets and liabilities in the financial statements and
their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted
for the effects of changes in tax laws and rates on the date of enactment.
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Overview
Like most financial institutions, Customers derives the majority of its income from interest it receives on its interest-earning
assets, such as loans and investments. Customers' primary source of funds for making these loans and investments is its
deposits, on which it pays interest. Consequently, one of the key measures of Customers' success is its amount of net interest
income, or the difference between the income on its interest-earning assets and the expense on its interest-bearing liabilities,
such as deposits and borrowings. Another key measure is the spread between the yield earned on these interest-earning assets
and the rate paid on these interest-bearing liabilities, which is referred to as net interest spread.
There is credit risk inherent in all loans, so Customers maintains an allowance for loan losses to absorb probable losses on
existing loans that may become uncollectible. Customers maintains this allowance by charging a provision for loan losses
against its operating earnings. Customers has included a detailed discussion of this process, as well as several tables describing
its allowance for loan losses.
2016 Economic Outlook
U.S. Real GDP is forecasted to grow 2.5% to 3.0% during 2016. The economy is expected to remain divided in two during
2016. Sectors tied closely to the domestic economy should fare better than those sectors that are more closely tied to the global
economy. Domestic demand is expected to grow during 2016 partly due to non-farm payroll growth averaging approximately
$190,000 per month and that the unemployment rate will continue to trend lower during 2016, ending the year at 4.6%.
While inflation has remained below the Federal Reserve's target of 2%, as measured by both the CPI and PCE deflator, many
economists feel that this has been the effect of lower-than-expected commodity prices around the world, led by oil. Once
energy prices “normalize” sometime in 2016, upward pressure will be applied to both the CPI and PCE deflator likely resulting
in higher prices for businesses and consumers, it is expected that the Federal Reserve to act on an overheating U.S. economy
by increasing the overnight interest rate.
Since “lift off” in mid-December 2015, it is expected that the Federal Reserve will continue to raise the overnight interest rate
two to four more times throughout 2016. The Federal Reserve has made it clear that any future interest rate hike will be data
dependent. For these interest rate hikes to happen, the CPI and PCE deflator will need to approach the Federal Reserve's 2%
target and employment will need to improve or at least retain recent positive trends.
While the outlook in the U.S. remains optimistic, fears of a continued slowdown in the rest of the world could have a negative
impact on the U.S. economy. While the rest of the world continues to take steps to increase growth, the U.S. continues to churn
along in a positive direction. In Customers' market area, management sees continued moderate (2.0% to 3.0%) growth in 2016,
the housing market continuing to improve and unemployment improving or at least remaining at current levels during the year.
Management is seeing improvement in loan demand in Customers' commercial and industrial, multi-family and commercial
real estate loan portfolios. There continues to be some uncertainty in the political and external environments in 2016 as the
presidential election looms, and it is likely that these challenging conditions will continue over the next few years. Overall,
Customers' management is optimistic that 2016 will show a continuation of the improving economic environment experienced
in 2015.
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Results of Operations
The following discussion of Customers Bancorp’s consolidated results of operations should be read in conjunction with its
consolidated financial statements, including the accompanying notes. Also see “CRITICAL ACCOUNTING POLICIES” and
“NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION” for information concerning
certain significant accounting policies and estimates applied in determining reported results of operations.
For the years ended December 31, 2015 and 2014
Net income available to common shareholders increased $12.9 million , or 29.8%, to $56.1 million for the year ended
December 31, 2015, compared to $43.2 million for the year ended December 31, 2014. The increased net income resulted from
increases in net interest income of $44.4 million and non-interest income of $2.6 million, partly offset by increases in provision
for loan losses of $5.8 million, non-interest expense of $16.0 million, tax expense of $9.7 million, and the accrual of preferred
stock dividends of $2.5 million.
Net interest income increased $44.4 million, or 29.2%, for the year ended December 31, 2015 to $196.3 million, compared to
$151.9 million for the year ended December 31, 2014. The increase in net interest income was driven by an increase in the
average balance of loans and securities of $1.6 billion, from $5.0 billion in 2014 to $6.7 billion in 2015, offset in part by a
decline in the net interest margin (tax equivalent) of 6 basis points (from 2.87% in 2014 to 2.81% in 2015). The net margin
decrease was largely a result of the growth in the lower yielding mortgage warehouse portfolio.
The provision for loan losses increased $5.8 million to $20.6 million for the year ended December 31, 2015, compared to $14.7
million for the same period in 2014. The increase in the provision for loan losses during 2015 was primarily attributable to a
provision expense of $9.0 million for the fraudulent loan identified by Customers in July 2015. $5.3 million of the loan was
charged off in third quarter 2015 and the residual balance of $3.7 million was charged off in fourth quarter 2015. Customers
will continue its efforts to collect the loan balance and is optimistic about a future recovery.
Non-interest income increased $2.6 million, or 10.3% during the year ended December 31, 2015 to $27.7 million, compared to
$25.1 million for the year ended December 31, 2014. The increase resulted primarily from a benefit received on a bank-owned
life insurance policy of $2.4 million, higher mortgage warehouse transactional fees driven by increased transaction volume and
an increase in the gain on sale of loans, offset in part by gains realized from sales of investment securities of $3.2 million in
2014 compared to a loss of $0.1 million in 2015.
Non-interest expense increased $16.0 million, or 16.2%, during the year ended December 31, 2015 to $114.9 million, compared
to $98.9 million during the year ended December 31, 2014. The increases in salaries and employee benefits of $12.4 million,
professional services of $3.3 million, and technology of $1.8 million resulted from growth of Customers' business, which has
required additional team members, services, and support. These increases were offset in part by decreased assessments and
regulatory fees of $1.1 million related primarily to an adjustment in the Pennsylvania shares tax expense and reduced loan
workout expenses of $0.6 million resulting from lower levels of non-performing loans and recoveries of prior expenses on
resolved loans during the year.
Income tax expense increased $9.7 million for the year ended December 31, 2015 to $29.9 million, compared to $20.2 million
in the same period of 2014. The increase in income tax expense was driven primarily from increased pre-tax income of $25.1
million in 2015, offset in part by the benefit received on a bank-owned life insurance policy of $2.4 million, which is not
taxable.
Preferred stock dividends increased $2.5 million for 2015 due to the accrual of dividends on Customers' Series C Preferred
Stock issued on May 18, 2015.
For the years ended December 31, 2014 and 2013
Net income available to common shareholders increased $10.5 million, or 32.2%, to $43.2 million for the year ended
December 31, 2014, compared to $32.7 million for the year ended December 31, 2013. The increased net income resulted from
increases in net interest income of $48.1 million and non-interest income of $2.4 million, partly offset by increases in provision
for loan losses of $12.5 million, non-interest expense of $24.9 million, and tax expense of $2.6 million.
Net interest income increased $48.1 million, or 46.3%, during 2014 to $151.9 million, compared to $103.9 million during 2013
primarily due to an increase in the average balance of interest earnings assets of $2.0 billion (from $3.3 billion in 2013 to $5.3
billion in 2014), offset in part by a decline in the net interest margin (tax equivalent) of 27 basis points (from 3.14% in 2013 to
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2.87% in 2014). The growth in average interest earning assets was principally driven by increases in multi-family and other
commercial loan products. The decrease in net interest margin results from a combination of changed market conditions,
including decreased market interest rates and increased competition on loans, and product mix, as secured multi-family loans
yield less than other commercial products and was our primary growth area.
Provision for loan losses increased $12.5 million during 2014 to $14.7 million, compared to $2.2 million during 2013. The
increase in the provision for loan losses during 2014 was primarily attributable to significant organic loan growth in the held-
for-investment loan portfolio, resulting in approximately $10.1 million of provision expense during 2014, and a reduced benefit
expected to be collected from the FDIC as collections on covered loans improved and the loss sharing arrangements for the
non-single family loans approach their contractual maturity, resulting in approximately $4.6 million of provision expense
during 2014.
Non-interest income increased $2.4 million during 2014 to $25.1 million, compared to $22.7 million during 2013. The increase
in 2014 was attributed to a $2.3 million increase in gains on sales of loans as the Bank began selling excess multi-family loan
originations, $1.9 million increase in gains on sales of investment securities as the Bank shortened the duration of its
investment portfolio, a $1.2 million increase in bank owned life insurance income as the number of insured team members
increased, and a $0.9 million increase in mortgage loan and banking income as the Bank continues to develop that business,
offset primarily by a decrease in the mortgage warehouse transactional fees of $4.7 million.
Non-interest expense increased $24.9 million during 2014 to $98.9 million, compared to $74.0 million during 2013. Expenses
increased in 2014 principally for salaries and employee benefits as staffing levels grew to support the growing business (up
$10.9 million), assessments for FDIC insurance and Pennsylvania shares tax increased as the Bank grew (up $6.2 million),
professional services related to loan workout, litigation and other general regulatory matters (up $2.2 million), occupancy
expense (up $2.2 million) as our need for space grew, other real estate owned resolution expenses as we work through problem
properties (up $2.2 million), and technology, communication and bank operations expense (up $1.5 million) as a result of our
growth. The increase was offset in by a provision for loss contingency recorded in 2013 of $2.0 million.
Income tax expense increased $2.6 million during 2014 to $20.2 million, compared to $17.6 million during 2013. The increased
income tax expense was driven primarily from increased taxable income in 2014 (up $13.1 million to $63.4 million), offset in
part by a $1.5 million benefit that resulted from a return to provision and deferred tax analysis performed in third quarter 2014.
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NET INTEREST INCOME
Net interest income (the difference between the interest earned on loans, investments and interest-earning deposits with banks,
and interest paid on deposits, borrowed funds and subordinated debt) is the primary source of Customers' earnings. The
following table summarizes the Customers' net interest income and related spread and margin for the periods indicated.
For the Years Ended December 31,
2015
2014
Average
balance
Interest
income or
expense
Average
yield or
cost
Average
balance
Interest
income or
expense
Average
yield or
cost
Average
balance
2013
Interest
income or
expense
Average
yield or
cost
0.25%
2.42
3.84
4.48
2.36
3.87
0.42
0.69
0.48
1.04
0.86
1.18
0.90
0.78
3.09%
3.13
3.14
$ 271,201
$
718
0.26% $ 228,668
$
577
0.25% $ 190,298
$
(amounts in thousands)
Assets
Interest-earning deposits
Investment securities (A)
Loans held for sale
Loans receivable (B)
Other interest earning assets
Total interest-earning assets
Non-interest-earning assets
Total assets
Liabilities
Interest checking
Money market deposit accounts
Other savings accounts
Certificates of deposit
Total interest-bearing deposits
Borrowings
Total interest-bearing liabilities
Non-interest-bearing deposits
Total deposits and borrowings
Other non-interest-bearing liabilities
Total liabilities
Shareholders’ equity
427,638
1,589,176
10,405
51,553
4,635,887
182,280
72,693
4,894
6,996,595
249,850
269,454
$7,266,049
$ 123,527
686
2,412,958
12,548
111
20,637
33,982
19,578
53,560
36,820
2,087,641
4,660,946
1,373,359
6,034,305
692,159
6,726,464
30,394
6,756,858
509,191
2.43
3.24
3.93
6.73
3.57
0.56
0.52
0.30
0.99
0.73
1.43
0.89
451,932
911,594
10,386
30,801
3,656,891
146,388
66,669
2,275
5,315,754
190,427
227,045
$5,542,799
$
62,840
361
1,712,896
10,391
40,795
1,403,774
3,220,305
1,268,205
4,488,510
620,385
172
13,530
24,454
14,050
38,504
2.30
3.38
4.00
3.41
3.58
0.57
0.61
0.42
0.96
0.76
1.11
0.86
260,862
992,421
1,842,310
27,095
482
6,314
38,140
82,580
640
3,312,986
128,156
142,350
$3,455,336
45,613
1,106,457
31,741
1,251,709
2,435,520
278,297
2,713,817
385,187
191
7,619
152
13,058
21,020
3,281
24,301
0.80
5,108,895
0.75
3,099,004
17,905
5,126,800
415,999
$5,542,799
11,779
3,110,783
344,553
$3,455,336
Total liabilities and shareholders’
equity
$7,266,049
Net interest earnings
Tax-equivalent adjustment (C)
Net interest earnings
Interest spread
Net interest margin (D)
Net interest margin tax
equivalent (C)(D)
196,290
449
$ 196,739
151,923
405
$ 152,328
103,855
244
$ 104,099
2.77%
2.81
2.81
2.83%
2.86
2.87
(A)
(B)
(C)
(D)
For presentation in this table, balances and the corresponding average rates for investment securities are based upon
historical cost, adjusted for amortization of premiums and accretion of discounts.
Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees.
Full tax equivalent basis, using a 35% statutory tax rate to approximate interest income as a taxable asset.
Excluding an adjustment to interest income for the change in accounting estimate on purchased-credit-impaired loans of
$4.5 million, net interest margin and net interest margin tax equivalent are 3.05% for the year ended December 31,
2013.
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The following table presents the dollar amount of changes in interest income and interest expense for the major categories of
interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and
interest-bearing liabilities with respect to (i) changes attributable to volume (i.e., changes in average balances multiplied by the
prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average
balances). For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been
allocated proportionately to the change due to volume and the change due to rate.
2015 vs. 2014
Increase (decrease) due
to change in
2014 vs. 2013
Increase (decrease) due
to change in
Rate
Volume
Total
Rate
Volume
Total
(amounts in thousands)
Interest income:
Interest earning deposits
Investment securities, taxable
Loans held for sale
Loans receivable
Other interest earning assets
Total interest income
Interest expense:
Interest checking
Money market deposit accounts
Savings
Certificates of deposit
Total interest bearing deposits
Borrowings
Total interest expense
Net interest income
$
29
$
594
(1,279)
(2,645)
2,396
(905)
(12)
(1,640)
(46)
355
(1,343)
4,288
2,945
112
(575)
22,031
38,537
223
60,328
337
3,797
(15)
6,752
10,871
1,240
12,111
$
141
$
(2) $
97
$
95
19
20,752
35,892
2,619
59,423
325
2,157
(61)
7,107
9,528
5,528
15,056
(335)
(4,384)
(9,683)
382
(14,022)
84
(996)
(20)
(1,040)
(1,972)
(210)
(2,182)
(11,840) $
4,407
(2,955)
73,491
1,253
76,293
86
3,768
40
1,512
5,406
10,979
16,385
59,908
$
4,072
(7,339)
63,808
1,635
62,271
170
2,772
20
472
3,434
10,769
14,203
48,068
$
(3,850) $
48,217
$
44,367
$
For the years ended December 31, 2015 and 2014
Net interest income for the year ended December 31, 2015 was $196.3 million, an increase of $44.4 million, or 29.2%, when
compared to net interest income for the year ended December 31, 2014 of $151.9 million. This increase in net interest income
was primarily attributable to an increase of $1.6 billion in the average balance of loans and securities.
The key measure of net interest income is net interest margin. While Customers' net interest margin decreased to 2.81% for the
year ended December 31, 2015 from 2.87% for the year ended December 31, 2014, the impact on net interest income was
secondary to the significant increases in loan volume.
For the years ended December 31, 2014 and 2013
Net interest income for the year ended December 31, 2014 was $151.9 million, an increase of $48.1 million, or 46.3%, when
compared to net interest income for the year ended December 31, 2013 of $103.9 million. This increase in net interest income
was primarily attributable to an increase of $1.8 billion in average loans receivable, principally in multi-family and other
commercial loans.
The key measure of net interest income is net interest margin. While the Bancorp’s net interest margin decreased to 2.87% for
the year ended December 31, 2014 from 3.14% for the year ended December 31, 2013, the impact on net interest income was
secondary to the significant increases in loan volume.
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PROVISION FOR LOAN LOSSES
For more information about our provision and allowance for loan losses methodology and our loss experience, see “Critical
Accounting Policies,” “Credit Risk” and “Asset Quality” herein and “NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES
AND BASIS OF PRESENTATION.”
Customers maintains its allowance for loan losses through a provision for loan losses charged as an expense on the
consolidated statements of income. The loan portfolio is reviewed quarterly to evaluate the outstanding loans and to measure
both the performance of the portfolio and the adequacy of the allowance for loan losses. The allowance for loan losses is
estimated as of the end of each quarter and compared to the balance recorded in the general ledger net of charge-offs and
recoveries. The allowance is adjusted to the estimated allowance for loan losses balance via a charge (or debit) to the provision
for loan losses.
For the years ended December 31, 2015 and 2014
During 2015, the provision for loan losses was $20.6 million, an increase of $5.8 million from a provision of $14.7 million in
2014. The 2015 provision for loan losses included a provision expense of $9.0 million for the fraudulent loan identified by
Customers in July 2015. The increase in the provision for loan losses resulting from this loan was offset in part by a $2.4
million reduction to the provision for loan losses resulting primarily from Customers' low level of historical losses on loans
originated after 2009 and updating the estimated loss ratios to reflect actual industry performance rather than qualitative
estimates. $5.3 million of the fraudulent loan was charged off in third quarter 2015 and the residual balance of $3.7 million was
charged off in fourth quarter 2015. Customers will continue its efforts to collect the loan balance and is optimistic about a
future recovery.
For the years ended December 31, 2014 and 2013
During 2014, the provision for loan losses was $14.7 million, an increase of $12.5 million from a provision of $2.2 million
during 2013. The increase in the provision for loan losses during 2014 was primarily attributable to significant organic loan
growth in the held-for-investment loan portfolio, resulting in approximately $10.1 million of provision expense during 2014,
and a reduced benefit expected to be collected from the FDIC as collections on covered loans improved and the loss sharing
arrangements for the non-single family loans approach their contractual maturity, resulting in approximately $4.7 million of
provision expense during 2014.
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NON-INTEREST INCOME
The chart below shows the various components of non-interest income for each of the years ended December 31, 2015, 2014
and 2013.
(amounts in thousands)
Mortgage warehouse transactional fees
Bank-owned life insurance
Gains on sales of loans
Deposit fees
Mortgage loan and banking income
Gain (loss) on sales of investment securities
Other
Total non-interest income
For the years ended December 31, 2015 and 2014
Years Ended December 31,
2015
2014
2013
$
$
10,394
7,006
4,047
944
741
(85)
4,670
27,717
$
$
8,233
3,702
3,125
801
2,048
3,191
4,026
25,126
$
$
12,962
2,482
852
675
1,142
1,274
3,316
22,703
Non-interest income increased $2.6 million, or 10.3%, during the year ended December 31, 2015 to $27.7 million compared to
$25.1 million for the year ended December 31, 2014. The increase resulted primarily from a benefit received on a bank-owned
life insurance policy of $2.4 million, higher mortgage warehouse transactional fees driven by increased transaction volume and
an increase in the gain on sale of loans primarily resulting from increased SBA loan sales, offset in part by gains realized from
sales of investment securities of $3.2 million in 2014 compared to a loss of $0.1 million in 2015.
For the years ended December 31, 2014 and 2013
Non-interest income increased $2.4 million during 2014 to $25.1 million, compared to $22.7 million during 2013. The increase
in 2014 was attributed to the $2.3 million increase in gains on sales of loans as the Bank began selling excess multi-family loan
originations, a $1.9 million increase in gains on sales of investment securities as the Bank shortened the duration of the
investment portfolio, a $1.2 million increase in bank owned life insurance income as the number of insured team members
increased, and a $0.9 million increase in mortgage loan and banking income as Customers continued to develop that business.
These increases were offset primarily by a decrease in mortgage warehouse transactional fees of $4.7 million.
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NON-INTEREST EXPENSE
The below chart shows the various components of non-interest expense for each of the years ended December 31, 2015, 2014,
and 2013.
(amounts in thousands)
Salaries and employee benefits
Professional services
FDIC assessments, taxes, and regulatory fees
Technology, communication and bank operations
Occupancy
Other real estate owned
Advertising and promotion
Loan workout
Loss contingency
Other
Total non-interest expense
For the years ended December 31, 2015 and 2014
Years Ended December 31,
2015
2014
2013
$
$
58,777
11,042
10,728
10,596
8,668
2,516
1,475
1,127
—
10,017
114,946
$
$
46,427
7,748
11,812
8,798
8,068
3,601
1,325
1,706
—
9,429
98,914
$
$
35,493
5,548
5,568
6,607
6,552
1,365
1,274
2,245
2,000
7,372
74,024
Non-interest expense was $114.9 million for the year ended December 31, 2015, which was an increase of $16.0 million over
non-interest expense of $98.9 million for the year ended December 31, 2014.
Salaries and employee benefits, which represent the largest component of non-interest expense, increased $12.4 million, or
26.6%, to $58.8 million for the year ended December 31, 2015 from $46.4 million for the year ended December 31, 2014. The
primary reason for this increase was the increase in the number of team members from 422 full-time equivalents at
December 31, 2014 to 517 full-time equivalents at December 31, 2015 and a full year of expense for the growth of team
members in 2014. This was directly related to the need for additional team members to support our organic growth. More
specifically, the increased headcount was needed to support the growing multi-family, commercial real estate, and commercial
and industrial loan portfolios and the increased deposits.
Professional services expense increased by $3.3 million to $11.0 million for the year ended December 31, 2015 from $7.7
million for the year ended December 31, 2014 due to costs incurred for BankMobile, increased professional services expense
related to fees paid for the FHLB letter of credit used to collateralize municipal deposits, and other professional service
expenses driven by the organic growth of the Bank.
FDIC assessments, taxes, and regulatory fees declined $1.1 million to $10.7 million for the year ended December 31, 2015
from $11.8 million for the year ended December 31, 2014. The primary reason for this decrease was due to an adjustment that
reduced the Pennsylvania shares tax expense by $2.3 million recorded in second quarter 2015 offset in part by increased deposit
premiums and other regulatory and filing fees largely as a result of the Bank's organic growth.
Technology, communication and bank operations expenses increased $1.8 million to $10.6 million for the year ended
December 31, 2015 from $8.8 million for the year ended December 31, 2014. This increase was primarily attributable to costs
incurred for BankMobile and other technology related expenses driven by the organic growth of the Bank.
Occupancy expense increased by $0.6 million to $8.7 million for the year ended December 31, 2015 from $8.1 million for the
year ended December 31, 2014. This increase was driven by increased business activity in existing and new markets which
required additional team members and facilities.
Other real estate owned expense declined $1.1 million to $2.5 million for the year ended December 31, 2015 from $3.6 million
for the year ended December 31, 2014 as the level of other real estate owned declined from 2014. The decrease primarily
resulted from lower valuation adjustments, reduced holding expenses, and decreased losses realized from the sale of other real
estate owned.
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Loan workout expense decreased by $0.6 million to $1.1 million for the year ended December 31, 2015 from $1.7 million for
the year ended December 31, 2014. The decrease was attributable to lower workout costs driven by reduced levels of non-
performing loans and recoveries of prior expenses incurred on two resolved loans during the year.
Other expense increased by $0.6 million to $10.0 million for the year ended December 31, 2015 from $9.4 million for the year
ended December 31, 2014. Customers' experienced higher levels of miscellaneous expenses resulting from the organic growth
experienced over the past year, increased staffing, and other activities associated with business development.
For the years ended December 31, 2014 and 2013
Non-interest expense was $98.9 million for the year ended December 31, 2014, which was an increase of $24.9 million over
non-interest expense of $74.0 million for the year ended December 31, 2013.
Salaries and employee benefits, which represent the largest component of non-interest expense, increased $10.9 million, or
30.8%, to $46.4 million for the year ended December 31, 2014 from $35.5 million for the year ended December 31, 2013. The
primary reason for this increase was due to the increase in the number of team members from 383 full-time equivalents at
December 31, 2013 to 422 full-time equivalents at December 31, 2014 and a full year of expense for the growth of team
members in 2013 as we increased the number of team members to support our growing commercial loan, multi-family/
commercial real estate, and mortgage banking businesses and the related administrative support functions.
FDIC assessments, taxes and regulatory fees increased by $6.2 million to $11.8 million for the year ended December 31, 2014
from $5.6 million for the year ended December 31, 2013 due to increased assets subject to the FDIC assessment, higher
regulatory fees and higher Pennsylvania bank shares tax expense as a result of the growth of the Bank.
Professional services expense increased $2.2 million to $7.7 million for the year ended December 31, 2014 from $5.5 million
for the year ended December 31, 2013 due to higher legal and consulting expenses in 2014 related to regulatory filings and
other regulatory and legal matters as well as general growth of the Bank.
Technology communication and bank operations increased $2.2 million, rising to $8.8 million for the year ended December 31,
2014 from $6.6 million for the year ended December 31, 2013 related to the increased number of employees and increased
technology improvements to meet the needs of a larger Bank.
Occupancy expense increased $1.5 million, rising to $8.1 million for the year ended December 31, 2014 from $6.6 million for
the year ended December 31, 2013 as a result of a full year of facilities expense from expansion into new markets during 2013.
Larger expenses classified in other expense include loan origination expenses, supplies, director fees, shareholder relations,
sponsorships, and business development expenses. Generally these expenses increased as a direct result of the growth of the
Bank.
For the years ended December 31, 2015 and 2014
INCOME TAXES
The income tax expense and effective tax rate include both federal and state income taxes. In 2015, income tax expense was
$29.9 million with an effective tax rate of 33.80%, compared to an expense of $20.2 million and an effective tax rate of 31.83%
for 2014. Income tax expense was driven primarily by net income before taxes of $88.5 million and $63.4 million, for the years
ended December 31, 2015 and 2014, respectively. In 2015, the effective tax rate was lower due to a non-taxable bank-owned
life insurance death benefit received of $2.4 million, or a 2.73% effective tax rate reduction. In 2014, the effective tax rate was
reduced due to a tax benefit resulting from bank-owned life insurance income of $1.3 million, or a 2.04% effective tax rate
reduction, and a benefit of $1.8 million, or a 2.88% effective tax rate reduction, resulting primarily from recording a $1.5
million benefit from a return to provision and deferred tax analysis completed in third quarter 2014.
For the years ended December 31, 2014 and 2013
The income tax expense and effective tax rate include both federal and state income taxes. In 2014, income tax expense was
$20.2 million with an effective tax rate of 31.83%, compared to an income tax expense of $17.6 million and an effective tax
rate of 35.00% for 2013. Income tax expense was driven primarily by net income before taxes of $63.4 million and $50.3
million, for the years ended December 31, 2014 and 2013, respectively. In 2014, the effective tax rate was reduced due to a tax
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benefit resulting from bank-owned life insurance income of $1.3 million, or a 2.04% effective tax rate reduction, and a benefit
of $1.8 million, or a 2.88% effective tax rate reduction, resulting primarily from recording a $1.5 million benefit from a return
to provision and deferred tax analysis completed in third quarter 2014. In 2013, the effective tax rate was reduced due to a tax
benefit resulting from bank-owned life insurance income of $0.9 million, or a 1.73% effective tax rate reduction.
For additional information regarding the Bancorp’s income taxes, refer to “NOTE 15 – INCOME TAXES”.
FINANCIAL CONDITION
GENERAL
Total assets were $8.4 billion at December 31, 2015. This represented a $1.6 billion, or 23.1%, increase from total assets of
$6.8 billion at December 31, 2014. The major change in our financial position occurred as the result of the growth in loans
receivable, which increased by $1.1 billion, or 26.5%, to $5.4 billion at December 31, 2015, from $4.3 billion at December 31,
2014.
Customers continued its efforts to increase loan balances outstanding, particularly in the commercial loan portfolio. Multi-
family loans increased by $0.6 billion to $2.9 billion at December 31, 2015. Commercial loans and lines of credit to mortgage
companies increased by $0.4 billion to $1.8 billion at December 31, 2015. Additionally, commercial and industrial loans,
including owner-occupied commercial real estate, increased by $0.3 billion to $1.1 billion at December 31, 2015.
Total liabilities were $7.8 billion at December 31, 2015. This represented a $1.5 billion, or 23.0%, increase from total liabilities
of $6.4 billion at December 31, 2014. The increase in total liabilities resulted primarily from a higher level of deposits in 2015
compared to 2014. Total deposits grew by $1.4 billion, or 30.4%, to $5.9 billion at December 31, 2015 from $4.5 billion at
December 31, 2014. Deposit growth was primarily the result of marketing efforts targeted to attract municipal and other
government deposits. Transaction deposits increased by $0.7 billion, or 26.3%, to $3.6 billion at December 31, 2015 from $2.8
billion at December 31, 2014, with non-interest bearing deposits increasing by $107 million. Certificates of deposit accounts
increased by $0.6 billion, or 37.2%, to $2.3 billion at December 31, 2015 from $1.7 billion at December 31, 2014.
The following table sets forth certain key condensed balance sheet data:
(amounts in thousands)
Cash and cash equivalents
Investment securities available for sale, at fair value
Loans held for sale (includes $1,757,807 and $1,335,668, respectively at fair value)
$
Loans receivable
Total loans receivable, net of allowance for loan losses
Total assets
Total deposits
Federal funds purchased
FHLB advances
Other borrowings
Subordinated debt
Total liabilities
Total shareholders’ equity
Total liabilities and shareholders’ equity
63
December 31,
2015
2014
$
264,593
560,253
1,797,064
5,453,479
5,417,832
8,401,313
5,909,501
70,000
1,625,300
88,250
110,000
7,847,411
553,902
8,401,313
371,023
416,685
1,435,459
4,312,173
4,281,241
6,825,370
4,532,538
—
1,618,000
88,250
110,000
6,382,225
443,145
6,825,370
Table of Contents
CASH AND DUE FROM BANKS
Cash and due from banks consists mainly of vault cash and cash items in the process of collection. These balances totaled $53.6
million at December 31, 2015. This represents a $9.2 million decrease from $62.7 million at December 31, 2014. These
balances vary from day to day, primarily due to variations in customers’ deposits with the Bank.
INTEREST-EARNING DEPOSITS
Interest earning deposits consist mainly of deposits at the Federal Reserve Bank of Philadelphia. These deposits totaled $211.0
million at December 31, 2015, which was a $97.2 million decrease from $308.3 million at December 31, 2014. This balance
varies from day to day, depending on several factors, such as variations in customers’ deposits with the Bank and the payment
of checks drawn on customers’ accounts. The decrease in 2015 was largely driven by the investment of amounts previously
held in interest-earning deposits in highly liquid mortgage-backed securities issued by U.S. government agencies.
INVESTMENT SECURITIES
The investment securities portfolio is an important source of interest income and liquidity. It consists of mortgage-backed
securities (guaranteed by an agency of the United States government), domestic corporate debt, and marketable equity
securities. In addition to generating revenue, the investment portfolio is maintained to manage interest rate risk, provide
liquidity, provide collateral for other borrowings, and diversify the credit risk of earning assets. The portfolio is structured to
maximize net interest income, given changes in the economic environment, liquidity position and balance sheet mix.
At December 31, 2015, investment securities were $560.3 million compared to $416.7 million at December 31, 2014. The
increase was primarily the result of the investment of amounts previously held in interest-earning deposits in highly liquid
mortgage-backed securities issued by U.S. government agencies.
Unrealized gains and losses on available-for-sale securities are included in other comprehensive income and reported as a
separate component of shareholders’ equity, net of the related tax effect.
The following table sets forth the amortized cost of the investment securities at the last two fiscal year ends:
(amounts in thousands)
Available for Sale:
Residential mortgage-backed securities (1)
Commercial real estate mortgage-backed securities (1)
Corporate notes (2)
Equity securities (3)
December 31,
2015
2014
$
$
299,392
206,719
39,925
22,514
568,550
$
$
376,854
—
15,000
23,074
414,928
(1)
(2)
(3)
Consists entirely of mortgage-backed securities issued by government-sponsored agencies, including FHLMC, FNMA,
and GNMA at December 31, 2015. Consists primarily of mortgage-backed securities issued by government-sponsored
agencies, including FHLMC, FNMA, and GNMA at December 31, 2014.
Includes subordinated debt issued by other bank holding companies.
Consists primarily of equity securities in a foreign entity.
For financial reporting purposes, available-for-sale securities are carried at fair value.
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The following table sets forth information about the maturities and weighted-average yield of the securities portfolio. Yields are
not reported on a tax-equivalent basis.
December 31, 2015
Amortized Cost
Fair
Value
<
1yr
1 -5
years
5 -10
years
After 10
years
No
Specific
Maturity
Total
Total
(amounts in thousands)
Available for Sale
Residential mortgage-backed
securities
Yield
Commercial real estate
mortgage-backed securities
Yield
Corporate notes
Yield
Equity securities
Yield
Total
Weighted Average Yield
$ — $
— $ — $ — $ 299,392
$ 299,392
$
—
—
—
—
—
$ — $
—%
—
32,925
—
—
5.59%
—
—
—
—
—
— $32,925
—%
5.59%
2.65%
2.65%
206,719
$ 206,719
2.80%
—
—
22,514
—%
2.80%
39,925
5.58%
22,514
—%
$ 528,625
$ 568,550
$
2.60%
2.81%
—
7,000
5.54%
—
—
$ 7,000
5.54%
298,104
—
202,870
—
40,067
—
19,212
—
560,253
The mortgage-backed securities in the portfolio were issued by Fannie Mae, Freddie Mac, and Ginnie Mae and contain
guarantees for the collection of principal and interest on the underlying mortgages. The corporate notes in the portfolio include
subordinated notes issued by other bank holding companies.
LOANS
Existing lending relationships are primarily with small and middle market businesses and individual consumers primarily in
Bucks, Berks, Chester, Montgomery, Delaware, and Philadelphia Counties, Pennsylvania; Camden and Mercer Counties, New
Jersey; and Westchester County and New York City, New York; and the New England area. The loans to mortgage banking
companies portfolio is nation-wide. The loan portfolio consists primarily of loans to support mortgage banking companies’
funding needs, multi-family/commercial real estate, construction, and commercial and industrial loans. The Bank continues to
focus on small and middle market business loans to grow its commercial lending efforts, establish a specialty lending business,
and expand its consumer lending products, as outlined below:
Commercial Lending
Customers' commercial lending is divided into four groups: Business Banking, Small and Middle Market Business Banking,
Multi-family and Commercial Real Estate Lending, and Mortgage Banking Lending. This grouping is designed to allow for
greater resource deployment, higher standards of risk management, strong asset quality, lower interest rate risk and higher
productivity levels.
The commercial lending group focuses on companies with annual revenues ranging from $1 million to $50 million, which
typically have credit requirements between $0.5 million and $10 million.
The small and middle market business banking platform originates loans, including Small Business Administration loans,
through the branch network sales force and a team of dedicated relationship managers. The support administration of this
platform is centralized including risk management, product management, marketing, performance tracking and overall strategy.
Credit and sales training has been established for Customers' sales force, ensuring that it has small business experts in place
providing appropriate financial solutions to the small business owners in its communities. A division approach focuses on
industries that offer high asset quality and are deposit rich to drive profitability.
In 2009, Customers launched its lending to mortgage banking businesses products, which primarily provides financing to
mortgage bankers for residential mortgage originations from loan closing until sale in the secondary market. Many providers of
65
Table of Contents
liquidity in this segment exited the business in 2009 during a period of excessive market turmoil. Customers saw an
opportunity to provide liquidity to this business segment at attractive spreads. There was also the opportunity to attract escrow
deposits and to generate fee income in this business.
The goal of the mortgage banking businesses lending group is to provide liquidity to mortgage companies. These loans are
primarily used by mortgage companies to fund their pipelines from closing of individual mortgage loans until their sale into the
secondary market. The underlying residential loans are taken as collateral for Customers' loans. As of December 31, 2015,
loans in the warehouse lending portfolio totaled $1.8 billion and are designated as held for sale.
The goal of the multi-family lending product is to build a portfolio of high-quality multi-family loans within Customers'
covered markets, while cross selling other products and services. This product primarily targets refinancing existing loans with
other banks using conservative underwriting and provides purchase money for new acquisitions by borrowers. The primary
collateral for these loans is a first lien mortgage on the multi-family property, plus an assignment of all leases related to such
property. As of December 31, 2015, Customers had multi-family loans of $2.9 billion outstanding, comprising approximately
40.7% of the total loan portfolio, compared to $2.3 billion, or approximately 40.2% of the total loan portfolio, at December 31,
2014.
As of December 31, 2015, Customers had $6.9 billion in commercial loans outstanding, composing approximately 94.6% of its
total loan portfolio, which includes loans held for sale, compared to $5.3 billion, composing approximately 92.5% at
December 31, 2014.
Consumer Lending
Customers provides home equity and residential mortgage loans to customers. Underwriting standards for home equity lending
are conservative and lending is offered to solidify customer relationships and grow relationship revenues in the long term. This
lending is important in Customers' efforts to grow total relationship revenues for its consumer households. As of December 31,
2015, the Bank had $391.7 million in consumer loans outstanding, or 5.4% of the Bank’s total loan portfolio, which includes
loans held for sale. The Bank plans to expand its product offerings in real estate secured consumer lending.
Customers Bank has launched a community outreach program in Philadelphia to finance homeownership in urban
communities. As part of this program, the Bank is offering an “Affordable Mortgage Product”. This community outreach
program is penetrating the underserved population, especially in low-and moderate income neighborhoods. As part of this
commitment, a loan production office was opened in Progress Plaza, 1501 North Broad Street, Philadelphia, PA. The program
includes homebuyer seminars that prepare potential homebuyers for homeownership by teaching money management and
budgeting skills, including the financial responsibilities that come with having a mortgage and owning a home. The
“Affordable Mortgage Product” is offered throughout Customers Bank’s assessment areas.
The composition of loans held for sale was as follows:
2015
2014
2013
2012
2011
December 31,
(amounts in thousands)
Commercial Loans:
Mortgage warehouse loans at fair
value
Multi-family loans at lower of cost
or fair value
Total commercial loans held for
sale
Consumer Loans:
Residential mortgage loans at fair
value
Loans held for sale
$
1,754,950
$
1,332,019
$
740,694
$
1,439,889
$
174,999
39,257
99,791
—
—
—
1,794,207
1,431,810
740,694
1,439,889
174,999
2,857
1,797,064
$
3,649
1,435,459
$
6,899
747,593
$
—
1,439,889
$
—
174,999
$
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Table of Contents
Because the period to submit losses for non-single family loans covered under the FDIC loss sharing agreements expired in
third quarter 2015, and the balance of covered loans is not significant to Customers' total loan portfolio, the disaggregation
between covered and non-covered loans is no longer presented in the disclosures that follow. Additional disaggregation of the
commercial real estate loan portfolio between owner occupied and non-owner occupied is presented for 2015 and 2014. For
years prior, owner occupied and non-owner occupied are presented collectively as commercial real estate loans.
The composition of loans receivable (excluding loans held for sale) was as follows:
2015
2014
2013
2012
2011
December 31,
(amounts in thousands)
Commercial:
Multi-family
Commercial and industrial (a)
Commercial real estate (b)
Construction
Mortgage warehouse (c)
Total commercial loans
$
Consumer:
Residential real estate
Manufactured housing
Other
Total consumer loans
Total loans receivable
$
2,909,439
1,111,400
956,255
87,240
—
5,064,334
271,613
113,490
3,708
388,811
5,453,145
$
$
2,208,405
785,669
839,310
49,718
—
3,883,102
297,395
126,731
4,433
428,559
4,311,661
1,064,059
296,595
753,591
42,917
—
2,157,162
163,920
139,471
5,437
308,828
2,465,990
$
363,336
126,333
489,332
45,554
9,565
1,034,120
129,960
153,429
5,801
289,190
1,323,310
70,945
123,784
305,234
35,605
619,318
1,154,886
76,111
104,565
6,220
186,896
1,341,782
Deferred costs (fees) and
unamortized premiums (discounts),
net
Allowance for loan losses
Loans receivable, net of allowance $
334
(35,647)
5,417,832
$
512
(30,932)
4,281,241
$
(912)
(23,998)
2,441,080
$
1,157
(25,837)
1,298,630
$
(389)
(15,032)
1,326,361
(a)
(b)
(c)
Includes owner occupied commercial real estate loans for 2015 and 2014.
Includes non-owner occupied commercial real estate loans for 2015 and 2014. For 2013, 2012 and 2011, includes
owner occupied and non-owner occupied commercial real estate loans.
Beginning in third quarter 2012, certain mortgage warehouse lending transactions were documented under master
repurchase agreements and classified as held for sale.
Loans to mortgage banking businesses and certain residential mortgage and multi-family loans expected to be sold are
classified as loans held for sale. Loans held for sale totaled $1.8 billion and $1.4 billion at December 31, 2015 and 2014,
respectively. The mortgage warehouse product line provides financing to mortgage companies nationwide from the time of loan
origination until the loans are sold into the secondary market. As a mortgage warehouse lender, we provide a form of financing
to mortgage bankers by purchasing for resale the underlying residential mortgages on a short-term basis under a master
repurchase agreement. We are subject to the risks associated with such lending, including, but not limited to, the risks of fraud,
bankruptcy and default of the mortgage banker or of the underlying residential borrower, any of which could result in credit
losses. The mortgage warehouse lending employees monitor these mortgage originators by obtaining financial and other
relevant information to reduce these risks during the lending period.
Loans receivable, net of the allowance for loan losses, increased by $1.1 billion to $5.4 billion at December 31, 2015 from $4.3
billion at December 31, 2014. The increase in loans receivable, net of the allowance for loan losses, was attributable to higher
balances in multi-family, commercial and industrial (including owner occupied commercial real estate) and non-owner
occupied commercial real estate loans, which increased $0.7 billion, $0.3 billion, and $0.1 billion, respectively, from
December 31, 2014. The increase in these loan balances are the result of the Bank's successful execution of its organic growth
strategy.
The following table sets forth Customers' commercial loans receivable as of December 31, 2015, in terms of contractual
maturity date and interest rate characteristics:
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Table of Contents
After one
but
within
five
years
Within
one year
After
five
years
Total
(amounts in thousands)
Commercial Loans:
Multi-family
Commercial and industrial (including owner occupied
commercial real estate)
Commercial real estate non-owner occupied
Construction
Total commercial loans
Amount of such loans with:
Predetermined rates
Floating or adjustable rates
Total commercial loans
$
$
$
$
5,322
$
1,886,364
$
1,017,753
$
2,909,439
147,103
41,665
368
194,458
51,343
143,115
194,458
$
$
$
489,748
557,382
48,568
2,982,062
2,466,942
515,120
2,982,062
$
$
$
474,549
357,208
38,304
1,887,814
1,186,577
701,237
1,887,814
$
$
$
1,111,400
956,255
87,240
5,064,334
3,704,862
1,359,472
5,064,334
CREDIT RISK
Customers Bancorp manages credit risk by maintaining diversification in its loan portfolio, establishing and enforcing prudent
underwriting standards and collection efforts, and continuous and periodic loan classification reviews. Management also
considers the effect of credit risk on financial performance by reviewing quarterly and maintaining an adequate allowance for
loan losses. Credit losses are charged when they are identified, and provisions are added when it is estimated that a loss has
occurred, to the allowance for loan losses at least quarterly. The allowance for loan losses is estimated at least quarterly.
The provision for loan losses was $20.6 million, $14.7 million, and $2.2 million for the years ended December 31, 2015, 2014
and 2013, respectively. The allowance for loan losses maintained for loans receivable (excludes loans held for sale as estimable
credit losses are embedded in the fair values at which the loans are reported) was $35.7 million, or 0.65% of total loans
receivable, at December 31, 2015 and $30.9 million, or 0.72% of total loans receivable, at December 31, 2014. The percentage
of the allowance of loan losses to total loans receivable declined during 2015 primarily due to continued growth of the multi-
family and commercial real estate portfolios, which have lower reserving factors due to their notably better historical loss
experience than other commercial loans. Net charge-offs were $12.0 million for the year ended December 31, 2015, an increase
of $8.9 million compared to $3.1 million for the year ending December 31, 2014. The increase in net charge offs was driven by
the identification of a $9.0 million fraudulent loan that was charged-off in its entirety during 2015.
Customers had approximately $13.8 million and $42.2 million in loans that were covered under loss share arrangements with
the FDIC as of December 31, 2015 and 2014, respectively. The period to submit losses for non-single family loans under the
loss sharing agreements expired in third quarter 2015. The period to submit losses for single family loans expires in third
quarter 2017. The final maturity of the FDIC loss sharing agreements occurs in third quarter 2020.
Customers Bank considers the covered loans in estimating the allowance for loan losses and considers recovery of estimated
credit losses from the FDIC in the FDIC indemnification asset. Refer to “Critical Accounting Policies” herein and “NOTE 3 –
SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION” for further discussion on the accounting for
the FDIC loss sharing receivable balance.
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Table of Contents
The chart below depicts the Bank's allowance for loan losses, excluding the effects of the FDIC receivable, for the periods
indicated.
(amounts in thousands)
Beginning Balance
Loan charge-offs: (1)
Construction
Commercial and industrial (2)
Commercial real estate (3)
Residential real estate
Other consumer
Total Charge-offs
Loan recoveries (1):
Construction
Commercial and industrial (2)
Commercial real estate (3)
Residential real estate
Other consumer
Total Recoveries
Total net charge-offs
Provision for loan losses (4)
For the Years Ended December 31,
2015
2014
2013
2012
2011
$
30,932
$
23,998
$
25,837
$
15,032
$
15,129
1,064
11,709
327
276
36
13,412
204
562
—
575
92
1,433
11,979
16,694
895
1,637
1,715
667
33
4,947
13
736
801
265
8
1,823
3,124
10,058
2,096
1,387
3,358
410
87
7,338
—
391
42
2
9
444
6,894
5,055
2,507
522
2,462
649
26
6,166
4
514
63
5
114
700
5,466
16,271
1,179
2,543
5,775
109
55
9,661
2
11
94
—
7
114
9,547
9,450
Ending Balance
Net charge-offs as a percentage of average
loans receivable
$
35,647
$
30,932
$
23,998
$
25,837
$
15,032
0.26%
0.09%
0.37%
0.38%
1.20%
(1)
(2)
(3)
(4)
Charge-offs and recoveries on purchased-credit-impaired loans that are accounted for in pools are recognized on a net
basis when the pool matures.
Includes owner occupied commercial real estate loans for 2015 and 2014.
Includes non-owner occupied commercial real estate loans for 2015 and 2014. For 2013, 2012 and 2011, includes
owner occupied and non-owner occupied commercial real estate loans.
The provision amounts exclude the (cost)/benefit of the FDIC loss share arrangements of $(3.9) million, $(4.7) million,
$2.8 million, $2.0 million, and $2.0 million, respectively.
The allowance for loan losses is based on a periodic evaluation of the loan portfolio and is maintained at a level that
management considers adequate to absorb probable losses incurred as of the balance sheet date. All commercial loans are
assigned credit risk ratings, based upon an assessment of the borrower, the structure of the transaction and the available
collateral and/or guarantees. All loans are monitored regularly by the responsible officer, and the risk ratings are adjusted when
considered appropriate. The risk assessment allows management to identify problem loans timely. Management considers a
variety of factors, and recognizes the inherent risk of loss that always exists in the lending process. Management uses a
disciplined methodology to estimate an appropriate level of allowance for loan losses. Refer to “Critical Accounting Policies”
herein and “NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION” for further discussion
on management's methodology for estimating the allowance for loan losses.
Approximately 80% of the Bank’s commercial real estate, commercial and residential construction, consumer residential and
commercial and industrial loan types have real estate as collateral (collectively, “the real estate portfolio”). The Bank’s lien
position on the real estate collateral will vary on a loan-by-loan basis and will change as a result of changes in the value of the
collateral. Current appraisals providing current value estimates of the property are received when the Bank’s credit group
determines that the facts and circumstances have significantly changed since the date of the last appraisal, including that real
estate values have deteriorated. The credit committee and loan officers review loans that are fifteen or more days delinquent
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Table of Contents
and all non-accrual loans on a periodic basis. In addition, loans where the loan officers have identified a “borrower of interest”
are discussed to determine if additional analysis is necessary to apply the risk rating criteria properly. The risk ratings for the
real estate loan portfolio are determined based upon the current information available, including but not limited to discussions
with the borrower, updated financial information, economic conditions within the geographic area and other factors that may
affect the cash flow of the loan. If a loan is individually evaluated for impairment, the collateral value or discounted cash flow
analysis is used to determine the estimated fair value of the underlying collateral and compared, net of estimated selling costs,
to the outstanding loan balance to measure a specific reserve. Appraisals used in this evaluation process are typically less than
two years aged. For loans where real estate is not the primary source of collateral, updated financial information is obtained,
including accounts receivable and inventory aging reports and relevant supplemental financial data to estimate the fair value of
the loan and compared, net of estimated selling costs, to the outstanding loan balance to estimate the required reserve.
These impairment measurements are inherently subjective as they require material estimates, including, among others,
estimates of property values in appraisals, the amounts and timing of expected future cash flows on individual loans, and
general considerations for historical loss experience, economic conditions, uncertainties in estimating losses and inherent risks
in the various credit portfolios, all of which require judgment and may be susceptible to significant change overtime and as a
result of changing economic conditions or other factors. Pursuant to ASC 450 Contingencies and ASC 310-40 Troubled Debt
Restructurings by Creditors, impaired loans, consisting primarily of non-accrual and restructured loans, are considered in the
methodology for determining the allowance for credit losses. Impaired loans are generally evaluated based on the expected
future cash flows or the fair value of the underlying collateral (less estimated costs to sell) if principal repayment is expected to
come from the sale or operation of such collateral.
The following table shows the allowance for loan losses by various loan portfolios:
2015
2014
December 31,
2013
2012
2011
Percent of
Loans in
each
category
to total
loans
Percent of
Loans in
each
category
to total
loans
Allowance
for loan
losses
Percent of
Loans in
each
category
to total
loans
Percent of
Loans in
each
category
to total
loans
Percent of
Loans in
each
category
to total
loans
Allowance
for loan
losses
Allowance
for loan
losses
Allowance
for loan
losses
Allowance
for loan
losses
$ 1,074
3.0% $ 1,047
3.4% $ 2,385
9.9% $ 3,991
15.4% $ 4,656
31.0%
10,212
28.6%
9,120
29.5%
2,674
11.2%
1,477
5.7%
1,441
9.6%
8,420
12,016
3,298
133
23.6%
33.7%
9.3%
0.4%
9,198
8,493
2,698
114
29.7% 11,478
4,227
27.5%
47.8% 13,645
1,794
17.6%
8.7%
0.4%
2,490
130
10.4%
0.5%
3,233
154
52.9%
6.9%
12.5%
0.6%
5,447
1,583
36.2%
10.5%
844
77
5.6%
0.5%
494
1.4%
262
0.8%
614
2.6%
750
2.9%
1
—%
(amounts in thousands)
Construction
Commercial and
industrial (a)
Commercial real
estate (b)
Multi-family
Residential real
estate
Other consumer
Manufactured
housing
Mortgage warehouse
Residual reserve
—
—
$ 35,647
—%
—%
—
—
100.0% $ 30,932
—%
—%
—
—
100.0% $ 23,998
—%
—%
71
722
100.0% $ 25,837
0.3%
2.8%
929
54
100.0% $ 15,032
6.2%
0.4%
100.0%
(a) Includes owner occupied commercial real estate loans for 2015 and 2014.
(b) Includes non-owner occupied commercial real estate loans for 2015 and 2014. For 2013, 2012 and 2011, includes owner
occupied and non-owner occupied commercial real estate loans.
ASSET QUALITY
Customers divides its loan portfolio into two categories to analyze and understand loan activity and performance: loans that
were originated, and loans that were acquired. Customers' originated loans were subject to the current underwriting standards
that were put in place in 2009. Management believes this additional information provides a better understanding of the risk in
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Table of Contents
the portfolio and the various types of reserves that are available to absorb loan losses that may arise in future periods. Credit
losses from originated loans are absorbed by the allowance for loan loss reserves. Credit losses from acquired loans are
absorbed by the allowance for loan losses, nonaccretable difference fair value marks, and cash reserves, as described below.
The allowance for loan losses is to absorb only those losses estimated to have been incurred after acquisition, whereas the fair
value mark and cash reserves absorb losses estimated to have been embedded in the acquired loans at acquisition. This schedule
includes both loans held for sale and loans held for investment.
Asset Quality at December 31, 2015
Total
Loans
Current
30-90
Days
Greater
than 90
Days
and
Accruing
Non-
accrual/
NPL (a)
OREO
(b)
NPA
(a)+(b)
NPL
to
Loan
Type
(%)
NPA
to
Loans +
OREO
(%)
Loan Type
(amounts in thousands)
Originated Loans
Multi-Family
2,903,814
2,903,814
Commercial & Industrial (1)
990,621
987,783
Commercial Real Estate Non-Owner
Occupied
Residential
Construction
Other Consumer
906,544
113,858
87,006
712
905,756
113,757
87,006
712
—
78
—
69
—
—
Total Originated Loans
5,002,555
4,998,828
147
—
—
—
—
—
—
—
—
2,760
788
32
—
—
—
153
—
—
—
—
—
2,913
788
32
—
—
—%
0.28%
0.09%
0.03%
—%
—%
—%
0.29%
0.09%
0.03%
—%
—%
3,580
153
3,733
0.07%
0.07%
Loans Acquired
Bank Acquisitions
Loan Purchases
Total Loans Acquired
Unearned Origination Fees
206,971
243,619
450,590
334
190,117
232,692
422,809
334
5,842
3,898
9,740
—
6,269
4,581
10,850
—
4,743
2,448
7,191
—
4,379
525
9,122
2,973
4,904
12,095
—
—
2.29%
1.00%
1.60%
4.32%
1.22%
2.66%
Total Loans Receivable
5,453,479
5,421,971
9,887
10,850
10,771
5,057
15,828
0.20%
0.29%
Total Loans Held for Sale
1,797,064
1,797,064
—
—
—
—
—
Total Portfolio
$7,250,543
$ 7,219,035
$ 9,887
$
10,850
$
10,771
$ 5,057
$ 15,828
0.15%
0.22%
(1) Commercial & industrial loans, including owner occupied commercial real estate.
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Table of Contents
Asset Quality at December 31, 2015 (continued)
Loan Type
Total Loans
NPL
ALL
Cash
Reserve
Total
Credit
Reserves
Reserves
to Loans
(%)
Reserves
to NPLs
(%)
Originated Loans
Multi-Family
Commercial & Industrial
Commercial Real Estate
Residential
Construction
Other Consumer
2,903,814
—
12,016
990,621
906,544
113,858
87,006
712
2,760
788
32
—
—
8,864
3,706
1,992
1,074
9
Total Originated Loans
5,002,555
3,580
27,661
Loans Acquired
Bank Acquisitions
Loan Purchases
Total Loans Acquired
Unearned Origination Fees
Total Loans Held for Investment
Total Loans Held for Sale
206,971
243,619
450,590
334
4,743
2,448
7,191
7,492
494
7,986
5,453,479
1,797,064
10,771
35,647
—
—
—
—
—
—
—
—
—
—
1,159
1,159
1,159
—
12,016
8,864
3,706
1,992
1,074
9
27,661
7,492
1,653
9,145
36,806
—
0.41%
0.89%
0.41%
1.75%
1.23%
1.26%
0.55%
3.62%
0.68%
2.03%
n/a
321.16%
470.30%
6,225.00%
n/a
n/a
772.65%
157.96%
67.52%
127.17%
0.67%
341.71%
Total Portfolio
$
7,250,543
$ 10,771
$ 35,647
$
1,159
$
36,806
0.51%
341.71%
Originated Loans
Post 2009 originated loans (excluding held-for-sale loans) totaled $5.0 billion, or 69.0%, of total loans at December 31, 2015,
compared to $3.8 billion, or 66.7%, at December 31, 2014. The new management team adopted new underwriting standards
that management believes better limits risks of loss. Only $3.6 million, or 0.07%, of the post 2009 loans were non-performing
at December 31, 2015. Only $2.9 million, or 0.08%, of the post 2009 loans were non-performing at December 31, 2014. The
post 2009 originated loans were supported by an allowance for loan losses of $27.7 million (0.55% of post 2009 originated
loans) and $21.1 million (0.55% of post 2009 originated loans) at December 31, 2015 and 2014, respectively.
Loans Acquired
At December 31, 2015, Customers reported $0.5 billion of acquired loans, which was 6.2% of total loans, compared to $0.5
billion, or 8.3%, of total loans at December 31, 2014. Non-performing acquired loans totaled $7.2 million at December 31,
2015 and $8.8 million at December 31, 2014. When loans are acquired, they are recorded on the balance sheet at fair value.
Acquired loans include purchased portfolios, FDIC failed-bank acquisitions, and unassisted acquisitions. Of the manufactured
housing loans purchased from Tammac prior to 2012, $63.4 million were supported by a $1.2 million cash reserve at December
31, 2015, compared to $70.6 million supported by a cash reserve of $3.0 million at December 31, 2014. The cash reserve was
created as part of the purchase transaction to absorb losses and is maintained in a demand deposit account at Customers. All
current losses and delinquent interest are absorbed by this reserve. For the manufactured housing loans purchased in 2012,
Tammac has an obligation to pay the Customers the full payoff amount of the defaulted loan, including any principal, unpaid
interest, or advances on the loans, once the borrower vacates the property. At December 31, 2015, $41.9 million of these loans
were outstanding, compared to $47.5 million at December 31, 2014.
Many of the acquired loans were purchased at a discount. The price paid considered management’s judgment as to the credit
and interest rate risk inherent in the portfolio at the time of purchase. Every quarter, management reassesses the risk and adjusts
the cash flow forecast to incorporate changes in the credit outlook. Generally, a decrease in forecasted cash flows for a
purchased loan will result in a provision for loan losses, and absent charge-offs, an increase in the allowance for loan losses.
Acquired loans have a significantly higher percentage of non-performing loans than loans originated after September 2009.
Management acquired these loans with the expectation that non-performing loan levels would be elevated, and therefore
incorporated that expectation into the price paid. There is a Special Assets Group that focuses on workouts for these acquired
non-performing assets. Total acquired loans were supported by reserves (allowance for loan losses and cash reserves) of $9.1
million (2.03% of total acquired loans) and $12.9 million (2.69% of total acquired loans), respectively, at December 31, 2015
and 2014.
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Table of Contents
Held-for-Sale Loans
At December 31, 2015, loans held for sale were $1.8 billion, or 24.8%, of the total loan portfolio, compared to $1.4 billion, or
25.0% of the total loan portfolio at December 31, 2014. The loans held-for-sale portfolio at December 31, 2015 included $1.8
billion of loans to mortgage banking businesses, $39.3 million of multi-family loans and $2.9 million of residential mortgage
loans, compared to $1.3 billion of loans to mortgage banking businesses, $99.8 million of multi-family loans and $3.6 million
of residential mortgages loans at December 31, 2014. Held-for-sale loans are carried on our balance sheet at either fair value
(due to the election of the fair value option) or the lower of cost of fair value. An allowance for loan losses is not recorded on
loans that are held for sale.
Customers manages its credit risk through the diversification of the loan portfolio and the application of policies and
procedures designed to foster sound credit standards and monitoring practices. While various degrees of credit risk are
associated with substantially all investing activities, the lending function carries the greatest degree of potential loss. At
December 31, 2015 and 2014, non-performing loans to total loans were 0.15% and 0.20%, respectively. Total reserves to non-
performing loans were 341.7% and 289.6%, respectively, at December 31, 2015 and 2014.
The tables below set forth non-accrual loans and non-performing assets and asset quality ratios:
2015
2014
2013
2012
2011
December 31,
(amounts in thousands)
Loans 90+ days delinquent still
accruing (1)
Non-accrual loans
OREO
Total non-performing assets
$
$
(1)
Excludes purchased-credit-impaired loans.
2,805
$
4,388
$
3,772
$
1,966
$
—
10,771
5,057
15,828
$
11,733
15,371
27,104
$
19,163
12,265
31,428
$
32,851
8,114
40,965
$
36,626
13,482
50,108
Non-accrual loans to total loans receivable
Non-accrual loans to total loans
Non-performing assets to total assets
2015
2014
2013
2012
2011
December 31,
0.20%
0.27%
0.78%
2.48%
2.73%
0.15%
0.20%
0.60%
1.19%
2.42%
0.19%
0.40%
0.76%
1.28%
2.41%
Non-accrual loans and 90+ days delinquent to total
assets
0.16%
0.24%
0.55%
1.09%
1.76%
Allowance for loan losses to:
Total loans receivable
Non-accrual loans
0.65%
0.72%
0.97%
330.95%
263.63%
125.23%
1.95%
78.65%
1.12%
41.04%
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Table of Contents
The table below sets forth loans that were non-performing at December 31, 2015, 2014, 2013, 2012 and 2011.
(amounts in thousands)
Commercial and industrial (1)
Commercial real estate (2)
Commercial real estate non-owner
occupied
Construction
Residential real estate
Manufactured housing
Other consumer
Total non-performing loans
2015
2014
December 31,
2013
2012
2011
$
$
$
1,973
2,700
$
2,513
2,514
$
125
11,615
$
388
21,482
1,307
—
2,202
2,449
140
10,771
$
1,460
2,325
1,855
931
135
11,733
$
N/A
5,431
1,533
459
—
19,163
$
N/A
7,667
3,027
231
56
32,851
$
2,857
22,720
N/A
8,214
2,717
78
40
36,626
(1)
(2)
Includes owner occupied commercial real estate loans for 2015 and 2014.
Includes non-owner occupied commercial real estate loans for 2015 and 2014. For 2013, 2012 and 2011, includes
owner occupied and non-owner occupied commercial real estate loans.
Customers seeks to manage credit risk through the diversification of the loan portfolio and the application of credit
underwriting policies and procedures designed to foster sound credit standards and monitoring practices. While various degrees
of credit risk are associated with substantially all investing activities, the lending function carries the greatest degree of
potential loss.
Asset quality assurance activities include careful monitoring of borrower payment status and the periodic review of borrower
current financial information to ensure ongoing financial strength and borrower cash flow viability. The Bank has established
credit policies and procedures, seeks the consistent application of those policies and procedures across the organization, and
adjusts policies as appropriate for changes in market conditions and applicable regulations.
Problem Loan Identification and Management
To facilitate the monitoring of credit quality within the commercial and industrial, commercial real estate, construction
portfolio and residential real estate segments, and for purposes of analyzing historical loss rates used in the determination of the
allowance for loan losses for the respective portfolio segment, Customers utilizes the following categories of risk ratings: pass
(there are six risk ratings of pass loans), special mention, substandard, doubtful or loss. The risk rating categories, which are
derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated
periodically thereafter. Pass ratings, which are assigned to those borrowers who do not have an identified potential or well-
defined weaknesses and for which there is a high likelihood of orderly repayment, are updated periodically based on the size
and credit characteristics of the borrower. All other categories are updated on a quarterly basis during the month preceding the
end of the calendar quarter. While assigning risk ratings involves judgment, the risk rating process allows management to
identify riskier credits in a timely manner and allocate the appropriate resources to managing the loans.
Customers assigns a special mention rating to loans that have potential weaknesses that deserve management’s close attention.
If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects
for the loan and our credit position. At December 31, 2015 and 2014, special mention loans were $24.5 million and $34.6
million, respectively.
Risk ratings are not established for home equity loans, consumer loans, and installment loans, mainly because these portfolios
consist of a larger number of homogenous loans with smaller balances. Instead, these portfolios are evaluated for risk mainly
based on aggregate payment history, through the monitoring of delinquency levels and trends.
A regular reporting and review process is in place to provide for proper portfolio oversight and control, and to monitor those
loans identified as problem credits by management. This process is designed to assess our progress in working toward a
solution, and to assist in determining an appropriate specific allowance for possible losses. All loan work-out situations involve
the active participation of management and are reported regularly to the Board. When a loan becomes delinquent 90 days or
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more, or earlier if considered appropriate, the loan is assigned to Customers’ Special Asset Group (“SAG”) for workout or other
resolution.
Loan charge-offs are determined on a case-by-case basis. Loans are generally charged off when principal is likely to be
unrecoverable and after appropriate collection steps have been taken. Loan charge-offs are proposed by the SAG and approved
by the Board of Directors.
Loan policies and procedures are reviewed internally for possible revisions and changes on a regular basis. In addition, these
policies and procedures, together with the loan portfolio, are reviewed on a periodic basis by various regulatory agencies and
by our internal, external and loan review auditors, as part of their examination and audit procedures.
Troubled Debt Restructurings (TDRs)
At December 31, 2015 and 2014, there were $11.4 million and $5.0 million, respectively, in loans reported as TDRs. TDRs are
considered impaired loans in the calendar year of their restructuring and are evaluated to determine whether they should be
placed on non-accrual status. In subsequent years, a TDR may be returned to accrual status if it satisfies a minimum six-month
performance requirement; however, it will remain classified as an impaired loan. Generally, Customers requires sustained
performance for nine months before returning a TDR to accrual status.
Modification of purchased-credit-impaired loans that are accounted for within loan pools in accordance with the accounting
standards for purchased-credit-impaired loans do not result in the removal of these loans from the pool even if modifications
would otherwise be considered a TDR. Accordingly, as each pool is accounted for as a single asset with a single composite
interest rate and an expectation of cash flows, modifications of loans within such pools are not reported as TDRs.
TDR modifications primarily involve interest rate concessions, extensions of term, deferrals of principal, and other
modifications. Other modifications typically reflect other nonstandard terms which Customers would not offer in non-troubled
situations. During the years ended December 31, 2015 and 2014, loans aggregating $7.5 million and $1.1 million, respectively,
were modified in troubled debt restructurings. TDR modifications of loans within the commercial and industrial category were
primarily interest rate concessions, deferrals of principal and other modifications; modifications of commercial real estate loans
were primarily deferrals of principal, extensions of term and other modifications; and modifications of residential real estate
loans were primarily interest rate concessions and deferrals of principal. As of December 31, 2015 and 2014, there were no
commitments to lend additional funds to debtors whose terms have been modified in troubled debt structuring.
There were no valuation losses at the time of the troubled debt restructuring and the TDR had no impact on the allowance for
loan losses. During the twelve months ended December 31, 2015, thirty-six TDR loans defaulted with a total recorded
investment of $2.5 million. During the twelve months ended December 31, 2014, six TDR loans defaulted with a total recorded
investment of $0.4 million. Because these loans were included in the loan portfolio that is subject to the cash reserve, they will
be removed from the loan portfolio if they become ninety days past due.
All loans modified in troubled debt restructurings are considered impaired and measured for impairment. The nature and extent
of impairment of TDRs, including those which have experienced a subsequent default, is considered in the determination of an
appropriate level of allowance for loan losses. There were 3 specific allowances resulting from TDR modifications during
2015, totaling $0.2 million for 2 commercial and industrial loans, and $0.1 million for 1 commercial real estate non-owner
occupied loan. There were no specific allowances resulting from TDR modifications during 2014.
FDIC LOSS SHARING RECEIVABLE AND CLAWBACK LIABILITY
As of December 2015 and 2014, loans covered under loss sharing agreements with the FDIC were $13.8 million and $42.2
million, respectively. As part of the FDIC loss sharing arrangements, Customers also assumed a liability to be paid within 45
days subsequent to the maturity or termination of the loss sharing arrangements that is contingent upon actual losses incurred
over the life of the arrangements relative to expected losses and the consideration paid upon acquisition of the failed
institutions. Due to cash received on the covered assets in excess of the original cash to be received expectations of the FDIC,
the Bank anticipates that it will be required to pay the FDIC at the end of its loss sharing arrangements. As of December 31,
2015, a clawback liability of $2.3 million has been recorded. To the extent actual losses on the covered assets are less than
estimated losses, the clawback liability will increase. To the extent actual losses on the covered assets are more than the
estimated losses, the clawback liability will decrease.
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As of December 31, 2015, the Bank expected to collect $0.2 million from the FDIC for estimated losses and reimbursement of
external costs, such as legal fees, real estate taxes and appraisal expenses, and estimated the clawback liability due to the FDIC
in 2020 at $2.3 million. The net amount of $2.1 million is included in "Accrued interest payable and other liabilities" in the
accompanying consolidated balance sheet.
ACCRUED INTEREST RECEIVABLE
Accrued interest receivable increased by $4.7 million, or 31.1%, to $19.9 million at December 31, 2015 from $15.2 million at
December 31, 2014. This increase was primarily associated with the increase in total loans of $1.5 billion to $7.3 billion at
December 31, 2015 from $5.7 billion at December 31, 2014.
PREMISES AND EQUIPMENT AND OTHER ASSETS
Our premises and equipment, net of accumulated depreciation, was $11.5 million and $10.8 million at December 31, 2015 and
2014, respectively. Technology equipment contributed $1.2 million due to the increase of additional technology, facilities and
team members. Leasehold improvements and furniture and equipment purchases contributed $1.7 million to the increase.
Customers Bank’s restricted stock holdings at December 31, 2015 and 2014 were $90.8 million and $82.0 million,
respectively. These consist of stock of the Federal Reserve Bank, Federal Home Loan Bank and Atlantic Central Bankers Bank,
and are required as part of our relationship with these banks.
Other assets at December 31, 2015 and 2014 were $73.3 million and $52.9 million, respectively. Activity that contributed to the
increase of $20.4 million included $14.9 million of deferred taxes primarily driven by increases in taxable income and changes
in the value of investment securities, and $4.3 million of cash pledged for interest rate swaps.
BOLI purchases of $15.0 million during 2015 contributed to the increase in our BOLI cash surrender value of $18.5 million, to
$157.2 million at December 31, 2015 from $138.7 million at December 31, 2014. BOLI is used by the Bank as tax-free funding
for employee benefits. Covered in BOLI on the balance sheet is the cash surrender value of the Supplemental Executive
Retirement Plan (“SERP”) balance of $2.7 million and $2.8 million at December 31, 2015 and 2014, respectively.
DEPOSITS
The Bank offers a variety of deposit accounts, including checking, savings, money market deposit accounts (“MMDA”) and
time deposits. Deposits are obtained primarily from our geographic service area. Total deposits grew to $5.9 billion at
December 31, 2015, an increase of $1.4 billion, or 30.4%, from $4.5 billion at December 31, 2014. Transaction deposits
increased by $0.7 billion, or 26.3%, to $3.6 billion at December 31, 2015 from $2.8 billion at December 31, 2014, with non-
interest bearing deposits increasing by $107 million. Certificate of deposit accounts increased $0.6 billion, or 37.2%, to $2.3
billion at December 31, 2015 from $1.7 billion at December 31, 2014.
The components of deposits were as follows at the dates indicated:
(amounts in thousands)
Demand, non-interest bearing
Demand, interest bearing
Savings, including MMDA
Time, $100,000 and over
Time, other
Total deposits
December 31,
2015
2014
2013
$
$
653,679
127,215
2,781,010
1,624,562
723,035
5,909,501
$
$
546,436
71,202
2,203,237
1,043,265
668,398
4,532,538
$
$
478,103
58,013
1,298,468
797,322
328,016
2,959,922
We experienced growth in retail deposits, despite lower interest rates in 2015. Non-interest bearing demand deposits totaled
$0.7 billion at December 31, 2015, up from $0.5 billion at December 31, 2014.
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Average deposit balances by type and the associated average rate paid are summarized below:
For the Years ended December 31,
2015
2014
2013
Average
Balance
Average
Rate Paid
Average
Balance
Average
Rate Paid
Average
Balance
Average
Rate Paid
(amounts in thousands)
Demand deposits
Interest-bearing demand deposits
Savings, including MMDA
Time deposits
Total
$
692,159
123,527
2,449,778
2,087,641
$ 5,353,105
0.00% $
0.56
0.52
0.99
620,385
62,840
1,753,691
1,403,774
$ 3,840,690
0.00% $
0.61
0.42
0.96
385,175
45,613
1,138,200
1,251,707
$ 2,820,695
0.00%
0.52
0.68
1.04
At December 31, 2015, the scheduled maturities of time deposits greater than $100,000 were as follows:
(amounts in thousands)
3 months or less
Over 3 through 6 months
Over 6 through 12 months
Over 12 months
Total
December 31, 2015
$
$
289,462
653,273
397,203
284,624
1,624,562
FHLB ADVANCES and OTHER BORROWINGS
Borrowed funds from various sources are generally used to supplement deposit growth and meet other operating needs. The
Bank strategically views the short term FHLB advances as funding the loans to mortgage companies national business.
Short-term debt
Short-term debt was as follows:
2015
December 31,
2014
2013
Amount
Rate
Amount
Rate
Amount
Rate
(amounts in thousands)
FHLB advances
Federal funds purchased
$ 1,365,300
70,000
Total short-term borrowings $ 1,435,300
0.48% $ 1,298,000
0.56
—
$ 1,298,000
0.29% $
—
$
611,500
13,000
624,500
0.26%
0.48%
For additional information on the Company’s short-term debt, refer to “NOTE 11 – BORROWINGS.”
Long-term debt
The contractual maturities of fixed-rate long-term FHLB advances are as noted below.
(amounts in thousands)
2016
2017
2018
2019
December 31,
2015
2014
Amount
Rate
Amount
Rate
—
205,000
55,000
—
260,000
$
$
77
—% $
1.18
1.61
—
$
85,000
180,000
55,000
—
320,000
0.59%
1.21
1.61
—
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Senior notes
On June 26, 2014, Customers Bancorp, Inc. closed a private placement transaction in which it issued $25.0 million of 4.625%
senior notes due 2019. Interest is paid semi-annually in arrears in June and December. The notes are unsecured obligations of
the Bancorp and rank equally with all of its secured and unsecured senior indebtedness.
In July and August 2013, the Bancorp issued $63.3 million in aggregate principal amount of senior notes due 2018.
The notes bear interest at 6.375% per year which is payable on March 15, June 15, September 15, and December 15.
Subordinated debt
On June 26, 2014, Customers Bank closed a private placement transaction in which it issued $110.0 million of fixed-to-floating
rate subordinated notes due 2029. The subordinated notes bear interest at an annual fixed rate of 6.125% until June 26, 2024,
and interest is paid semiannually. From June 26, 2024, the subordinated notes will bear an annual interest rate equal to three-
month LIBOR plus 344.3 basis points until maturity on June 26, 2029. Customers Bank has the ability to call the subordinated
notes, in whole or in part, at a redemption price equal to 100% of the principal balance at certain times on or after June 26,
2024.
The subordinated notes qualify as Tier 2 capital for regulatory capital purposes.
SHAREHOLDERS’ EQUITY
Shareholders’ equity increased by $110.8 million to $553.9 million at December 31, 2015, from $443.1 million at
December 31, 2014. The increase in equity was primarily the result of net income for 2015 of $58.6 million and the issuance of
2,300,000 shares of preferred stock, the latter resulting in a $55.6 million increase to shareholders' equity.
On May 18, 2015, Customers Bancorp issued 2,300,000 shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred
Stock, Series C, par value $1.00 per share, with a liquidation preference of $25.00 per share. Dividends on the Preferred Stock
totaled $2.5 million for the year ended December 31, 2015. For additional information regarding this offering, refer to "NOTE
12 - SHAREHOLDERS' EQUITY."
On August 24, 2015, Customers Bancorp's board of directors declared a cash dividend on its Series C Preferred Stock of
$0.56875 per share. The dividend was paid on September 15, 2015 to shareholders of record on August 31, 2015.
On November 17, 2015, Customers Bancorp's board of directors declared a cash dividend on its Series C Preferred Stock of
$0.4375 per share. The dividend was paid on December 15, 2015 to shareholders of record on November 30, 2015.
During 2015 all of the remaining 1.1 million shares of Class B Non-Voting Common Stock were converted into 1.1 million
shares of Voting Common Stock.
During 2015 Customers issued 156,272 shares of Common Stock, 27,674 shares were issued to directors in lieu of meeting
retainer fees, 98,386 shares were issued under share-based compensation arrangements, 22,601 shares under the employee
stock purchase plan, and 7,611 upon exercise of outstanding warrants.
During 2014, the Bancorp:
•
•
declared a 10% stock dividend to all shareholders of record as of May 27, 2014. This special dividend was paid on June 30,
2014 in the form of an aggregate of 2.4 million additional shares of Common Stock;
issued 91,457 shares of Common Stock, 52,770 shares were issued to directors in lieu of meeting retainer fees, 34,414
shares were issued under share-based compensation arrangements and 4,273 shares under the employee stock purchase
plan.
During 2013, the Bancorp:
•
•
•
sold 6.2 million shares of new issue Voting Common Stock to the public at a price of $16.75 per share. The net proceeds
after deducting underwriting discounts and commissions and offering expenses were $97.5 million;
converted 3.7 million shares of Class B Non-Voting Common Stock into 3.7 million shares of Voting Common Stock;
authorized a stock repurchase plan in which the Bancorp could acquire up to 5% of its current outstanding shares at prices
not to exceed a 20% premium over the current book value. The repurchase program may be suspended, modified or
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discontinued at any time, and the Bancorp has no obligation to repurchase any amount of its Common Stock under the
program;
repurchased 0.5 million shares under the stock repurchase program discussed above;
issued 23,413 shares of Common Stock under share-based compensation arrangements;
issued 31,904 shares of Class B Non-Voting Common Stock and 14,869 shares of Voting Common Stock upon exercise of
outstanding warrants; and
repurchased warrants to purchase 17,227 shares of voting Common Stock and 17,227 shares of Class B Non-Voting stock.
•
•
•
•
For additional details relating to changes in the Bancorp’s shareholders’ equity, refer to the “Consolidated Statements of
Changes in Shareholders Equity” presented in Part II, Item 8. Financial Statements and Supplementary Data of this Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity for a financial institution is a measure of that institution’s ability to meet depositors’ needs for funds, to satisfy or
fund loan commitments, and for other operating purposes. Ensuring adequate liquidity is an objective of the Asset/Liability
Management process. Customers coordinates its management of liquidity with our interest rate sensitivity and capital position,
and strives to maintain a strong liquidity position.
Customers' investment portfolio provides periodic cash flows through regular maturities and amortization, and can be used as
collateral to secure additional liquidity funding. Our principal sources of funds are proceeds from common and preferred stock
issuance, deposits, debt issuance, principal and interest payments on loans, and other funds from operations. Borrowing
arrangements are maintained with the Federal Home Loan Bank and the Federal Reserve Bank of Philadelphia to meet short-
term liquidity needs. As of December 31, 2015 and 2014, our borrowing capacity with the Federal Home Loan Bank was $3.7
billion and $3.2 billion, respectively, of which $1.4 billion and $1.3 billion, respectively, was used in short-term borrowings. As
of December 31, 2015 and 2014, our borrowing capacity with the Federal Reserve Bank of Philadelphia was $59.2 million and
$62.7 million, respectively.
Net cash flows used in operating activities were $356.6 million for the year ended December 31, 2015, compared to net cash
flows used in operating activities of $542.5 million for the year ended December 31, 2014. Origination of loans held for sale in
excess of the proceeds from the sales of loans contributed $422.1 million to cash flows used in operating activities during 2015.
Origination of loans held for sale in excess of the proceeds from the sales of loans contributed $585.1 million to cash flows
used in operating activities during 2014.
Investing activities used net cash flows of $1.3 billion for the year ended December 31, 2015, compared to the net cash flows
used in investing activities of $1.9 billion for the year ended December 31, 2014. The net increase in loans was $1.3 billion for
the year ended December 21, 2015 compared to a net increase of $1.8 billion for the year ended December 31, 2014.
Financing activities provided $1.5 billion for the year ended December 31, 2015 compared to $2.6 billion for the year ended
December 31, 2014. For 2015, increases in cash from deposits provided $1.4 billion and net proceeds from a preferred stock
issuance provided $55.6 million. For 2014, increases in cash from deposits provided $1.6 billion, net proceeds from short-term
FHLB advances provided $0.6 billion and net proceeds from long-term FHLB advances provided $0.3 billion.
Overall, based on our core deposit base and available sources of borrowed funds, management believes that we have adequate
resources to meet our short-term and long-term cash requirements for the foreseeable future.
CAPITAL ADEQUACY
The Bank and the Bancorp are subject to various regulatory capital requirements administered by the federal banking agencies.
Failure to meet the minimum capital requirements can result in certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on Customers' financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank and Bancorp must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items, as calculated under
the regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank
holding companies.
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Quantitative measures established by regulation to ensure capital adequacy require the Bank and Bancorp to maintain minimum
amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to
average assets (as defined in the regulations).
The Dodd-Frank Act required the FRB to establish minimum consolidated capital requirements for bank holding companies
that are as stringent as those required for insured depositary subsidiaries. In 2013, the federal banking agencies approved rules
that implemented the Dodd-Frank requirements and certain other regulatory capital reforms effective January 1, 2015, that (i)
introduced a new capital ratio pursuant to the prompt corrective action provisions, the common equity tier 1 capital to risk rated
assets ratio, (ii) increased the adequately capitalized and well capitalized thresholds for the Tier 1 risk based capital ratios to 6%
and 8%, respectively, (iii) changed the treatment of certain capital components for determining Tier 1 and Tier 2 capital, and
(iv) changed the risk weighting of certain assets and off balance sheet items in determining risk weighted assets.
To be categorized as well capitalized, an institution must maintain minimum common equity Tier 1, total risk based, Tier 1 risk
based and Tier 1 leveraged ratios as set forth in the following table:
(amounts in thousands)
December 31, 2015
Common equity Tier 1 (to risk-
weighted assets)
Customers Bancorp, Inc.
Customers Bank
Total capital (to risk-weighted
assets)
Customers Bancorp, Inc.
Customers Bank
Tier 1 capital (to risk-weighted
assets)
Customers Bancorp, Inc.
Customers Bank
Tier 1 capital (to average assets)
Customers Bancorp, Inc.
Customers Bank
December 31, 2014
Total capital (to risk-weighted
assets)
Customers Bancorp, Inc.
Customers Bank
Tier 1 capital (to risk-weighted
assets)
Customers Bancorp, Inc.
Customers Bank
Tier 1 capital (to average assets)
Customers Bancorp, Inc.
Customers Bank
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Actual
For Capital Adequacy
Purposes
To Be Well Capitalized
Under
Prompt Corrective Action
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
500,624
565,217
7.61% $
296,014
4.50%
N/A
8.62% $
294,916
4.50% $
425,990
698,323
710,864
10.62% $
526,247
10.85% $
524,295
8.0%
N/A
8.0% $
655,369
556,193
565,217
556,193
565,217
8.46% $
394,685
8.62% $
393,221
6.0%
N/A
6.0% $
524,295
7.16% $
310,812
7.30% $
309,883
4.0%
N/A
4.0% $
387,353
N/A
6.50%
N/A
10.0%
N/A
8.0%
N/A
5.0%
578,644
621,894
11.09 % $
417,473
11.98 % $
415,141
8.0 %
N/A
8.0 % $
518,926
N/A
10.0 %
437,712
480,963
437,712
480,963
8.39 % $
208,737
9.27 % $
207,570
4.0 %
N/A
4.0 % $
311,356
6.69 % $
261,622
7.39 % $
260,462
4.0 %
N/A
4.0 % $
325,577
N/A
6.0 %
N/A
5.0 %
At December 31, 2015 and 2014, the Bank and Bancorp met all capital adequacy requirements to which they were subject.
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Capital Ratios
Customers continued to build the amount of capital during 2015. In general, for the past few years, capital growth has been
achieved by retained earnings and increases in capital from sales of common stock. During second quarter 2015, the Bancorp
issued non-cumulative perpetual preferred stock which meets the definition of Tier 1 capital per regulatory guidelines. The net
proceeds of $55.6 million is included in the Bancorp's Tier 1 capital ratios presented above.
Customers is unaware of any current recommendations by the regulatory authorities which, if they were to be implemented,
would have a material effect on our liquidity, capital resources, or operations.
The maintenance of appropriate levels of capital is an important objective of our Asset and Liability Management process.
Through our initial capitalization and our subsequent offerings, we believe we have continued to maintain a strong capital
position. Beginning in first quarter 2015, and continuing for the remaining three quarters of 2015, Customers Bank's board of
directors declared a cash dividend to its sole shareholder, the Bancorp. To date, cash dividends declared by the Bank and paid to
the Bancorp, include the following:
•
•
•
•
•
$4.0 million declared on March 17, 2015 and paid on March 31, 2015;
$4.0 million declared and paid on June 30, 2015;
$5.5 million declared and paid on September 23, 2015;
$5.0 million declared on October 28, 2015 and paid on December 10, 2015; and
$5.1 million declared on January 20, 2016 and payable on March 10, 2016.
Effective January 1, 2015, Customers Bancorp and Customers Bank became subject to new capital requirements as detailed
earlier in this document. Management has reviewed the new requirements and both the Bank and Bancorp are compliant with
the new requirements.
OFF-BALANCE SHEET ARRANGEMENTS
Customers is involved with financial instruments and other commitments with off-balance sheet risks. Financial instruments
with off-balance sheet risks are incurred in the normal course of business to meet the financing needs of our customers. These
financial instruments include commitments to extend credit, including unused portions of lines of credit, and standby letters of
credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the balance
sheets.
With commitments to extend credit, exposures to credit loss in the event of non-performance by the other party to the financial
instrument is represented by the contractual amount of those instruments. The same credit policies are used in making
commitments and conditional obligations as for on-balance sheet instruments. Because they involve credit risk similar to
extending a loan, these financial instruments are subject to the Bank’s Credit Policy and other underwriting standards.
As of December 31, 2015 and 2014, the following off-balance sheet commitments, financial instruments and other
arrangements were outstanding:
(amounts in thousands)
Commitments to fund loans
Unfunded commitments to fund mortgage warehouse loans
Unfunded commitments under lines of credit
Letters of credit
Other unused commitments
81
December 31,
2015
2014
$
$
537,380
1,302,759
436,550
42,002
6,360
231,294
713,619
430,995
36,206
7,685
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Commitments to fund loans, unfunded commitments to fund mortgage warehouse loans, unfunded commitments under lines of
credit and letters of credit are agreements to extend credit to or for the benefit of a customer in the ordinary course of our
business.
Commitments to fund loans and unfunded commitments under lines of credit may be obligations of ours as long as there is no
violation of any condition established in the contract. Because many of the commitments are expected to expire without being
drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally
have fixed expiration dates or other termination clauses and may require payment of a fee. We evaluate each customer’s
creditworthiness on a case-by-case basis. The amount of collateral obtained, if we deem it necessary upon extension of credit, is
based on management’s credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts
receivable, inventory and equipment.
Mortgage warehouse loan commitments are agreements to fund the pipelines of mortgage banking businesses from closing of
individual mortgage loans until their sale into the secondary market. Most of the individual mortgage loans are insured or
guaranteed by the U.S. government through one of their programs such as FHA, VA, or are conventional loans eligible for sale
to Fannie Mae and Freddie Mac. These commitments generally fluctuate monthly based on changes in interest rates, refinance
activity, new home sales and laws and regulation.
Outstanding letters of credit written are conditional commitments issued by us to guarantee the performance of a customer to a
third party. Letters of credit may obligate us to fund draws under those letters of credit whether or not a customer continues to
meet the conditions of the extension of credit. The credit risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
CONTRACTUAL OBLIGATIONS
The following table sets forth contractual obligations and other commitments representing required and potential cash outflows
as of December 31, 2015. Interest on subordinated notes, FHLB long-term advances, and senior notes was calculated using
then current contractual interest rates.
(amounts in thousands)
Operating leases
Benefit plan commitments
Contractual maturities of time deposits
Subordinated notes
Interest on subordinated notes
Loan commitments
FHLB long-term advances
Interest on FHLB long-term advances
Senior notes
Interest on senior notes
Other commitments (1)
Standby letters of credit
Total
Total
Within one
year
After one but
within three years
After three but
within five years
More than
five years
$
$
19,051
4,500
2,347,597
110,000
90,882
2,276,689
260,000
5,873
88,250
14,547
6,360
42,002
5,265,751
$
$
3,861
300
1,799,310
—
6,738
1,975,809
—
3,304
—
5,188
—
35,053
3,829,563
$
$
7,112
600
448,765
—
13,475
96,241
260,000
2,569
63,250
8,697
6,360
5,746
912,815
$
$
4,820
600
99,522
—
13,475
91,478
—
—
25,000
662
—
1,203
236,760
$
$
3,258
3,000
—
110,000
57,194
113,161
—
—
—
—
—
—
286,613
(1)
Represents a commitment expiring in approximately three years that is subject to unscheduled requests for payment.
NEW ACCOUNTING PRONOUNCEMENTS
For information about the impact that recently adopted or issued accounting guidance will have on us, refer to “NOTE 3 –
SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION”.
82
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Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Sensitivity
The largest component of our net income is net interest income, and the majority of our financial instruments are interest rate
sensitive assets and liabilities with various term structures and maturities. One of the primary objectives of management is to
maximize net interest income while minimizing interest rate risk. Interest rate risk is derived from timing differences in the
repricing of assets and liabilities, loan prepayments, deposit withdrawals, and differences in lending and funding rates. Our
Asset/Liability Committee actively seeks to monitor and control the mix of interest rate sensitive assets and interest rate
sensitive liabilities.
We use two complementary methods to analyze and measure interest rate sensitivity as part of the overall management of
interest rate risk. They are income simulation modeling and estimates of economic value of equity. The combination of these
two methods provides a reasonably comprehensive summary of the levels of interest rate risk of our exposure to time factors
and changes in interest rate environments.
Income simulation modeling is used to measure our interest rate sensitivity and manage our interest rate risk. Income
simulation considers not only the impact of changing market interest rates upon forecasted net interest income, but also other
factors such as yield curve relationships, the volume and mix of assets and liabilities, customer preferences and general market
conditions.
Through the use of income simulation modeling, we have estimated the net interest income for the year ending December 31,
2016, based upon the assets, liabilities and off-balance sheet financial instruments in existence at December 31, 2015. We have
also estimated changes to that estimated net interest income based upon interest rates rising or falling immediately (“rate
shocks”). For upward rate shocks modeling a rising rate environment, current market interest rates were increased immediately
by 100, 200, and 300 basis points. For downward rate shocks modeling a falling rate environment, current market rates were
only decreased immediately by 100 basis points due to the limitations of the current low interest rate environment that renders
the Down 200 and Down 300 rate shocks impractical. The following table reflects the estimated percentage change in
estimated net interest income for the year ending December 31, 2015, that would have resulted from a shock of the referenced
changes in interest rates.
Net change in net interest income
Rate Shocks
Up 3%
Up 2%
Up 1%
Down 1%
%
Change
(10.2)%
(3.4)%
0.1 %
2.4 %
The net changes in net interest income in all scenarios are within Customers Bank’s interest rate risk policy guidelines.
Economic Value of Equity (“EVE”) estimates the discounted present value of asset and liability cash flows. Discount rates are
based upon market prices for comparable assets and liabilities. Upward and downward rate shocks are used to measure
volatility of EVE in relation to a constant rate environment. For upward rate shocks modeling a rising rate environment,
current market interest rates were increased immediately by 100, 200, and 300 basis points. For downward rate shocks
modeling a falling rate environment, current market rates were only decreased immediately by 100 basis points due to the
limitations of the current low interest rate environment that renders the Down 200 and Down 300 rate shocks impractical. This
method of measurement primarily evaluates the longer term repricing risks and options in Customers Bank’s balance sheet.
The following table reflects the estimated EVE at risk and the ratio of EVE to EVE adjusted assets at December 31, 2015,
resulting from the referenced shocks to interest rates.
83
Table of Contents
Rate Shocks
Up 3%
Up 2%
Up 1%
Down 1%
From base
(34.1)%
(17.3)%
(5.8)%
0.2 %
The matching of assets and liabilities may also be analyzed by examining the extent to which such assets and liabilities are
interest rate sensitive and by monitoring a bank’s interest rate sensitivity “gap”. An asset or liability is said to be interest rate
sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest earning assets maturing or repricing within a specific time period and
the amount of interest bearing liabilities maturing or repricing within that time period.
The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31,
2015 that are anticipated, based upon certain assumptions, to reprice or mature in each of the future time periods shown. Except
as stated below, the amount of assets and liabilities shown that reprice or mature during a particular period were determined in
accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an
approximation of the projected repricing of assets and liabilities at December 31, 2015 on the basis of contractual maturities,
anticipated prepayments, and scheduled rate adjustments within a three-month period and subsequent selected time
intervals. The loan amounts in the table reflect principal balances expected to be repaid and/or repriced as a result of
contractual amortization and anticipated prepayments of adjustable and fixed rate loans, and as a result of contractual-rate
adjustments on adjustable-rate loans.
Balance Sheet Gap Analysis at
December 31, 2015
Assets
Interest earning deposits and federal
funds sold
Investment securities
Loans (a)
Other interest-earning assets
Total interest-earning assets
Non interest-earning assets
Total assets
Liabilities
3 months
or less
3 to 6
months
6 to 12
months
1 to 3
years
3 to 5
years
Over 5
years
Total
(dollars in thousands)
$
— $
— $
—
$
— $
—
$ 210,548
$
210,548
33,087
2,898,089
—
31,424
153,676
—
59,161
241,013
—
190,664
141,610
1,249,367
2,402,771
—
—
2,931,176
185,100
300,174
1,440,031
2,544,381
—
—
—
—
—
2,931,176
185,100
300,174
1,440,031
2,544,381
80,040
264,747
93,580
648,915
316,461
965,376
535,986
7,209,663
93,580
8,049,777
316,461
$
8,366,238
Other interest-bearing deposits
$
52,674
$
50,850
$
96,502
$
325,446
$ 2,269,814
$ 112,939
$
2,908,225
Time deposits
Other borrowings
Subordinated debt
Total interest-bearing liabilities
Non-interest-bearing liabilities
Shareholders’ equity
432,304
1,385,300
—
1,870,278
27,413
—
822,460
50,000
—
923,310
26,322
—
547,332
10,000
—
653,834
49,542
—
446,818
250,000
—
100,734
—
—
1,022,264
2,370,548
162,403
342,017
—
—
Total liabilities and shareholders’ equity
1,897,691
949,632
703,376
1,184,667
2,712,565
Interest sensitivity gap
$ 1,033,485
$
$
(764,532)
$ (403,202)
268,953
$ (134,249)
$
$
255,364
$ (168,184)
121,115
$
(47,069)
$
$
2,347,597
1,695,300
110,000
7,061,122
751,214
553,902
$
8,366,238
(2,051)
—
110,000
220,888
143,517
553,902
918,307
47,069
—
Cumulative interest sensitivity gap
Cumulative interest sensitivity gap to
total assets
Cumulative interest-earning assets to
cumulative interest-bearing liabilities
(a)
Including loans held for sale
12.4%
3.2%
(1.6)%
1.5%
(0.6)%
(0.9)%
154.5%
109.5%
96.2 %
102.6%
99.4 %
99.1 %
84
Table of Contents
As shown above, we have a slightly negative cumulative gap (cumulative interest sensitive assets are lower than cumulative
interest sensitive liabilities) within the next year, which generally indicates that an increase in rates may lead to a decrease in
net interest income, and a decrease in rates may lead to an increase in net interest income. Interest rate sensitivity gap analysis
measures whether assets or liabilities may reprice but does not capture the ability to reprice or the range of potential repricing
on assets or liabilities. Thus indications based on a negative or positive gap position need to be analyzed in conjunction with
other interest rate risk management tools.
Management believes that the assumptions and combination of methods utilized in evaluating estimated net interest income are
reasonable. However, the interest rate sensitivity of our assets, liabilities and off-balance sheet financial instruments, as well as
the estimated effect of changes in interest rates on estimated net interest income, could vary substantially if different
assumptions are used or actual experience differs from the assumptions used in the model.
85
Table of Contents
Item 8.
Financial Statements and Supplementary Data
Financial Statements for the three years ended
December 31, 2015, 2014 and 2013
INDEX TO CUSTOMERS BANCORP, INC. FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Report of Independent Registered Public Accounting Firm on Internal Controls
Consolidated Balance Sheets as of December 31, 2015 and 2014
Consolidated Statements of Income for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Changes In Shareholders’ Equity for the years ended December 31, 2015, 2014
and 2013
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013
Notes to Consolidated Financial Statements for the years ended December 31, 2015, 2014 and 2013
87
88
89
90
91
92
93
95
86
Table of Contents
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Customers Bancorp, Inc.
Wyomissing, Pennsylvania
We have audited the accompanying consolidated balance sheets of Customers Bancorp, Inc. and Subsidiaries (the “Bancorp”)
as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, changes in
shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2015. These consolidated
financial statements are the responsibility of the Bancorp’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of Customers Bancorp, Inc. and Subsidiaries as of December 31, 2015 and 2014, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles
generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Bancorp’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated February 26, 2016 expressed an unqualified opinion.
/s/ BDO USA, LLP
Philadelphia, Pennsylvania
February 26, 2016
87
Table of Contents
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Customers Bancorp, Inc.
Wyomissing, Pennsylvania
We have audited Customers Bancorp, Inc. and Subsidiaries’ (the “Bancorp”) internal control over financial reporting as of
December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). The Bancorp’s management is responsible
for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Management’s Responsibility for Financial Statements and Report on
Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Bancorp’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit
also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America. A company’s internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Customers Bancorp, Inc. and Subsidiaries maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2015, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of Customers Bancorp, Inc. and Subsidiaries as of December 31, 2015 and 2014 and the related
consolidated statement of income, comprehensive income, changes in shareholders’ equity, and cash flow for each of the three
years in the period ended December 31, 2015, and our report dated February 26, 2016 expressed an unqualified opinion
thereon.
/s/ BDO USA, LLP
Philadelphia, Pennsylvania
February 26, 2016
88
Table of Contents
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share data)
Cash and due from banks
Interest earning deposits
Cash and cash equivalents
ASSETS
Investment securities available for sale, at fair value
Loans held for sale (includes $1,757,807 and $1,335,668, respectively at fair value)
Loans receivable
Allowance for loan losses
Total loans receivable, net of allowance for loan losses
FHLB, Federal Reserve Bank, and other restricted stock
Accrued interest receivable
FDIC loss sharing receivable
Bank premises and equipment, net
Bank-owned life insurance
Other real estate owned
Goodwill and other intangibles
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing
Interest bearing
Total deposits
Federal funds purchased
FHLB advances
Other borrowings
Subordinated debt
Accrued interest payable and other liabilities
Total liabilities
Commitments and contingencies (NOTES 17 and 21)
Shareholders’ equity:
$
$
$
December 31,
2015
2014
$
$
$
53,550
211,043
264,593
560,253
1,797,064
5,453,479
(35,647)
5,417,832
90,841
19,939
—
11,531
157,211
5,057
3,651
73,341
8,401,313
653,679
5,255,822
5,909,501
70,000
1,625,300
88,250
110,000
44,360
7,847,411
62,746
308,277
371,023
416,685
1,435,459
4,312,173
(30,932)
4,281,241
82,002
15,205
2,320
10,810
138,676
15,371
3,664
52,914
6,825,370
546,436
3,986,102
4,532,538
—
1,618,000
88,250
110,000
33,437
6,382,225
Preferred stock, par value $1.00 per share; liquidation preference $25.00 per share;
100,000,000 shares authorized, 2,300,000 and 0 shares issued and outstanding as of
December 31, 2015 and 2014
Common stock, par value $1.00 per share; 200,000,000 shares authorized; 27,432,061
and 27,277,789 shares issued as of December 31, 2015 and 2014; 26,901,801 and
26,745,529 shares outstanding as of December 31, 2015 and 2014
Additional paid in capital
Retained earnings
Accumulated other comprehensive loss, net
Treasury stock, at cost (530,260 shares as of December 31, 2015 and 532,260 shares as
of December 31, 2014)
Total shareholders’ equity
Total liabilities and shareholders’ equity
55,569
—
27,432
362,607
124,511
(7,984)
27,278
355,822
68,421
(122)
(8,233)
553,902
8,401,313
$
(8,254)
443,145
6,825,370
$
See accompanying notes to the consolidated financial statements.
89
Table of Contents
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
Interest income:
Loans receivable, including fees
Loans held for sale
Investment securities
Other
Total interest income
Interest expense:
Deposits
Other borrowings
FHLB advances
Subordinated debt
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income:
Mortgage warehouse transactional fees
Bank-owned life insurance
Gains on sales of loans
Deposit fees
Mortgage loan and banking income
Gain (loss) on sale of investment securities
Other
Total non-interest income
Non-interest expense:
Salaries and employee benefits
Professional services
FDIC assessments, taxes, and regulatory fees
Technology, communication and bank operations
Occupancy
Other real estate owned
Advertising and promotion
Loan workout
Loss contingency
Other
Total non-interest expense
Income before income tax expense
Income tax expense
Net income
Preferred stock dividend
Net income available to common shareholders
Basic earnings per common share
Diluted earnings per common share
See accompanying notes to the consolidated financial statements.
90
For the Years Ended December 31,
2015
2014
2013
$
$
$
$
182,280
51,553
10,405
5,612
249,850
33,982
6,096
6,743
6,739
53,560
196,290
20,566
175,724
10,394
7,006
4,047
944
741
(85)
4,670
27,717
58,777
11,042
10,728
10,596
8,668
2,516
1,475
1,127
—
10,017
114,946
88,495
29,912
58,583
2,493
56,090
2.09
1.96
$
$
$
$
146,388
30,801
10,386
2,852
190,427
24,454
5,342
5,194
3,514
38,504
151,923
14,747
137,176
8,233
3,702
3,125
801
2,048
3,191
4,026
25,126
46,427
7,748
11,812
8,798
8,068
3,601
1,325
1,706
—
9,429
98,914
63,388
20,174
43,214
—
43,214
1.62
1.55
$
$
$
$
82,580
38,140
6,314
1,122
128,156
21,020
2,024
1,192
65
24,301
103,855
2,236
101,619
12,962
2,482
852
675
1,142
1,274
3,316
22,703
35,493
5,548
5,568
6,607
6,552
1,365
1,274
2,245
2,000
7,372
74,024
50,298
17,604
32,694
—
32,694
1.34
1.30
For the Years Ended December 31,
2015
2014
2013
$
58,583
$
43,214
$
32,694
(10,140)
3,759
85
(32)
(6,328)
(2,532)
998
(1,534)
(7,862)
50,721
17,437
(6,103)
(3,191)
1,117
9,260
(1,945)
681
(1,264)
7,996
$
51,210
$
(12,853)
4,499
(1,274)
446
(9,182)
—
—
—
(9,182)
23,512
Table of Contents
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in thousands)
Net income
Unrealized gains (losses) on securities:
Unrealized gains (losses) on available-for-sale securities arising during
the period
Income tax effect
Less: reclassification adjustments for losses (gains) on securities
included in net income
Income tax effect
Net unrealized gains (losses) on securities
Unrealized losses on cash flow hedges:
Unrealized losses on cash flow hedges arising during the period
Income tax effect
Net unrealized losses on cash flow hedges
Other comprehensive income (loss), net of income tax effect
Comprehensive income
$
See accompanying notes to the consolidated financial statements.
91
Table of Contents
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2015, 2014 and 2013
(amounts in thousands, except share data)
Preferred Stock
Common Stock
Shares of
Preferred
Stock
Outstanding
Shares of
Common
Stock
Outstanding
Preferred
Stock
Common
Stock
Additional
Paid in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
18,459,502
$ 18,507
$ 212,090
$ 38,314
$
1,064
$
(500) $
269,475
Balance, January 1,
2013
Net income
Other comprehensive
loss
Share-based
compensation expense
Public offering of
common stock, net of
costs of $5,994
Exercise and
redemption of
warrants
Issuance of common
stock under share-
based-compensation
arrangements
Repurchase of shares
Balance, December
31, 2013
Net income
Other comprehensive
income
Stock dividend
Share-based
compensation expense
Exercise of warrants
Issuance of common
stock under share-
based-compensation
arrangements
Balance, December
31, 2014
Net income
Other comprehensive
loss
Issuance of preferred
stock, net of offering
costs of $1,931
Preferred stock
dividends
Share-based
compensation expense
Exercise of warrants
Issuance of common
stock under share-
based-compensation
arrangements
Balance, December
31, 2015
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,300,000
55,569
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,368
6,179,104
6,179
91,328
46,773
23,413
(484,641)
47
23
—
217
228
—
32,694
—
—
—
—
—
—
24,224,151
24,756
307,231
—
—
—
—
—
—
71,008
43,214
—
2,429,375
2,429
43,364
(45,801)
—
546
91,457
—
1
92
4,209
5
1,013
26,745,529
27,278
355,822
—
—
—
—
—
7,611
—
—
—
—
—
8
—
—
—
—
4,862
90
—
—
—
68,421
58,583
—
—
(2,493)
—
—
—
See accompanying notes to the consolidated financial statements.
92
—
(9,182)
—
—
—
—
—
—
—
—
—
—
—
32,694
(9,182)
3,368
97,507
264
251
(7,754)
(7,754)
(8,118)
(8,254)
386,623
—
7,996
—
—
—
—
—
—
—
—
—
—
43,214
7,996
(8)
4,209
6
1,105
(122)
(8,254)
443,145
—
(7,862)
—
—
—
—
—
—
—
—
—
—
—
21
58,583
(7,862)
55,569
(2,493)
4,862
98
2,000
—
148,661
146
1,833
2,300,000
$
55,569
26,901,801
$ 27,432
$ 362,607
$ 124,511
$
(7,984) $ (8,233) $
553,902
Table of Contents
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Cash Flows from Operating Activities
Net income
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses, net of change to FDIC receivable and clawback liability
Loss contingency
Provision for depreciation and amortization
Share-based compensation expense
Deferred taxes
Net amortization of investment securities premiums and discounts
Loss (gain) on sale of investment securities
Gain on sale of mortgages and other loans
Origination of loans held for sale
Proceeds from the sale of loans held for sale
Increase in FDIC loss sharing receivable net of clawback liability
Amortization (accretion) of fair value discounts
Net loss on sales of other real estate owned
Valuation and other adjustments to other real estate owned, net of FDIC receivable
Earnings on investment in bank-owned life insurance
Increase in accrued interest receivable and other assets
Increase in accrued interest payable and other liabilities
Net Cash (Used in) Provided by Operating Activities
Cash Flows from Investing Activities
Purchases of investment securities available for sale
Proceeds from maturities, calls and principal repayments on investment securities available
for sale
Proceeds from sales of investment securities available for sale
Net increase in loans
Purchase of loan portfolios
Proceeds from sale of loans held for investment
Net purchases of bank-owned life insurance
Proceeds from bank-owned life insurance
Net purchases of FHLB, Federal Reserve Bank, and other restricted stock
Reimbursements from the FDIC on loss sharing agreements
Purchases of bank premises and equipment
Proceeds from sales of other real estate owned
Net Cash Used in Investing Activities
Cash Flows from Financing Activities
Net increase in deposits
Net increase in short-term borrowed funds from the FHLB
Net increase in federal funds purchased
Proceeds from long-term FHLB borrowings
Proceeds from issuance of long-term debt, net
Repayment of subordinated debt
Net proceeds from issuance of preferred stock
Preferred stock dividends paid
Exercise and redemption of warrants
Purchase of treasury stock
Net proceeds from issuance of common stock
Net Cash Provided by Financing Activities
Net (Decrease) Increase in Cash and Cash Equivalents
Cash and Cash Equivalents – Beginning
Cash and Cash Equivalents – Ending
For the Years Ended December 31,
2015
2014
2013
$
58,583
$
43,214
$
32,694
20,566
—
3,998
5,661
(10,092)
858
85
(4,479)
(29,925,763)
29,504,104
(2,430)
832
761
992
(7,006)
(12,024)
8,706
(356,648)
14,747
—
3,604
5,237
(6,187)
821
(3,191)
(5,344)
2,236
2,000
3,129
3,368
2,210
475
(1,274)
(852)
(18,138,339)
17,553,196
(20,670,866)
21,360,465
(2,409)
(273)
966
1,979
(3,702)
(16,423)
9,606
(542,498)
(1,610)
(912)
732
839
(2,482)
(15,091)
6,974
722,035
(231,703)
(164,940)
(542,110)
76,331
806
49,195
213,249
(1,341,133)
(1,814,196)
—
248,060
(15,000)
3,384
(8,839)
3,917
(2,939)
8,890
(309,927)
162,724
(30,465)
—
(39,578)
5,446
(1,419)
7,991
25,109
135,193
(1,008,410)
(164,033)
11,624
(45,465)
—
(12,261)
6,726
(3,894)
9,506
(1,258,226)
(1,921,920)
(1,588,015)
1,376,985
(17,700)
70,000
25,000
—
—
55,569
(2,314)
98
—
806
1,508,444
(106,430)
371,023
1,572,648
633,500
—
265,000
133,142
(2,000)
—
—
6
—
77
2,602,373
137,955
233,068
$
264,593
$
371,023
$
(continued)
93
519,179
208,500
—
35,000
60,336
—
—
—
264
(7,754)
97,507
913,032
47,052
186,016
233,068
Table of Contents
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(amounts in thousands)
Supplementary Cash Flow Information
Interest paid
Income taxes paid
Non-cash Items:
Transfer of loans to other real estate owned
Transfer of loans from held for investment to held for sale
Transfer of loans from held for sale to held for investment
See accompanying notes to the consolidated financial statements.
For the Years Ended December 31,
2015
2014
2013
$
$
51,313
$
38,734
37,580
$
29,843
24,157
9,815
3,467
$
14,042
$
15,003
—
30,365
164,681
18,826
—
—
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CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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, New York
(Westchester County), Hamilton, New Jersey (Mercer County), Boston, Massachusetts, Providence, Rhode Island, Portsmouth,
New Hampshire (Rockingham County), and Manhattan, New York. The Bank has 14 full-service branches and provides
commercial banking products, primarily loans and deposits. Customers Bank provides 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 and Philadelphia, Pennsylvania. The Bank also provides liquidity to residential
mortgage originators nationwide through commercial loans to mortgage companies. Customers Bank is subject to regulation of
the Pennsylvania Department of Banking and Securities and the Federal Reserve Bank and is periodically examined by those
regulatory authorities. Customers Bancorp has made certain equity investments through its wholly owned subsidiaries CB
Green Ventures Pte Ltd. and CUBI India Ventures Pte Ltd.
NOTE 2 – ACQUISITION ACTIVITY
Acquisition of Higher One, Inc.'s One Account Student Checking and Refund Management Disbursement Services Business
On December 15, 2015, Customers announced that it had entered into an Asset Purchase Agreement (the "Agreement") to
acquire assets related to the One Account Student Checking and Refund Management Disbursement Services business
("Disbursements") of Higher One, Inc. ("Higher One"). Pursuant to the Agreement, Customers will acquire all assets of the
Disbursements business, including all property and equipment, existing contractual relationships with vendors and educational
institutions, and all intellectual property, will assume certain normal business related liabilities, and will commit to hire
approximately 225 current Higher One employees primarily located in New Haven, Connecticut that manage the Disbursement
business and serve the customers. Customers intends to retain these team members in New Haven. Customers will pay Higher
One an aggregate of $42 million in cash in connection with the acquisition of the Disbursements business. Under the
Agreement, Customers will pay Higher One $17 million in cash at closing and make cash payments of $10 million each on the
first and second anniversaries of the closing. Customers also will pay Higher One $5 million in cash for Higher One's services
under a transition services agreement. The transaction is subject to approval by Higher One stockholders which is expected to
occur in the first quarter of 2016 with the transaction closing expected no later than July 1, 2016.
Acquisition of Loan Portfolio
In the first quarter 2014, Customers Bank purchased $277.9 million of residential adjustable-rate jumbo mortgage loans
(indexed to one-year LIBOR) from Michigan-based Flagstar Bank. The purchase price was 100.75% of loans outstanding.
In first quarter 2013, Customers Bank completed the purchase of certain commercial loans from Michigan-based Flagstar
Bank. Under the terms of the agreement, Customers Bank acquired $182.3 million in commercial loan and related
commitments, of which $155.1 million was drawn at the date of acquisition. Also, as part of the agreement, Customers Bank
assumed the leases for two of Flagstar’s commercial lending offices in New England. The purchase price was 98.7% of loans
outstanding.
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NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation
The accounting and reporting policies of Customers Bancorp, Inc. and subsidiaries are in conformity with accounting principles
generally accepted in the United States of America and predominant practices of the banking industry. The preparation of
financial statements requires management to make estimates and assumptions that affect the reported balances of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses, credit
deterioration and expected cash flows of purchased-credit-impaired loans, FDIC indemnification asset and related clawback
liability, valuation of deferred tax assets, other-than-temporary impairment losses on securities, fair values of financial
instruments, and annual goodwill impairment analysis.
Certain amounts reported in the 2014 and 2013 financial statements have been reclassified to conform to the 2015
presentation. These reclassifications did not significantly impact Customers financial position or results of operations.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the parent company and its wholly owned
subsidiaries: Customers Bank, CB Green Ventures Pte Ltd. and CUBI India Ventures Pte Ltd. Customers Bank includes the
accounts of its wholly owned subsidiary CIC, Inc. and other subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents and Statements of Cash Flows
Cash and cash equivalents include cash on hand, amounts due from banks, and interest-bearing deposits with banks with a
maturity date of three months or less and are recorded at cost. The carrying value of cash and cash equivalents is a reasonable
estimate of its approximate fair value. Changes in the balances of cash and cash equivalents are reported in the consolidated
statements of cash flows. Cash receipts from the repayment or sale of loans are classified within the statement of cash flows
based on management's original intent upon origination of the loan, as prescribed by accounting guidance related to the
statement of cash flows. Cash used upon initial funding of Customers' mortgage warehousing lending transactions and proceeds
received when the mortgage loans are sold into the secondary market are classified as operating activities within the statement
of cash flows.
Restrictions on Cash and Amounts due from Banks
Customers Bank is required to maintain average balances on hand or with the Federal Reserve Bank. At December 31, 2015
and 2014, these reserve balances were $73.2 million and $61.2 million, respectively.
Investment Securities
Customers acquires securities, largely mortgage-backed securities, to effectively utilize cash and capital and to generate
earnings. Security transactions are recorded as of the trade date. Securities are classified at the time of acquisition as available
for sale, held to maturity, or trading, and their designation determines their accounting as follows:
Available for sale: Investments securities classified as available for sale are those debt and equity securities that Customers
intends to hold for an indefinite period of time but not necessarily to maturity. Investment securities available for sale are
carried at fair value. Unrealized gains or losses are reported as increases or decreases in accumulated other comprehensive
income, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of the specific
securities sold, are included in earnings and recorded at the trade date. Premiums and discounts are recognized in interest
income using the interest method over the terms of the securities.
Held to maturity: Investment securities classified as held to maturity are those debt securities that Customers has both the intent
and ability to hold to maturity regardless of changes in market conditions, liquidity needs, or changes in general economic
conditions. These securities are carried at cost, adjusted for the amortization of premiums and accretion of discounts, computed
by a method which approximates the interest method over the terms of the securities. There are no securities classified as held
to maturity as of December 31, 2015 or 2014.
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Trading: Investment securities classified as trading are those debt and equity securities that management intends to actively
trade. These securities are carried at their current fair value, with changes in fair value reported in income. Customers does not
actively trade securities.
For available-for-sale and held-to-maturity securities, management periodically assesses whether the securities are other than
temporarily impaired. Other-than-temporary impairment means that management believes a security’s decline in fair value
below its amortized cost basis is due to factors that could include the issuer’s inability to pay interest or dividends, its potential
for default, and/or other factors. When a held-to-maturity or available-for-sale debt security is assessed for other-than-
temporary impairment, management has to first consider (a) whether Customers intends to sell the security, and (b) whether it is
more likely than not that Customers will be required to sell the security prior to recovery of its amortized cost basis.
If one of these circumstances applies to a security, an other-than-temporary impairment loss is recognized in the consolidated
statements of income equal to the full amount of the decline in fair value below amortized cost. If neither of these
circumstances applies to a security, but Customers does not expect to recover the entire amortized cost, an other-than-temporary
impairment has occurred that must be separated into two categories: (a) the amount related to credit loss, and (b) the amount
related to other factors. In assessing the level of other-than-temporary impairment attributable to credit loss, management
compares the present value of cash flows expected to be collected with the amortized cost basis of the security. The portion of
the total other-than-temporary impairment related to credit loss is recognized in earnings (as the difference between the fair
value and the present value of the estimated cash flows), while the amount related to other factors is recognized in other
comprehensive income. The total other-than-temporary impairment loss is presented in the statement of income, less the portion
recognized in other comprehensive income. When a debt security becomes other-than-temporarily impaired, its amortized cost
basis is reduced to reflect the portion of the total impairment related to credit loss.
For marketable equity securities, the Bancorp considers the issuer’s financial condition, capital strength and near term prospects
to determine whether an impairment is temporary or other-than-temporary. The Bancorp also considers the volatility of a
security’s price in comparison to the market as a whole and any recoveries or declines in fair value subsequent to the balance
sheet date. If management determines that the impairment is other-than-temporary, the entire amount of the impairment as of
the balance sheet date is recognized in earnings even if the decision to sell the security has not been made. The fair value of the
security becomes the new amortized cost basis of the investment and is not adjusted for subsequent recoveries in fair value.
Loan Accounting Framework
The accounting for a loan depends on management’s strategy for the loan, and on whether the loan was credit impaired at the
date of acquisition. The Bank accounts for loans based on the following categories:
• Loans Held for Sale
• Loans at Fair Value
• Loans Receivable
•
Purchased loans
• Loans receivable covered under Loss Sharing Agreements with the FDIC.
The following provides a detailed discussion of the accounting for loans in these categories:
Loans Held for Sale and Loans at Fair Value
Loans originated or acquired by the Bank with the intent to sell in the secondary market are carried either at the lower of cost or
fair value, determined in the aggregate, or at fair value, depending upon an election made at the time the loan is made. These
loans are generally sold on a non-recourse basis with servicing released. Gains and losses on the sale of loans accounted for at
lower of cost or fair value are recognized in earnings based on the difference between the proceeds received and the carrying
amount of the loans, inclusive of deferred origination fees and costs, if any. As a result of changes in events and circumstances
or developments regarding management’s view of the foreseeable future, loans not originated or acquired with the intent to sell
may subsequently be designated as held for sale. These loans are transferred to the held-for-sale portfolio at the lower of
amortized cost or fair value.
Loans originated or acquired by the Bank with the intent to sell for which fair value accounting is elected are marked to fair
value with any difference between the proceeds received and the carrying amount of the loan recognized in earnings. No fees or
costs related to such loans are deferred, so they do not affect the gain or loss calculation at the time of sale.
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Certain mortgage warehouse lending transactions subject to master repurchase agreements are designated as held for sale and
reported at fair value based on an election to account for the loans at fair value. Pursuant to these agreements, the Bank 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
repurchase event).
An allowance for loan losses is not maintained on loans designated as held for sale or reported at fair value.
Loans Receivable
Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are
reported at their outstanding unpaid principal balances, net of an allowance for loan losses and any deferred fees. Interest
income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred
and recognized as an adjustment of the yield (interest income) of the related loans using the level-yield method without
anticipating prepayments. The Bank is generally amortizing these amounts over the contractual life of the loans.
The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past
due or when management has doubts about further collectibility of principal or interest, even though the loan is currently
performing. A loan may remain on accrual status if it is in the process of collection and is well secured. When a loan is placed
on non-accrual status, unpaid accrued interest credited to income is reversed. Interest received on non-accrual loans is applied
against principal until all principal has been recovered. Thereafter, payments are recognized as interest income until all unpaid
amounts have been received. Generally, loans are restored to accrual status when the obligation is brought current and has
performed in accordance with the contractual terms for a minimum of six months and the ultimate collectibility of the total
contractual principal and interest is no longer in doubt.
Transfers of financial assets, including loan participations sold, are accounted for as sales when control over the assets has been
surrendered (settlement date). Control over transferred assets is deemed to be surrendered when (1) the assets have been
isolated from the Bank, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that
right) to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred
assets through an agreement to repurchase them before their maturity.
Purchased Loans
Customers believes that the varying circumstances under which it purchases loans and the diverse credit quality of loans
purchased should drive the decision as to whether loans in a portfolio should be deemed to be purchased-credit-impaired loans.
Therefore, loan purchases are evaluated on a case-by-case basis to determine the appropriate accounting treatment. Loans
acquired that do not have evidence of credit deterioration at the purchase date are accounted for in accordance with ASC
310-20, Nonrefundable Fees and Other Costs, and loans acquired with evidence of credit deterioration since origination and for
which it is probable that all contractually required payments will not be collected are accounted for in accordance with ASC
310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality.
Loans that are purchased that do not have evidence of credit deterioration
Purchased performing loans are initially recorded at fair value and include credit and interest rate marks associated with
acquisition accounting adjustments. Purchase premiums or discounts are subsequently amortized as an adjustment to yield over
the estimated contractual lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired
performing loans. An allowance for loan losses is recorded for any credit deterioration in these loans subsequent to acquisition.
Loans that are purchased that have evidence of credit deterioration since origination and for which it is probable that
all contractually required payments will not be collected
For purchases of this type of loan, evidence of deteriorated credit quality may include past-due and non-accrual status,
borrower credit scores and recent loan-to-value percentages.
The fair value of loans with evidence of credit deterioration is recorded net of a nonaccretable difference and accretable yield.
The difference between contractually required payments at acquisition and the cash flows expected to be collected at
acquisition is the nonaccretable difference, which is not included in the carrying amount of acquired loans. Subsequent to
acquisition, estimates of cash flows expected to be collected are updated each reporting period based on updated assumptions
regarding default rates, loss severities, and other factors that are reflective of current market conditions. Subsequent decreases
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in expected cash flows will generally result in a provision for loan losses. Subsequent increases in expected cash flows result in
a reversal of the provision for loan losses to the extent of prior charges, or a reclassification of the difference from
nonaccretable to accretable with a positive impact on accretion of interest income in future periods. Further, any excess of cash
flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest
income over the remaining life of the loan when there is a reasonable expectation about the amount and timing of those cash
flows.
Purchased-credit-impaired loans acquired in the same fiscal quarter may be aggregated into one or more pools, provided that
the loans have common risk characteristics. A pool is then accounted for as a single asset with a single composite interest rate
and an aggregate expectation of cash flows. On a quarterly basis, the Bank re-estimates the total cash flows (both principal and
interest) expected to be collected over the remaining life of each pool. These estimates incorporate assumptions regarding
default rates, loss severities, the amounts and timing of prepayments and other factors that reflect then-current market
conditions. If the timing and/or amounts of expected cash flows on purchased-credit-impaired loans were determined not to be
reasonably estimable, no interest would be accreted and the loans would be reported as non-accrual loans; however, when the
timing and amounts of expected cash flows for purchased-credit-impaired loans are reasonably estimable, interest is being
accreted and the loans are being reported as performing loans.
Loans Receivable Covered Under Loss Sharing Agreements
Loans acquired in the FDIC assisted transactions in 2010 from USA Bank and ISN Bank are subject to loss sharing agreements
with the FDIC and are referred to as “covered loans.” The period to submit losses under the FDIC loss sharing arrangements for
non-single family loans expired in third quarter 2015. The period to submit losses under the FDIC loss sharing arrangements for
single family loans expires in third quarter 2017. The final maturity of the FDIC loss sharing arrangements occurs in third
quarter 2020. Outstanding balances for covered loans were $13.8 million and $42.2 million as of December 31, 2015 and 2014,
respectively.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have occurred through provisions for loan losses. Loans
deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to
the allowance for loan losses. The allowance for loan losses is maintained at a level considered appropriate to absorb probable
incurred loan losses inherent in the loan portfolio as of the reporting date.
The Bank disaggregates its loan portfolio into groups of loans with similar risk characteristics for purposes of estimating the
allowance for loan losses.
The Bank’s loan groups include multi-family, commercial and industrial, commercial real estate, construction, residential real
estate, manufactured housing, consumer, and PCI loans. The Bank further disaggregates its residential real estate portfolio into
two classes based upon certain risk characteristics; first mortgage loans and home equity loans and lines of credit. The
remaining loan groups are also considered classes for purposes of monitoring and assessing credit quality based on certain risk
characteristics. Additionally, within each loan group the acquired loans that are accounted for under ASC 310-10 are further
segregated.
The total allowance for loan losses consists of an allowance for impaired loans, a general allowance for losses, and may also
include residual non-specific reserve amounts. The allowance for loan losses is maintained at a level considered adequate to
provide for losses that are estimated to have been incurred. Management performs a quarterly assessment of the adequacy of
the allowance for loan losses, which is based on the Bank’s past loan loss experience, known and inherent risks in the portfolio,
adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition
of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it
requires material estimates that may be susceptible to significant revision as more information becomes available. The Bank’s
current methodology for determining the allowance for loan losses is based on historical loss rates, peer and industry data,
current economic conditions, risk ratings, specific allocations on loans identified as impaired, and other qualitative adjustments.
The impaired loan component of the allowance for loan losses relates to loans for which it is probable that the Bank will be
unable to collect all contractual principal and interest due. For such loans, an allowance is established when the (i) discounted
cash flows, (ii) collateral value, or (iii) the impaired loan value is lower than the carrying value of the loan.
The general component of the allowance for loan losses covers groups of loans by loan class, including commercial loans not
considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity loans, home
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equity lines of credit and other consumer loans. These pools of loans are evaluated for loss exposure based upon loan risk
ratings and industry or Customers' historical loss rates for each of these groups of loans. After determining the appropriate
historical loss rate for each group of loans, management considers those current qualitative or environmental factors that are
likely to cause estimated credit losses as of the evaluation date to differ from the historical loss experience. The overall effect
of these factors is recorded as an adjustment that, as appropriate, increases or decreases the historical loss rate applied to the
loan group. The qualitative factors that management considers includes the following:
• National, regional, and local economic and business conditions including review of changes in the unemployment rate.
• Volume and severity of past due loans and classified loans.
• Lending policies and procedures, including underwriting standards and historical-based loss/collection, charge-off, and
recovery practices.
• Nature and volume of the portfolio including lending concentrations.
• Experience, ability, and depth of lending management and staff.
A residual reserve may be maintained to cover uncertainties that could affect management’s estimate of probable losses. The
residual reserve amount reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies
for estimating specific and general losses in the portfolio.
Commercial and industrial loans are underwritten after evaluating historical and projected profitability and cash flow to
determine the borrower’s ability to repay their obligation as agreed. Commercial and industrial loans are made primarily based
on the identified cash flow of the borrower and secondarily on the underlying collateral supporting the loan facility.
Accordingly, the repayment of a commercial and industrial loan depends primarily on the creditworthiness of the borrower (and
any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.
Construction loans are underwritten based upon a financial analysis of the developers and property owners and construction
cost estimates, in addition to independent appraisal valuations. These loans will rely on the value associated with the project
upon completion. These cost and valuation amounts used are estimates and may be inaccurate. Construction loans generally
involve the disbursement of substantial funds over a short period of time with repayment substantially dependent upon the
success of the completed project. Sources of repayment of these loans would be permanent financing upon completion or sales
of developed property. These loans are closely monitored by onsite inspections and are considered to be of a higher risk than
other real estate loans due to their ultimate repayment being sensitive to general economic conditions, availability of long-term
financing, interest rate sensitivity, and governmental regulation of real property.
Commercial real estate and multi-family loans are subject to the underwriting standards and processes similar to commercial
and industrial loans, in addition to those underwriting standards for real estate loans. These loans are viewed primarily as cash
flow dependent and secondarily as loans secured by real estate. Repayment of these loans is generally dependent upon the
successful operation of the property securing the loan or the principal business conducted on the property securing the loan. In
addition, the underwriting considers the amount of the principal advanced relative to the property value. Commercial real
estate and multi-family loans may be adversely affected by conditions in the real estate markets or the economy in general.
Management monitors and evaluates commercial real estate and multi-family loans based on cash flow estimates, collateral and
risk-rating criteria. The Bank also utilizes third-party experts to provide environmental and market valuations. Substantial
effort is required to underwrite, monitor and evaluate commercial real estate and multi-family loans.
Residential real estate loans are secured by one to four dwelling units. This group is further divided into first mortgage and
home equity loans. First mortgages are originated at a loan to value ratio of 80% or less. Home equity loans have additional
risks as a result of typically being in a second position or lower in the event collateral is liquidated.
Manufactured housing loans represent loans that are secured by the manufactured housing unit where the borrower may or may
not own the underlying real estate and therefore have a higher risk than a residential real estate loan.
Other consumer loans consist of loans to individuals originated through the Bank’s retail network and are typically unsecured
or secured by personal property. Consumer loans have a greater credit risk than residential loans because of the difference in the
underlying collateral, if any. The application of various federal and state bankruptcy and insolvency laws may limit the amount
that can be recovered on such loans.
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Delinquency status and other borrower characteristics are used to monitor loans and identify credit risks, and the general
reserves are established based on the expected net charge-offs, adjusted for qualitative factors. Loss rates are based on the
average net charge-off history, either industry or Customers, by loan group. Historical loss rates may be adjusted for significant
factors that, in management’s judgment, are necessary to reflect losses inherent in the portfolio. Factors that management
considers in the analysis include the effects of the national and local economies; trends in the nature and volume of
delinquencies, charge-offs and non-accrual loans; changes in loan mix; changes in risk management and loan administration;
and changes in internal lending policies, credit standards and collection practices.
Charge-offs on commercial and industrial, construction, multi-family and commercial real estate loans are recorded when
management estimates that there are insufficient cash flows to repay the loan contractual obligation based upon financial
information available and valuation of the underlying collateral. Additionally, the Bank takes into account the strength of any
guarantees and the ability of the borrower to provide value related to those guarantees in determining the ultimate charge-off or
reserve associated with any impaired loans. Accordingly, the Bank may charge-off a loan to a value below the net appraised
value if it believes that an expeditious liquidation is desirable in the circumstance and it has legitimate offers or other
indications of interest to support a value that is less than the net appraised value. Alternatively, the Bank may carry a loan at a
value that is in excess of the appraised value certain circumstances, such as the Bank has a guarantee from a borrower that the
Bank believes has realizable value. In evaluating the strength of any guarantee, the Bank evaluates the financial wherewithal of
the guarantor, the guarantor’s reputation, and the guarantor’s willingness and desire to work with the Bank. The Bank then
conducts a review of the strength of a guarantee on a frequency established as the circumstances and conditions of the borrower
warrant.
The Bank records charge-offs for residential real estate, consumer, and manufactured housing loans after 120 days of
delinquency or sooner when cash flows are determined to be insufficient for repayment. The Bank may also charge-off these
loans below the net appraised valuation if the Bank holds a junior mortgage position in a piece of collateral whereby the risk to
acquiring control of the property through the purchase of the senior mortgage position is deemed to potentially increase the risk
of loss upon liquidation due to the amount of time to ultimately market the property and the volatile market conditions. In such
cases, the Bank may abandon its junior mortgage and charge-off the loan balance in full.
Estimates of cash flows expected to be collected for purchased credit impaired loans are updated each reporting period. If the
Bank estimates decreases in expected cash flows to be collected after acquisition, the Bank charges the provision for loan losses
and establishes an allowance for loan losses.
Credit Quality Factors
Commercial and industrial, multi-family, commercial real estate, residential real estate and construction loans are each assigned
a numerical rating of risk based on an internal risk rating system. The risk rating indicates management's estimate of the credit
quality and the rating is assigned at loan origination and reviewed on a periodic or “as needed” basis. Consumer and
manufactured housing loans are evaluated based on the payment activity of the loan. Risk ratings are not established for home
equity loans, consumer loans, manufactured housing loans, and installment loans, mainly because these portfolios consist of a
larger number of homogeneous loans with smaller balances. Instead, these portfolios are evaluated for risk mainly based on
aggregate payment history (through the monitoring of delinquency levels and trends). For additional information about credit
quality factor ratings refer to “NOTE 8 – “LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES.”
Impaired Loans
A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to
collect all amounts due according to the contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal
and interest owed.
Impairment is measured on a loan by loan basis for commercial and construction loans by the present value of expected future
cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if
the loan is collateral dependent. The fair value of the collateral is measured based on the value of the collateral securing the
loans, less estimated costs to sell. Collateral may be in the form of real estate or business assets including equipment, inventory,
and accounts receivable. The vast majority of the Bank's collateral is real estate. The value of real estate collateral is determined
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utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser
outside of the Bank using observable market data. The value of business equipment is based upon an outside appraisal if
deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using
observable market data. Likewise, values for inventory and accounts receivable collateral are based on financial statement
balances or aging reports.
Goodwill
Goodwill represents the excess of cost over the identifiable net assets of businesses acquired. Goodwill is recognized as an
asset and is reviewed for impairment annually as of October 31 and between annual tests when events and circumstances
indicate that impairment may have occurred. Impairment is a condition that exists when the carrying amount of goodwill
exceeds its implied fair value. A qualitative factor test can be performed to determine whether it is necessary to perform the
two-step quantitative goodwill impairment test. If the results of the qualitative review indicate that it is unlikely (less than 50%
probability) that the carrying value of the reporting unit exceeds its fair value, no further evaluation needs to be performed. As
part of its qualitative assessment, Customers reviewed regional and national trends in current and expected economic
conditions, examining indicators such as GDP growth, interest rates and unemployment rates. Customers also considered its
own historical performance, expectations of future performance and other trends specific to the banking industry. Based on its
qualitative assessment, Customers determined that there was no impairment on the goodwill balance. There was $3.7 million
of goodwill at December 31, 2015 and 2014.
FHLB, Federal Reserve Bank, and other restricted stock
FHLB, Federal Reserve Bank, and other restricted stock represents required investment in the capital stock of the Federal
Home Loan Bank (“FHLB”), the Federal Reserve Bank and Atlantic Central Bankers Bank and is carried at cost. Total
restricted stock as of December 31, 2015 and 2014 was $90.8 million and $82.0 million, respectively, which included $78.9
million and $71.6 million, respectively of FHLB stock.
Other Real Estate Owned
Real estate properties acquired through, or in lieu of, loan foreclosure are initially recorded at fair value less estimated costs to
sell at the date of foreclosure, establishing a new cost basis. After foreclosure, valuations are periodically performed by
management and the real estate is carried at the lower of its carrying amount or fair value less estimated costs to sell. Revenue
and expenses from operations and changes in the valuation allowance are included in earnings. Certain other real estate owned
that was acquired from USA Bank and ISN Bank or through the foreclosure of loans of those banks is subject to loss sharing
agreements with the FDIC. As of December 31, 2015 and 2014, other real estate owned subject to Loss Sharing Agreements
with the FDIC was $0.5 million and $9.4 million, respectively.
FDIC Loss Sharing Receivable and Clawback Liability
The FDIC loss sharing receivable is measured separately from the related covered assets because it is not contractually
embedded in the assets and is not transferable if the assets are sold. The FDIC loss sharing receivable was initially recorded at
fair value, based on the discounted value of expected future cash flows under the loss share agreements. The difference between
the present value and the undiscounted cash flows the Bank expects to collect from the FDIC is accreted into interest income
over the life of the FDIC loss sharing receivable.
The FDIC loss sharing receivable is reviewed quarterly and adjusted for changes in expected cash flows based on recent
performance and expectations for future performance of the covered portfolio. These adjustments are measured on the same
basis as the related covered loans and covered other real estate owned. Increases in estimated cash flows on the covered assets
will reduce the FDIC loss sharing receivable and decreases in estimated cash flows on the covered assets will increase the
FDIC loss sharing receivable. Increases to the FDIC loss sharing receivable resulting from reduced cash flow estimates on the
covered loans are recorded as a reduction to the provision for loan losses and decreases to the FDIC loss sharing receivable are
recorded either as an increase to the provision for loan losses (to the extent an increase in the FDIC receivable balance was
previously recorded as a reduction to the provision for loan losses) or recognized over the life of the loss share agreements.
Decreases in the valuations of covered other real estate owned are recorded net of the FDIC receivable balance resulting from
the valuation allowance as an increase to other real estate owned expense (a component of non-interest expense).
The FDIC loss sharing receivable balance will be reduced through a charge to the provision for loan losses, with no offsetting
reduction to the allowance for loan losses, as the period to submit losses under the FDIC loss sharing agreements approaches
expiration and the estimated losses in the covered loans have not yet emerged or been realized in a final disposition event. The
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period to submit losses under the FDIC loss sharing agreements for non-single family loans expired in third quarter 2015. The
period to submit losses under the FDIC loss sharing agreements for single family loans expires in third quarter 2017. The final
maturity of the FDIC loss sharing agreements occurs in third quarter 2020.
As part of the FDIC loss sharing agreements, the Bank also assumed a potential liability to be paid within 45 days subsequent
to the maturity or termination of the loss sharing agreements that is contingent upon actual losses incurred over the life of the
agreements relative to expected losses and the consideration paid upon acquisition of the failed institutions. Due to cash
received on the covered assets in excess of the original expectations of the FDIC, the Bank anticipates that it will be required to
pay the FDIC at the end of its loss sharing agreements. As of December 31, 2015, a clawback liability of $2.3 million has been
recorded. To the extent actual losses on the covered assets are less than estimated losses, the clawback liability will increase. To
the extent actual losses on the covered assets are more than the estimated losses, the clawback liability will decrease.
The Bank presents the FDIC loss sharing receivable balance, net of the estimated clawback liability on the consolidated balance
sheet. As of December 31, 2015, the Bank expected to collect $0.2 million from the FDIC for estimated losses and
reimbursement of external costs, such as legal fees, real estate taxes and appraisal expenses, and estimated the clawback
liability due to the FDIC in 2020 at $2.3 million. The net amount of $2.1 million is included in "Accrued interest payable and
other liabilities" in the accompanying consolidated balance sheet.
Bank-Owned Life Insurance
Bank-owned life insurance policies insure the lives of officers of the Bank, and name the Bank as beneficiary. Non-interest
income is generated tax-free (subject to certain limitations) from the increase in value of the policies’ underlying investments
made by the insurance company. The Bank is capitalizing on the ability to partially offset costs associated with employee
compensation and benefit programs with the bank-owned life insurance.
Bank Premises and Equipment
Bank premises and equipment are recorded at cost less accumulated depreciation. Depreciation is computed on the straight-line
method over the estimated useful lives of the related assets. Leasehold improvements are amortized over the shorter of the term
of the lease or estimated useful life, unless extension of the lease term is reasonably assured.
Treasury Stock
Common stock purchased for treasury is recorded at cost.
Income Taxes
Customers accounts for income taxes under the liability method of accounting for income taxes. The income tax accounting
guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to
be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of
deductions over revenues. Customers determines deferred income taxes using the liability (or balance sheet) method. Under this
method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of
assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
A tax position is recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or
sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the term upon
examination includes resolution of the related appeals or litigation process. A tax position that meets the more-likely-than-not
recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50
percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant
information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold
considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.
In assessing the realizability of federal or state deferred tax assets, management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during periods in which those temporary differences become deductible.
Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and prudent, feasible
and permissible as well as available tax planning strategies in making this assessment. Based on the level of historical taxable
income and projections for future taxable income over the periods in which the deferred tax assets are deductible as well as
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available tax planning strategies, management believes it is more likely than not that Customers will realize the benefits of
these deferred tax assets.
Share-Based Compensation
Customers Bancorp has four active share-based compensation plans. Share-based compensation accounting guidance requires
that the compensation cost relating to share-based-payment transactions be recognized in earnings. The cost is measured based
on the grant-date fair value of the equity instruments issued. The Black-Scholes model is used to estimate the fair value of
stock options, while the market price of Customers Bancorp’s common stock at the date of grant is used for restricted stock
awards.
Compensation cost for all share-based awards is calculated and recognized over the employees’ service period, generally
defined as the vesting period. For performance based awards, compensation cost is recognized over the vesting period as long
as it remains probable that the performance conditions will be met. If the service or performance conditions are not met,
Customers reverses previously recorded compensation expense upon forfeiture.
In 2014, the shareholders of the Bancorp approved an employee stock purchase plan. Because the purchase price under the plan
is 85% of (a 15% discount to the market price) the fair market value of a share of common stock on the first day of each
quarterly subscription period, the plan is considered to be a compensatory plan under current accounting guidance. Therefore,
the entire amount of the discount is recognizable compensation expense.
Derivative Instruments and Hedging
ASC 815, Derivatives and Hedging (“ASC 815”), provides the disclosure requirements for derivatives and hedging activities
with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses
derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative
instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further,
qualitative disclosures are required that explain the objectives and strategies for using derivatives, as well as quantitative
disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related
contingent features in derivative instruments.
As required by ASC 815, Customers records all derivatives on the balance sheet at fair value. The accounting for changes in the
fair value of derivatives depends on the intended use of the derivative, whether Customers has elected to designate a derivative
in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary
to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an
asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges.
Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of
forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency
exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain
or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions
in a cash flow hedge. Customers may enter into derivative contracts that are intended to economically hedge certain of its risks,
even though hedge accounting does not apply or Customers elects not to apply hedge accounting.
Prior to first quarter 2014, none of Customers financial derivatives were designated in qualifying hedge relationships in
accordance with the applicable accounting guidance. As such, all changes in fair value of the financial derivatives were
recognized directly in earnings. In March 2014, Customers entered into a $150.0 million notional balance forward starting pay
fixed interest rate swap to hedge the variable cash flows associated with the forecasted issuance of debt. Customers documented
and designated this swap as a cash flow hedge. The effective portion of changes in the fair value of financial derivatives
designated and qualifying as cash flow hedges is recorded in Accumulated Other Comprehensive Income and is subsequently
reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the
change in fair value of the financial derivatives is recognized directly in earnings. Amounts reported in accumulated other
comprehensive income related to financial derivatives will be reclassified to interest expense as interest payments are made on
Customers' variable-rate debt.
Customers purchased credit derivatives with a current notional balance of $19.3 million to hedge the performance risk of one of
its counterparties during first quarter 2014. These derivatives were not designated in hedge relationships for accounting
purposes and are being recorded at their fair value, with fair value changes recorded directly in earnings.
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In accordance with the FASB’s fair value measurement guidance, Customers made an accounting policy election to measure the
credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty
portfolio.
Comprehensive Income
Comprehensive income (loss) consists of net income (loss) and other comprehensive income (loss). Other comprehensive
income includes changes in unrealized gains and losses on securities available for sale arising during the period and
reclassification adjustments for realized gains and losses on securities available for sale included in net income. Unrealized
gains and losses on securities available for sale include a component for unrealized changes in foreign currency exchange rates
relating to the Bancorp’s investment in certain foreign equity securities. Other comprehensive income also includes the
effective portion of changes in fair value of financial derivatives designated and qualifying as cash flow hedges. Cash flow
hedge amounts classified as comprehensive income are subsequently reclassified into earnings in the period that the hedged
forecasted transaction affects earnings.
Earnings per Share
Basic earnings per share represents net income divided by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share includes all potentially dilutive common shares outstanding during the period. Potential
common shares that may be issued related to outstanding stock options, restricted stock units, and warrants are determined
using the treasury stock method.
Segment Information
Customers has one reportable segment, “Community Banking.” All of Customers' activities are interrelated, and each activity is
dependent and assessed based on how each of the activities supports the others. For example, lending is dependent upon the
ability of Customers to fund itself with deposits and borrowings while managing interest rate and credit risk. Accordingly, all
significant operating decisions are based upon analysis of Customers as one segment or unit.
Recently Issued Accounting Standards and Updates
In February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, Leases. 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. Leases will be classified as either finance or operating, with
classification affecting the pattern of expense recognition in the income statement for a lessess. From the lessor's perspective,
the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if
it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are
conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or
control, an operating lease results.
The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years. 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. A modified retrospective transition approach is required for lessors for sales-type, direct financing, 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. Customers is currently evaluating the impact of the pending adoption of
the new standard on its consolidated financial statements.
In January 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-01, Financial Instruments - Overall. The
guidance in this ASU among other things, (1) requires equity investments with certain exceptions, to be measured at fair value
with changes in fair value recognized in net income, (2) simplifies the impairment assessment of equity investments without
readily determinable fair values by requiring a qualitative assessment to identify impairment, (3) eliminates the requirement for
public businesses 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, (4) requires public business entities to
use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (5) 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, (6) requires separate presentation of financial assets and financial liabilities by
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measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements
and (7) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-
sale securities. The guidance in this ASU is effective for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. Customers does not expect the adoption of this ASU to have a significant impact on its
financial condition or results of operations.
In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2015-17, Income
Taxes. The amendments in this ASU, which will align the presentation of deferred income tax assets and liabilities with
International Financial Reporting Standards (IFRS), require that deferred tax liabilities and assets be classified as non-current in
a classified statement of financial position. The amendments in this ASU apply to all entities that present a classified statement
of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be
offset and presented as a single amount is not affected by the amendments in this ASU.
For public business entities, the amendments in this ASU are effective for financial statements issued for annual periods
beginning after December 15, 2016, and interim periods within those annual periods. Customers does not expect the adoption
of this ASU to have a significant impact on its financial condition or results of operations.
In September 2015, the FASB issued ASU 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. To
simplify the accounting for adjustments made to provisional amounts recognized in a business combination, the guidance in
this ASU eliminates the requirement to retrospectively account for those adjustments and requires an entity to present
separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period
earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts
had been recognized as of the acquisition date. The guidance in this ASU is effective for fiscal years beginning after
December 15, 2015, including interim periods within those fiscal years and should be applied prospectively to adjustment to
provisional amounts that occur after the effective date of this ASU. The adoption of this ASU did not have an impact on
Customers' financial condition or results of operations.
In April 2015 and August 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs and ASU
2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements-
Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, respectively. The guidance
in these ASUs is intended to simplify presentation of debt issuance costs, and requires that debt issuance costs related to a
recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability
consistent with debt discounts and is applicable on a retrospective basis. The guidance in these ASUs is effective for interim
and annual periods beginning after December 15, 2015. The adoption of these ASUs did not have a significant impact on
Customers' financial condition or results of operations.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis. The guidance in this ASU is
intended to amend the update, which changes the analysis that a reporting entity must perform to determine whether it should
consolidate certain types of legal entities. The amendments in this ASU affect the following areas:
1. Limited partnerships and similar legal entities.
2. Evaluating fees paid to a decision maker or a service provider as a variable interest.
3. The effect of fee arrangements on the primary beneficiary determination.
4. The effect of related parties on the primary beneficiary determination.
5. Certain investment funds.
The guidance in this ASU is effective for annual and interim periods beginning after December 15, 2015. The adoption of this
ASU did not have an impact on Customers' financial condition or results of operations.
In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20)
Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. The guidance in this ASU was
issued as part of the FASB's initiative to reduce complexity in accounting standards and eliminates from GAAP the concept of
extraordinary items. The guidance in this update is effective for fiscal years and interim periods within those fiscal years
beginning after December 15, 2015. The adoption of this ASU did not have an impact on Customers' financial condition or
results of operations.
In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging (Subtopic 815-10): Determining Whether the
Host contract in a Hybrid Financial Instrument in the Form of a Share is More Akin to Debt or to Equity. The guidance in this
ASU requires entities that issue or invest in a hybrid financial instrument to separate an embedded derivative feature from a
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host contract and account for the feature as a derivative. In the case of derivatives embedded in a hybrid financial instrument
that is issued in the form of a share, that criterion requires evaluating whether the nature of the host contract is more akin to
debt or to equity and whether the economic characteristics and risks of the embedded derivative feature are clearly and closely
related to the host contract. If the host contract is akin to equity, then equity-like features (for example, a conversion option) are
considered clearly and closely related to the host contract and, thus, would not be separated from the host contract. If the host
contract is akin to debt, then equity-like features are not considered clearly and closely related to the host contract. In the latter
case, an entity may be required to separate the equity-like embedded derivative feature from the debt host contract if certain
other criteria in Subtopic 815-15 are met. Similarly, debt-like embedded derivative features may require separate accounting
from an equity-like host contract. The guidance in this ASU is effective for fiscal years, and interim periods within those fiscal
years, beginning after December 15, 2015. The adoption of this ASU did not have an impact on Customers' financial condition
or results of operations.
In August 2014, the FASB issued ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon
Foreclosure. The guidance in this ASU affects creditors that hold government-guaranteed mortgage loans, including those
guaranteed by the FHA and the VA. It requires that a mortgage loan be derecognized and a separate other receivable be
recognized upon foreclosure if the following conditions are met:
1. The loan has a government guarantee that is not separable from the loan before foreclosure.
2. At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a
claim on the guarantee, and the creditor has the ability to recover under that claim.
3. At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is
fixed.
Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and
interest) expected to be recovered from the guarantor. The guidance in this ASU was effective for public business entities for
annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The guidance may be
applied using a prospective transition method in which a reporting entity applies the guidance to foreclosures that occur after
the date of adoption, or a modified retrospective transition using a cumulative-effect adjustment (through a reclassification to a
separate other receivable) as of the beginning of the annual period of adoption. Prior periods should not be adjusted. A reporting
entity must apply the same method of transition as elected under ASU 2014-04. The adoption of this ASU did not have a
significant impact on Customers' financial condition or results of operations.
In August 2014, the FASB issued ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial
Liabilities of a Consolidated Collateralized Financing Entity. The guidance in this ASU applies to a reporting entity that is
required to consolidate a collateralized financing entity under the Variable Interest Entities guidance when: (1) the reporting
entity measures all of the financial assets and the financial liabilities of that consolidated collateralized financing entity at fair
value in the consolidated financial statements based on other Codification Topics; and (2) the changes in the fair values of those
financial assets and financial liabilities are reflected in earnings. The guidance in this ASU is effective for public business
entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The adoption
of this ASU did not have an impact on Customers' financial condition or results of operations.
In June 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation. The guidance in this ASU requires that a
performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance
condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award.
Compensation cost should be recognized in the period in which it becomes probable that the performance target will be
achieved and should represent the compensation cost attributable to the period(s) for which the requisite has already been
rendered. If the performance target becomes probable of being achieved before the end of the requisite period, the remaining
unrecognized cost should be recognized prospectively over the remaining requisite service period. The total amount of
compensation cost recognized during and after the requisite service period should reflect the number of awards that are
expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the
employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. As
indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be
achieved) may differ from the requisite service period. The guidance in this ASU is effective for annual and interim periods
beginning after December 15, 2015. The adoption of this ASU did not have an impact on Customers' financial condition or
results of operations.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. This ASU establishes a comprehensive
revenue recognition standard for virtually all industries following U.S. GAAP, including those that previously followed
industry-specific guidance such as the real estate and construction industries. The revenue standard’s core principal is built on
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the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of
rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor
is entitled. To accomplish this, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the
performance obligations in the contract, (iii) identify the transaction price, (iv) allocate the transaction price to the performance
obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies the performance obligation. Three basic
transition methods are available - full retrospective, retrospective with certain practical expedients, and a cumulative effect
approach. Under the cumulative effect alternative, an entity would apply the new revenue standard only to contracts that are
incomplete under legacy U.S. GAAP at the date of initial application and recognize the cumulative effect of the new standard as
an adjustment to the opening balance of retained earnings. In August 2015, the FASB issued ASU 2015-14, Revenue from
Contracts with Customers (Topic 606): Deferral of the Effective Date. The guidance in this ASU is now effective for annual
reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period.
Customers does not expect this ASU to have a significant impact on its financial condition or results of operations.
NOTE 4 – EARNINGS PER SHARE
The following are the components and results of the Bancorp’s earnings per share ("EPS") calculation for the periods presented.
(amounts in thousands, except share and per share data)
Net income available to common shareholders
Weighted-average number of common shares outstanding – basic
Share-based compensation plans
Warrants
Weighted-average number of common shares – diluted
Basic earnings per share
Diluted earnings per share
For the Years Ended
December 31,
2015
2014
2013
$
56,090
$
43,214
$
32,694
26,844,545
26,719,626
24,485,078
1,516,297
324,097
968,671
250,707
464,054
198,520
28,684,939
27,939,004
25,147,652
$
$
2.09
1.96
$
1.62
1.55
1.34
1.30
The following is a summary of securities that could potentially dilute basic EPS in the future that were not included in the
computation of diluted EPS because to do so would have been anti-dilutive for the periods presented.
Anti-dilutive securities:
Share-based compensation awards
Warrants
Total anti-dilutive securities
For the Years Ended
December 31,
2015
2014
2013
606,095
52,242
658,337
135,861
118,745
254,606
819,539
118,745
938,284
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NOTE 5 - CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT (1)
The following tables present the changes in accumulated other comprehensive income (loss) by component for the years ended
December 31, 2015 and 2014.
Available-for-sale Securities
Total
Unrealized
Foreign
Unrealized
Unrealized
Gains
Currency
Gains
Loss on Cash
(Losses) (2)
Items
(Losses)
Flow Hedge
Total
$
(8,118) $
— $
(8,118) $
— $
(8,118)
(amounts in thousands)
Balance, January 1, 2014
Current period:
Other comprehensive income (loss) before
reclassifications
11,334
Amounts reclassified from accumulated other
comprehensive income to net income (3)
(2,074)
Net current-period other comprehensive income
(loss)
Balance, December 31, 2014
Current period:
Other comprehensive income (loss) before
9,260
1,142
—
—
—
—
11,334
(1,264)
10,070
(2,074)
—
(2,074)
9,260
1,142
(1,264)
(1,264)
7,996
(122)
reclassifications
(5,797)
(584)
(6,381)
(1,534)
(7,915)
Amounts reclassified from accumulated other
comprehensive income to net income (3)
53
—
53
—
53
Net current-period other comprehensive income
(loss)
Balance, December 31, 2015
(5,744)
(4,602) $
(584)
(584) $
(6,328)
(5,186) $
$
(1,534)
(2,798) $
(7,862)
(7,984)
(1) All amounts are net of tax. Amounts in parentheses indicate reductions to accumulated other comprehensive income.
(2) Includes immaterial gains or losses on foreign currency items for the year ended December 31, 2014.
(3) Reclassification amounts are reported as gain or loss on sale of investment securities on the Consolidated Statements of
Income.
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NOTE 6 – INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities are summarized as follows:
(amounts in thousands)
Available for Sale:
Mortgage-backed securities (1)
Corporate notes (2)
Equity securities (3)
Total
Amortized
Cost
December 31, 2015
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
$
506,111
$
1,453
$
39,925
22,514
320
—
568,550
$
1,773
$
(6,590) $
(178)
(3,302)
(10,070) $
500,974
40,067
19,212
560,253
(1)
(2)
(3)
Consists of mortgage-backed securities issued by government-sponsored agencies, including FHLMC, FNMA, and
GNMA.
Includes subordinated debt issued by other bank holding companies.
Consists primarily of equity securities issued by a foreign entity.
(amounts in thousands)
Available for Sale:
Mortgage-backed securities (1)
Corporate notes (2)
Equity securities (3)
Total
Amortized
Cost
December 31, 2014
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
$
376,854
$
2,805
$
15,000
23,074
104
1,197
414,928
$
4,106
$
(2,348) $
—
(1)
(2,349) $
377,311
15,104
24,270
416,685
(1)
(2)
(3)
Consists primarily of mortgage-backed securities issued by government-sponsored agencies, including FHLMC,
FNMA, and GNMA.
Includes subordinated debt issued by other bank holding companies.
Consists primarily of equity securities issued by a foreign entity.
The following table shows proceeds from the sale of available-for-sale investment securities, gross gains, and gross losses on
those sales of securities:
(amounts in thousands)
Proceeds from sale of available-for-sale investment securities
Gross gains
Gross losses
Net gains
For the Year Ended December 31,
2015
2014
2013
$
$
$
806
$
— $
(85)
(85) $
213,249
3,191
—
3,191
$
$
$
135,193
1,274
—
1,274
These gains and losses were determined using the specific identification method and were included in non-interest income.
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 are, therefore,
classified separately with no specific maturity date:
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(amounts in thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
Mortgage-backed securities
Total debt securities
December 31, 2015
Available for Sale
Amortized
Cost
Fair
Value
$
— $
—
32,925
7,000
506,111
$
546,036
$
—
—
33,112
6,955
500,974
541,041
Gross unrealized losses and fair value of Customers' investments aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position were as follows:
Less than 12 months
December 31, 2015
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(amounts in thousands)
Available for Sale:
Mortgage-backed securities (1)
Corporate notes (2)
Equity securities (3)
Total
$ 305,702
$
9,748
19,206
$ 334,656
$
(4,384) $
(178)
(3,301)
(7,863) $
57,357
$
—
6
57,363
$
(2,206) $ 363,059
9,748
19,212
(2,207) $ 392,019
—
(1)
$
$
(6,590)
(178)
(3,302)
(10,070)
(1)
(2)
(3)
Consists of mortgage-backed securities issued by government-sponsored agencies, including FHLMC, FNMA, and
GNMA.
Includes subordinated debt issued by other bank holding companies.
Consists primarily of equity securities issued by a foreign entity.
(amounts in thousands)
Available for Sale:
Mortgage-backed securities (1)
Equity securities (2)
Total
Less than 12 months
December 31, 2014
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
$
60,388
—
60,388
$
$
(81) $
—
(81) $
80,426
5
80,431
$
$
(2,267) $ 140,814
5
(2,268) $ 140,819
(1)
$
$
(2,348)
(1)
(2,349)
(1)
(2)
Consists primarily of mortgage-backed securities issued by government-sponsored agencies, including FHLMC,
FNMA, and GNMA.
Consists primarily of equity securities issued by a foreign entity.
At December 31, 2015, there were twenty-six available-for-sale investment securities in the less-than-twelve-month category
and sixteen available-for-sale 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. All amounts are expected to be recovered when market prices recover or at maturity. The unrealized losses on the equity
securities reflect decreases in market price and adverse changes in foreign currency exchange rates. Customers evaluated the
financial condition and capital strength of the issuer of these securities and concluded that the decline in fair value was
temporary and estimated the value could reasonably recover by way of increases in market price or positive changes in foreign
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currency exchange rates. Customers intends to hold these securities for the foreseeable future, and does not intend to sell the
securities before the price recovers. Customers considers it more likely than not that it will not be required to sell the securities.
Accordingly, Customers concluded that the securities are not other-than-temporarily impaired as of December 31, 2015.
At December 31, 2015 and 2014, Customers Bank had pledged investment securities aggregating $299.8 million and $376.9
million 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 December 31, 2015 and 2014 was as follows:
(amounts in thousands)
Commercial loans:
Mortgage warehouse loans at fair value
Multi-family loans at lower of cost or fair value
Total commercial loans held for sale
Consumer loans:
Residential mortgage loans at fair value
Total loans held for sale
December 31,
2015
2014
$
$
1,754,950
39,257
1,794,207
1,332,019
99,791
1,431,810
2,857
3,649
$
1,797,064
$
1,435,459
Effective September 30, 2015, Customers transferred $30.4 million of multi-family loans from held for sale to loans receivable
(held for investment) because the Bank no longer has the intent to sell these loans. Customers transferred these loans at their
carrying value, which was lower than the estimated fair value at the time of transfer.
Effective September 30, 2014, Customers transferred $164.7 million of multi-family loans from loans receivable to held for
sale because Customers was actively marketing these loans and no longer had the intent to retain these loans in its portfolio.
Effective December 31, 2014, Customers transferred $18.8 million of these loans back to loans receivable because Customers
no longer had the intent to sell these loans. Customers transferred these loans at their amortized cost, which was lower than the
estimated fair value at the time of transfer.
NOTE 8 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Because the period to submit losses for non-single family loans covered under the FDIC loss sharing agreements expired in third quarter
2015, and the balance of covered loans at December 31, 2015 and 2014 was insignificant to Customers' total loan portfolio, the
disaggregation between covered and non-covered loans is no longer presented in the disclosures that follow. Additional disaggregation
of the commercial real estate loan portfolio between owner occupied and non-owner occupied is presented. Prior period amounts have
been reclassified to conform with the current period presentation.
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The following table presents loans receivable as of December 31, 2015 and 2014.
(amounts in thousands)
Commercial:
Multi-family
Commercial and industrial (including owner occupied commercial real estate)
Commercial real estate non-owner occupied
Construction
Total commercial loans
Consumer:
Residential real estate
Manufactured housing
Other
Total consumer loans
Total loans receivable
Deferred costs and unamortized premiums, net
Allowance for loan losses
Loans receivable, net of allowance for loan losses
December 31,
2015
2014
$
2,909,439
$
2,208,405
1,111,400
956,255
87,240
785,669
839,310
49,718
5,064,334
3,883,102
271,613
113,490
3,708
388,811
297,395
126,731
4,433
428,559
5,453,145
334
(35,647)
5,417,832
$
4,311,661
512
(30,932)
4,281,241
$
The following tables summarize loans receivable by loan type and performance status as of December 31, 2015 and 2014:
(amounts in thousands)
Multi-family
Commercial and industrial
Commercial real estate -
owner occupied
Commercial real estate -
non-owner occupied
Construction
Residential real estate
Manufactured housing (5)
Other consumer
Total
$
December 31, 2015
30-89 Days
Past Due (1)
90 Or
More Days
Past Due (1)
Total Past
Due Still
Accruing (1)
Non-
Accrual
Current (2)
Purchased-
Credit-
Impaired
Loans (3)
Total Loans
(4)
$
— $
— $
— $
— $2,905,789
$
3,650
$ 2,909,439
39
268
1,997
—
2,986
3,752
107
9,149
—
—
—
—
—
2,805
—
2,805
$
39
268
1,997
—
2,986
6,557
1,973
799,595
1,552
803,159
2,700
292,312
12,961
308,241
1,307
—
2,202
2,449
940,895
87,006
257,984
101,132
12,056
234
8,441
3,352
956,255
87,240
271,613
113,490
107
11,954
$
140
10,771
3,227
$5,387,940
$
234
42,480
3,708
$ 5,453,145
$
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(amounts in thousands)
Multi-family
Commercial and
industrial
Commercial real estate -
owner occupied
Commercial real estate -
non-owner occupied
Construction
Residential real estate
Manufactured housing
(5)
Other consumer
Total
30-89 Days
Past Due (1)
90 Or
More Days
Past Due (1)
Total Past
Due Still
Accruing (1)
Non-
Accrual
Current (2)
Purchased-
Credit-
Impaired
Loans (3)
Total Loans
(4)
December 31, 2014
$
— $
— $
— $
— $2,204,059
$
4,346
$ 2,208,405
884
—
—
—
1,226
6,324
147
—
—
—
—
—
4,388
—
884
2,513
543,245
3,293
549,935
—
—
—
1,226
10,712
147
2,514
217,187
16,033
235,734
1,460
2,325
1,855
931
135
822,046
44,483
284,347
111,072
3,903
15,804
2,910
9,967
4,016
248
839,310
49,718
297,395
126,731
4,433
$
8,581
$
4,388
$
12,969
$
11,733
$4,230,342
$
56,617
$ 4,311,661
(1)
(2)
(3)
Includes past due loans that are accruing interest because collection is considered probable.
Loans where next payment due is less than 30 days from the report date.
Purchased-credit-impaired loans aggregated into a pool are accounted for as a single asset with a single composite interest rate
and an aggregate expectation of cash flows, and the past due status of the pools, or that of the individual loans within the pools, is
not meaningful. Because of the credit impaired nature of the loans, the loans are recorded at a discount reflecting estimated
future cash flows and the Bank recognizes interest income on each pool of loans reflecting the estimated yield and passage of
time. Such loans are considered to be performing. Purchased-credit-impaired loans that are not in pools accrete interest when the
timing and amount of their expected cash flows are reasonably estimable, and are reported as performing loans.
Amounts exclude deferred costs and fees, unamortized premiums and discounts, and the allowance for loan losses.
(4)
(5) Manufactured housing loans purchased in 2010 are supported by cash reserves held at the Bank that are used to fund past-due
payments when the loan becomes 90 days or more delinquent. Subsequent purchases are subject to varying provisions in the
event of borrowers’ delinquencies.
Allowance for Loan Losses and the FDIC Loss Sharing Receivable and Clawback Liability
Losses incurred on covered loans are eligible for partial reimbursement by the FDIC. Subsequent to the purchase date, the expected cash
flows on the covered loans are subject to evaluation. Decreases in the present value of expected cash flows on the covered loans are
recognized by increasing the allowance for loan losses with a related charge to the provision for loan losses. At the same time, the FDIC
indemnification asset is increased reflecting an estimated future collection from the FDIC, which is recorded as a reduction to the
provision for loan losses. If the expected cash flows on the covered loans increase such that a previously recorded impairment can be
reversed, the Bank records a reduction in the allowance for loan losses (with a related credit to the provision for loan losses)
accompanied by a reduction in the FDIC receivable balance (with a related charge to the provision for loan losses). Increases in expected
cash flows on covered loans and decreases in expected cash flows of the FDIC loss sharing receivable, when there are no previously
recorded impairments, are considered together and recognized over the remaining life of the loans as interest income. Decreases in the
valuations of other real estate owned covered by the loss sharing agreements are recorded net of the estimated FDIC receivable as an
increase to other real estate owned expense (a component of non-interest expense).
The FDIC loss sharing receivable balance will be reduced through a charge to the provision for loan losses, with no offsetting reduction
to the allowance for loan losses, as the period to submit losses under the FDIC loss sharing arrangements approaches expiration and the
estimated losses in the covered loans have not yet emerged or been realized in a final disposition event. The period to submit losses
under the FDIC loss sharing arrangements for non-single family loans expired in third quarter 2015. The period to submit losses under
the FDIC loss sharing arrangements for single family loans expires in third quarter 2017. The final maturity of the FDIC loss sharing
arrangements occurs in third quarter 2020. As of December 2015 and 2014, loans covered under loss sharing agreements with the FDIC
were $13.8 million and $42.2 million, respectively.
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As part of the FDIC loss sharing arrangements, Customers also assumed a liability to be paid within 45 days subsequent to the maturity
or termination of the loss sharing arrangements that is contingent upon actual losses incurred over the life of the arrangements relative to
expected losses and the consideration paid upon acquisition of the failed institutions. Due to cash received on the covered assets in
excess of the original expectations of the FDIC, the Bank anticipates that it will be required to pay the FDIC at the end of its loss sharing
arrangements. As of December 31, 2015, a clawback liability of $2.3 million has been recorded. To the extent actual losses on the
covered assets are less than estimated losses, the clawback liability will increase. To the extent actual losses on the covered assets are
more than the estimated losses, the clawback liability will decrease.
As of December 31, 2015, Customers expects to collect $0.2 million from the FDIC for estimated losses and reimbursement of external
costs, such as legal fees, real estate taxes and appraisal expenses, and estimated the clawback liability due to the FDIC in 2020 at $2.3
million. The net amount of $2.1 million is included in "Accrued interest payable and other liabilities" in the accompanying consolidated
balance sheet.
The following table presents changes in the allowance for loans losses and the FDIC loss sharing receivable, including the effect of the
estimated clawback liability for the years ended December 31, 2015, 2014 and 2013.
(amounts in thousands)
Beginning Balance
Provision for loan losses (1)
Charge-offs
Recoveries
Ending Balance
(amounts in thousands)
Beginning Balance
Increased (decreased) estimated cash flows (2)
Increased estimated cash flows from covered OREO (a)
Other activity, net (b)
Cash receipts from FDIC
Ending Balance
(1) Provision for loan losses
(2) Effect attributable to FDIC loss share arrangements
Net amount reported as provision for loan losses
Allowance for Loan Losses
For The Year Ended December 31,
2015
2014
2013
30,932
$
23,998
$
16,694
(13,412)
1,433
10,058
(4,947)
1,823
35,647
$
30,932
$
25,837
5,055
(7,338)
444
23,998
FDIC Loss Sharing Receivable
For The Year Ended December 31,
2015
2014
2013
$
2,320
(3,872)
3,138
248
(3,917)
(2,083) $
16,694
3,872
20,566
$
$
10,046
(4,689)
—
2,409
(5,446)
2,320
10,058
4,689
14,747
$
$
$
$
12,343
2,819
—
1,610
(6,726)
10,046
5,055
(2,819)
2,236
$
$
$
$
$
$
(a) Recorded as a reduction to Other Real Estate Owned expense (a component of non-interest expense).
(b) Includes external costs, such as legal fees, real estate taxes and appraisal expenses, that qualify for reimbursement under loss share
arrangements.
Loans Individually Evaluated for Impairment
The following tables present the recorded investment (net of charge-offs), unpaid principal balance, and related allowance by
loan type for loans that are individually evaluated for impairment as of December 31, 2015 and 2014 and the
average recorded investment and interest income recognized for the years ended December 31, 2015 and
2014. Purchased-credit-impaired loans are considered to be performing and are not included in the tables below.
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(amounts in thousands)
With no related allowance recorded:
Multi-family
Commercial and industrial
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied
Construction
Other consumer
Residential real estate
Manufactured housing
With an allowance recorded:
Commercial and industrial
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied
Construction
Other consumer
Residential real estate
Total
December 31, 2015
Year Ended December 31, 2015
Recorded
Investment
Net of
Charge Offs
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
$
661
$
661
$
— $
267
$
12,056
8,317
4,276
—
48
4,331
8,300
13,028
8,317
4,276
—
48
4,331
8,300
—
—
—
—
—
—
—
8,543
6,526
6,605
749
42
2,254
5,433
5,565
5,914
1,990
9,331
12
555
—
92
395
12
555
—
92
395
1
148
—
50
84
15
817
—
83
426
24
891
454
648
—
1
86
368
191
1
12
—
—
2
$
44,608
$
45,929
$
2,273
$
41,091
$
2,678
December 31, 2014
Year Ended December 31, 2014
Recorded
Investment
Net of
Charge Offs
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
(amounts in thousands)
With no related allowance recorded:
Commercial and industrial
$
14,600
$
16,122
$
— $
13,329
$
Commercial real estate - owner occupied
12,599
12,744
Commercial real estate - non-owner occupied
Construction
Other consumer
Residential real estate
Manufactured housing
With an allowance recorded:
Commercial and industrial
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied
Construction
Other consumer
Residential real estate
Total
Troubled Debt Restructurings
5,602
2,325
21
3,675
2,588
5,602
2,325
21
5,917
2,588
1,923
1,923
750
571
—
114
365
750
571
—
114
365
—
—
—
—
—
857
95
170
—
32
188
10,204
7,770
2,415
26
4,145
2,588
1,725
1,184
902
851
82
296
674
504
383
41
—
87
128
28
22
17
—
1
1
$
45,133
$
49,042
$
1,342
$
45,517
$
1,886
At December 31, 2015, 2014 and 2013 there were $11.4 million, $5.0 million, $4.6 million respectively, in loans categorized as troubled
debt restructurings (“TDRs”). TDRs are reported as impaired loans in the calendar year of their restructuring and are evaluated to
determine whether they should be placed on non-accrual status. In subsequent years, a TDR may be returned to accrual status if the
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borrower satisfies a minimum six-month performance requirement; however, it will remain classified as impaired. Generally, the Bank
requires sustained performance for nine months before returning a TDR to accrual status.
Modification of purchased-credit-impaired loans that are accounted for within loan pools in accordance with the accounting standards
for purchased-credit-impaired loans do not result in the removal of these loans from the pool even if modifications would otherwise be
considered a TDR. Accordingly, as each pool is accounted for as a single asset with a single composite interest rate and an aggregate
expectation of cash flows, modifications of loans within such pools are not considered TDRs.
The following is an analysis of loans modified in a troubled debt restructuring by type of concession for the years ended December 31,
2015, 2014 and 2013. There were no modifications that involved forgiveness of debt.
(dollars in thousands)
Extended under forbearance
Interest-rate reductions
Total
(dollars in thousands)
Extended under forbearance
Interest rate reductions
Total
(dollars in thousands)
Extended under forbearance
Interest rate reductions
Total
December 31, 2015
Number
of Loans
Recorded
Investment
1
161
162
$
$
183
7,274
7,457
December 31, 2014
Number
of Loans
Recorded
Investment
11
10
21
$
$
460
620
1,080
December 31, 2013
Number
of Loans
Recorded
Investment
— $
14
14
$
—
1,238
1,238
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The following table provides, by loan type, the number of loans modified in troubled debt restructurings and the related
recorded investment during the years ended December 31, 2015, 2014 and 2013.
(dollars in thousands)
Commercial and industrial
Commercial real estate non-owner occupied
Manufactured housing
Residential real estate
Total loans
(dollars in thousands)
Manufactured housing
Home equity / other
Total loans
(dollars in thousands)
Manufactured housing
Home equity / other
Total loans
December 31, 2015
Number
of Loans
Recorded
Investment
$
3
1
156
2
162
$
December 31, 2014
Number
of Loans
Recorded
Investment
10
11
21
$
$
December 31, 2013
Number
of Loans
Recorded
Investment
13
1
14
$
$
791
211
6,251
204
7,457
620
460
1,080
1,206
32
1,238
As of December 31, 2015, 2014, 2013, there were no commitments to lend additional funds to debtors whose terms have been modified
in TDRs.
For the years ended December 31, 2015, 2014 and 2013, the recorded investment of loans determined to be TDRs was $7.5 million, $1.1
million and $1.2 million respectively, both before and after restructuring. During the year ending December 31, 2015, thirty-six TDR
loans defaulted with a recorded investment of $2.5 million. During the year ending December 31, 2014, six TDR loans defaulted with a
recorded investment of $0.4 million. During the year ended December 31, 2013, five TDR loans defaulted with a recorded investment of
$0.4 million. For the year ended 2015, $1.8 million of the $2.5 million defaulted loans are subject to a cash reserve.
Loans modified in troubled debt restructurings are evaluated for impairment. The nature and extent of impairment of TDRs, including
those which have experienced a subsequent default, is considered in the determination of an appropriate level of allowance for credit
losses. There were three specific allowances resulting from TDR modifications during 2015, totaling $0.2 million for 2 commercial and
industrial loans, and $0.1 million for one commercial real estate non-owner occupied loan. There were no specific allowances resulting
from TDR modifications during 2014 or 2013.
Credit Quality Indicators
Commercial and industrial, commercial real estate, multi-family, residential real estate and construction loans are based on an internally
assigned risk rating system which are assigned at loan origination and reviewed on a periodic or “as needed” basis. Other consumer and
manufactured housing loans are evaluated based on the payment activity of the loan.
To facilitate the monitoring of credit quality within commercial and industrial, commercial real estate, construction, multi-family and
residential real estate loans, and for purposes of analyzing historical loss rates used in the determination of the allowance for loan losses
for the respective portfolio class, the Bank utilizes the following categories of risk ratings: pass/satisfactory (includes risk rating 1
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through 6), special mention, substandard, doubtful, and loss. The risk rating categories, which are derived from standard regulatory
rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter. Pass/satisfactory ratings,
which are assigned to those borrowers who do not have identified potential or well-defined weaknesses and for whom there is a high
likelihood of orderly repayment, are updated periodically based on the size and credit characteristics of the borrower. All other categories
are updated on a quarterly basis during the month preceding the end of the calendar quarter. Certain consumer loans are not assigned a
risk rating. While assigning risk ratings involves judgment, the risk-rating process allows management to identify riskier credits in a
timely manner and allocate the appropriate resources to managing the loans.
The risk rating grades are defined as follows:
“1” – Pass/Excellent
Loans rated 1 represent a credit extension of the highest quality. The borrower’s historic (at least five years) cash flows manifest
extremely large and stable margins of coverage. Balance sheets are conservative, well capitalized, and liquid. After considering debt
service for proposed and existing debt, projected cash flows continue to be strong and provide ample coverage. The borrower typically
reflects broad geographic and product diversification and has access to alternative financial markets.
“2” – Pass/Superior
Loans rated 2 are those for which the borrower has a strong financial condition, balance sheet, operations, cash flow, debt capacity and
coverage with ratios better than industry norms. The borrowers of these loans exhibit a limited leverage position, are virtually immune to
local economies, and are in stable growing industries. The management team is well respected and the company has ready access to
public markets.
“3” – Pass/Strong
Loans rated 3 are those loans for which the borrower has above average financial condition and flexibility; more than satisfactory debt
service coverage; balance sheet and operating ratios are consistent with or better than industry peers; have little industry risk; and move
in diversified markets and are experienced and competent in their industry. These borrowers access to capital markets is limited mostly
to private sources, often secured, but the borrower typically has access to a wide range of refinancing alternatives.
“4” – Pass/Good
Loans rated 4 have a sound primary and secondary source of repayment. The borrower may have access to alternative sources of
financing, bust sources are not as widely available as they are to a higher grade borrower. These loans carry a normal level of risk, with
very low loss exposure. The borrower has the ability to perform according to the terms of the credit facility. The margins of cash flow
coverage are satisfactory but vulnerable to more rapid deterioration than the higher quality loans.
“5” – Satisfactory
Loans rated 5 are extended to borrowers who are determined to be a reasonable credit risk and demonstrate the ability to repay the debt
from normal business operations. Risk factors may include reliability of margins and cash flows, liquidity, dependence on a single
product or industry, cyclical trends, depth of management, or limited access to alternative financing sources. The borrower’s historical
financial information may indicate erratic performance, but current trends are positive and the quality of financial information is
adequate, but is not as detailed and sophisticated as information found on higher grade loans. If adverse circumstances arise, the impact
on the borrower may be significant.
“6” – Satisfactory/Bankable with Care
Loans rated 6 are those for which the borrower has higher than normal credit risk; however, cash flow and asset values are generally
intact. These borrowers may exhibit declining financial characteristics, with increasing leverage and decreasing liquidity, and may have
limited resources and access to financial alternatives. Signs of weakness in these borrowers may include delinquent taxes, trade slowness
and eroding profit margins.
“7” – Special Mention
Loans rated Special Mention are credit facilities that may have potential developing weaknesses and deserve extra attention from the
account manager and other management personnel. In the event potential weaknesses are not corrected or mitigated, deterioration in the
ability of the borrower to repay the debt in the future may occur. This grade is not assigned to loans that bear certain peculiar risks
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normally associated with the type of financing involved, unless circumstances have caused the risk to increase to a level higher than
would have been acceptable when the credit was originally approved. Loans where significant actual, not potential, weaknesses or
problems are clearly evident are graded in the category below.
“8” – Substandard
Loans are classified Substandard when the loans are inadequately protected by the current sound worth and payment capacity of the
obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the
liquidation of the debt and are characterized by the distinct possibility that the company will sustain some loss if the weaknesses are not
corrected.
“9” – Doubtful
Doubtful ratings are assigned to loans that have all the attributes of a substandard rating with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and
improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may
work to the advantage of and strengthen the credit quality of the loan, its classification as an estimated loss is deferred until its more
exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection,
perfecting liens on additional collateral or refinancing plans.
“10” – Loss
The Bank assigns a loss rating to loans considered uncollectible and of such little value that their continuance as an active asset is not
warranted. Amounts classified as loss are immediately charged off.
Risk ratings are not established for certain consumer loans, including home equity loans, manufactured housing, and installment loans,
mainly because these portfolios consist of a larger number of homogeneous loans with smaller balances. Instead, these portfolios are
evaluated for risk mainly based upon aggregate payment history through the monitoring of delinquency levels and trends and are
classified as performing and nonperforming.
The following table presents the credit ratings as of December 31, 2015 and 2014 for the loans receivable portfolio.
Multi-
family
Commercial
and
Industrial
Commercial
Real Estate
Owner
Occupied
Commercial
Real Estate
Non-Owner
Occupied
Construction
Residential
Real Estate
Manufactured
Housing
Other
Consumer
Total
December 31, 2015
$
$2,907,362
661
1,416
—
—
$
784,892
14,052
4,215
—
—
295,762
7,840
4,639
—
—
$
950,886
1,671
3,698
—
—
$
$
87,240
—
—
—
—
$ 268,210
282
3,121
—
—
— $
—
—
104,484
9,006
— $ 5,294,352
24,506
—
17,089
—
107,945
3,461
9,253
247
$2,909,439
$
803,159
$
308,241
$
956,255
$
87,240
$ 271,613
$
113,490
$
3,708
$ 5,453,145
Multi-
family
Commercial
and
Industrial
Commercial
Real Estate
Owner
Occupied
Commercial
Real Estate
Non-Owner
Occupied
Construction
Residential
Real Estate
Manufactured
Housing
Other
Consumer
Total
December 31, 2014
$2,206,776
—
1,629
—
—
$2,208,405
$
$
531,790
14,565
3,580
—
—
549,935
$
$
217,356
13,056
5,322
—
—
235,734
$
$
829,238
6,694
3,378
—
—
839,310
$
$
44,642
—
5,076
—
—
49,718
$ 294,225
243
2,927
—
—
$ 297,395
$
$
— $
—
—
115,088
11,643
126,731
$
— $ 4,124,027
34,558
—
21,912
—
119,239
4,151
282
11,925
$ 4,311,661
4,433
(amounts in thousands)
Pass/Satisfactory
Special Mention
Substandard
Performing (1)
Non-performing (2)
Total
(amounts in thousands)
Pass/Satisfactory
Special Mention
Substandard
Performing (1)
Non-performing (2)
Total
(1)
Includes consumer and other installment loans not subject to risk ratings.
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(2)
Includes loans that are past due and still accruing interest and loans on non-accrual status.
As of December 31, 2015, the Bank had $1.2 million of residential real estate held in other real estate owned. As of December 31, 2015,
the Bank initiated foreclosure proceedings on $0.6 million in loans secured by residential real estate.
During second quarter 2015, the Bank refined its methodology for estimating the general allowance for loan losses. Previously, the
general allowance for the portion of the loan portfolio originated after December 31, 2009 ("Post 2009 loan portfolio") was based
generally on qualitative factors due to insufficient historical loss data on the portfolio. During second quarter 2015, the Bank began
using objectively verifiable industry and peer loss data to estimate probable incurred losses as of the balance sheet date for the Post 2009
loan portfolio until sufficient internal loss history is available. The same methodology was also adopted for the portion of the loan
portfolio originated on or before December 31, 2009 ("Legacy loan portfolio") that had no loss history over the past two years.
The changes in the allowance for loan losses for the years ended December 31, 2015 and 2014 and the loans and allowance for loan
losses by loan class based on impairment evaluation method are as follows. The amounts presented for the provision for loan losses
below do not include the effect of changes to estimated benefits resulting from the FDIC loss share arrangements for the covered loans.
Twelve months ended
December 31, 2015
Multi-family
Commercial
and
Industrial
Commercial
Real Estate
Owner
Occupied
Commercial
Real Estate
Non-Owner
Occupied
Construction
Residential
Real Estate
Manufactured
Housing
Other
Consumer
Total
(amounts in thousands)
Beginning Balance,
January 1, 2015
Charge-offs
Recoveries
Provision for
loan losses
Ending Balance,
December 31, 2015
Loans:
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Loans acquired
with credit
deterioration
Allowance for loan
losses:
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Loans acquired
with credit
deterioration
$
8,493
$
4,784
$
4,336
$
9,198
$
1,047
$
2,698
$
262
$
114
$
30,932
—
—
(11,331)
548
(378)
14
3,523
14,863
(2,624)
(327)
0
(451)
(1,064)
204
887
(276)
575
301
—
—
232
(36)
92
(37)
(13,412)
1,433
16,694
$
12,016
$
8,864
$
1,348
$
8,420
$
1,074
$
3,298
$
494
$
133
$
35,647
$
661
$
17,621
$
8,329
$
4,831
$
— $
4,726
$
8,300
$
140
$
44,608
2,905,128
783,986
286,951
939,368
87,006
258,446
101,838
3,334
5,366,057
3,650
1,552
12,961
12,056
234
8,441
3,352
234
42,480
$ 2,909,439
$
803,159
$
308,241
$
956,255
$
87,240
$
271,613
$
113,490
$
3,708
$ 5,453,145
$
— $
1,990
$
1
$
148
$
— $
84
$
— $
50
$
2,273
12,016
6,650
1,347
3,858
1,074
2,141
—
224
—
4,414
—
1,073
$
12,016
$
8,864
$
1,348
$
8,420
$
1,074
$
3,298
$
98
396
494
28
55
27,212
6,162
$
133
$
35,647
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Twelve months ended
December 31, 2014
Multi-family
Commercial
and
Industrial
Commercial
Real Estate
Owner
Occupied
Commercial
Real Estate
Non-Owner
Occupied
Construction
Residential
Real Estate
Manufactured
Housing
Other
Consumer
Total
(amounts in thousands)
Beginning Balance,
January 1, 2014
Charge-offs
Recoveries
Provision for
loan losses
Ending Balance,
December 31, 2014
Loans:
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Loans acquired
with credit
deterioration
Allowance for loan
losses:
Individually
evaluated for
impairment
Collectively
evaluated for
impairment
Loans acquired
with credit
deterioration
$
4,227
$
2,674
$
2,517
$
8,961
$
2,385
$
2,490
$
614
$
130
$
23,998
—
—
(1,155)
511
(482)
225
(1,715)
801
4,266
2,754
2,076
1,151
(895)
13
(456)
(667)
265
610
—
—
(352)
(33)
8
9
(4,947)
1,823
10,058
$
$
8,493
$
4,784
$
4,336
$
9,198
$
1,047
$
2,698
$
262
$
114
$
30,932
— $
16,523
$
13,349
$
6,173
$
2,325
$
4,040
$
2,588
$
135
$
45,133
2,204,059
530,119
206,352
817,333
44,483
283,388
120,127
4,050
4,209,911
4,346
3,293
16,033
15,804
2,910
9,967
4,016
248
56,617
$ 2,208,405
$
549,935
$
235,734
$
839,310
$
49,718
$
297,395
$
126,731
$
4,433
$ 4,311,661
$
— $
857
$
95
$
170
$
— $
188
$
— $
32
$
1,342
8,493
3,765
1,757
6,580
—
162
2,484
2,448
424
623
1,436
1,074
$
8,493
$
4,784
$
4,336
$
9,198
$
1,047
$
2,698
$
92
170
262
28
54
22,575
7,015
$
114
$
30,932
The manufactured housing portfolio was purchased in August 2010. A portion of the purchase price may be used to reimburse the Bank
under the specified terms in the Purchase Agreement for defaults of the underlying borrower and other specified items. At December 31,
2015 and 2014, funds available for reimbursement, if necessary, were $1.2 million and $3.0 million, respectively. Each quarter, these
funds are evaluated to determine if they would be sufficient to absorb probable losses within the manufactured housing portfolio.
The changes in accretable yield related to purchased-credit-impaired loans for the three and nine months ended September 30,
2015 and 2014 were as follows:
The changes in accretable yield related to purchased-credit-impaired loans for the years ended December 31, 2015, 2014 and 2013
were as follows:
(amounts in thousands)
Accretable yield balance, beginning of period
Accretion to interest income
Reclassification from nonaccretable difference and disposals, net
Accretable yield balance, end of period
December 31,
2015
2014
2013
$
$
17,606
(2,299)
(2,360)
12,947
$
$
22,557
(3,201)
(1,750)
17,606
$
$
32,174
(6,213)
(3,404)
22,557
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NOTE 9 – BANK PREMISES AND EQUIPMENT
The components of bank premises and equipment as of December 31, 2015 and 2014 were as follows:
(amounts in thousands)
Leasehold improvements
Furniture, fixtures and equipment
IT equipment
Automobiles
Accumulated depreciation
Total
Expected Useful Life
2015
2014
December 31,
3 to 25 years
$
12,531
$
11,680
5 to 10 years
3 to 5 years
5 to 10 years
5,312
5,909
206
23,958
(12,427)
$
11,531
$
4,504
4,696
174
21,054
(10,244)
10,810
Future minimum rental commitments under non-cancelable leases were as follows:
(amounts in thousands)
2016
2017
2018
2019
2020
Subsequent to 2020
Total minimum payments
December 31, 2015
$
$
3,861
3,662
3,450
2,826
1,994
3,258
19,051
Rent expense was approximately $3.8 million, $3.3 million and $2.5 million for the years ended December 31, 2015, 2014 and
2013, respectively. Customers' leases are for land and branch or office space. A majority of the leases provide for the payment
of taxes, maintenance, insurance and certain other expenses applicable to the leased premises. Many of the leases contain
extension provisions and escalation clauses. These leases are generally renewable and may, in certain cases, contain renewal
provisions and options to expand and contract space and terminate the leases at predetermined contractual dates. In addition,
escalation clauses may exist, which are tied to a predetermined rate or may change based on a specified percentage increase or
the Consumer Price Index.
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Table of Contents
NOTE 10 – DEPOSITS
The components of deposits at December 31, 2015 and 2014 were as follows:
(amounts in thousands)
Demand, non-interest bearing
Demand, interest bearing
Savings, including money market deposit accounts
Time, $100,000 and over
Time, other
Total deposits
Time deposits scheduled maturities at December 31, 2015 were as follows:
(amounts in thousands)
2016
2017
2018
2019
2020
Total time deposits
December 31,
2015
2014
$
$
653,679
127,215
2,781,010
1,624,562
723,035
5,909,501
$
$
546,436
71,202
2,203,237
1,043,265
668,398
4,532,538
December 31, 2015
$
$
1,799,310
312,813
135,952
53,591
45,931
2,347,597
The aggregate amount of demand deposit overdrafts that were reclassified as loans were $0.6 million at December 31, 2015,
compared to $0.8 million as of December 31, 2014. Time deposits greater than $250,000 totaled $920.5 million and $365.4
million at December 31, 2015 and 2014, respectively.
Included in the savings balances above were $815.7 million and $632.7 million of brokered money market deposits as of
December 31, 2015 and 2014, respectively. Also, included in time, other balances above were $612.8 million and $483.2
million of brokered time deposits, respectively, as of December 31, 2015 and 2014.
NOTE 11 – BORROWINGS
Short-term debt
Short-term debt at December 31, 2015 and 2014 was as follows:
(amounts in thousands)
FHLB advances
Federal funds purchased
Total short-term debt
December 31,
2015
2014
Amount
Rate
Amount
Rate
$
$
1,365,300
70,000
1,435,300
0.48% $
0.56
$
1,298,000
—
1,298,000
0.29%
—
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Table of Contents
The following is a summary of additional information relating to Customers' short-term debt:
(amounts in thousands)
FHLB advances:
Maximum outstanding at any month end
Average balance during the year
Weighted-average interest rate during the year
Federal funds purchased:
Maximum outstanding at any month end
Average balance during the year
Weighted-average interest rate during the year
December 31,
2015
2014
2013
$ 1,365,300
844,835
$ 1,383,000
898,396
$
769,750
120,309
0.60%
0.46%
0.55%
85,000
41,397
35,000
13,312
125,000
32,351
0.35%
0.31%
0.31%
At December 31, 2015 and 2014, the Bank had aggregate availability under federal funds lines totaling $175 million and $95.0
million, respectively.
Long-term debt
FHLB advances
The contractual maturities of long-term advances from the FHLB were as follows:
(amounts in thousands)
2016
2017
2018
December 31,
2015
2014
Amount
Rate
Amount
Rate
$
$
—
205,000
55,000
260,000
—% $
1.18
1.61
$
85,000
180,000
55,000
320,000
0.59%
1.21
1.61
Of the $260 million of long-term advances enumerated above, $250.0 million are fixed rate.
The Bank had a total maximum borrowing capacity with the Federal Home Loan Bank of $3.7 billion and with the Federal
Reserve Bank of Philadelphia of $59.2 million at December 31, 2015. The Bank had a total borrowing capacity with the
Federal Home Loan Bank of $3.2 billion and with the Federal Reserve Bank of Philadelphia of $62.7 million at December 31,
2014. Amounts can be borrowed as short-term or long-term. As of December 31, 2015, advances under these arrangements
were secured by certain assets, which included a blanket lien on securities of $257.1 million and qualifying loans of Customers
Bank of $3.5 billion.
Senior notes
On June 26, 2014, the Bancorp closed a private placement transaction in which it issued $25.0 million of 4.625% senior notes
due 2019. Interest is paid semi-annually in arrears in June and December.
In July and August 2013, the Bancorp issued $63.3 million in aggregate principal amount of senior notes due 2018. The notes
bear interest at 6.375% per year which is payable on March 15, June 15, September 15, and December 15.
The notes are unsecured obligations of the Bancorp and rank equally with all of its secured and unsecured senior indebtedness.
Subordinated debt
On June 26, 2014, the Bank closed a private placement transaction in which it issued $110.0 million of fixed-to-floating rate
subordinated notes due 2029. The subordinated notes bear interest at an annual fixed rate of 6.125% until June 26, 2024, and
interest is paid semiannually. From June 26, 2024, the subordinated notes will bear an annual interest rate equal to three-month
LIBOR plus 344.3 basis points until maturity on June 26, 2029. The Bank has the ability to call the subordinated notes, in
whole or in part, at a redemption price equal to 100% of the principal balance at certain times on or after June 26, 2024.
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Table of Contents
The subordinated notes qualify as Tier 2 capital for regulatory capital purposes.
NOTE 12 – SHAREHOLDERS’ EQUITY
On May 18, 2015, Customers Bancorp issued 2,300,000 shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred
Stock, Series C, par value $1.00 per share, with a liquidation preference of $25.00 per share.
Customers Bancorp will pay dividends on the Series C Preferred Stock only when, as, and if declared by the board of directors
or a duly authorized committee of the board and to the extent that it has lawfully available funds to pay dividends. Dividends
on the Series C Preferred Stock will accrue and be payable quarterly in arrears, on the 15th day of March, June, September, and
December of each year, commencing on September 15, 2015, at a fixed rate per annum equal to 7.00% from the original issue
date to, but excluding, June 15, 2020, and thereafter at a floating rate per annum equal to three-month LIBOR on the related
dividend determination date plus a spread of 5.30% per annum.
Dividends on the Series C Preferred Stock will not be cumulative. If Customers Bancorp's board of directors or a duly
authorized committee of the board does not declare a dividend on the Series C Preferred Stock in respect of a dividend period,
then no dividend shall be deemed to have accrued for such dividend period, be payable on the applicable dividend payment
date, or be cumulative, and Customers Bancorp will have no obligation to pay any dividend for that dividend period, whether or
not the board of directors or a duly authorized committee of the board declares a dividend on the Series C Preferred Stock for
any future dividend period.
The Series C Preferred Stock has no stated maturity, is not subject to any mandatory redemption, sinking fund or other similar
provisions and will remain outstanding unless redeemed at Customers Bancorp's option. Customers Bancorp may redeem the
Series C Preferred Stock at its option, at a redemption price equal to $25.00 per share, plus any declared and unpaid dividends
(without regard to any undeclared dividends), (i) in whole or in part, from time to time, on any dividend payment date on or
after June 15, 2020 or (ii) in whole but not in part, within 90 days following the occurrence of a regulatory capital treatment
event. Any redemption of the Series C Preferred Stock is subject to prior approval of the Board of Governors of the Federal
Reserve System. The Series C Preferred Stock qualifies as Tier 1 capital under regulatory capital guidelines.
Except in limited circumstances, the Series C Preferred Stock does not have any voting rights.
On August 24, 2015, Customers Bancorp's board of directors declared a cash dividend on its Series C Preferred Stock of
$0.56875 per share. The dividend was paid on September 15, 2015 to shareholders of record on August 31, 2015.
On November 17, 2015, Customers Bancorp's board of directors declared a cash dividend on its Series C Preferred Stock of
$0.4375 per share. The dividend was paid on December 15, 2015 to shareholders of record on November 30, 2015.
In May 2014, the Bancorp announced that its Board of Directors had declared a 10% stock dividend to all shareholders of
record as of May 27, 2014. This special dividend was paid on June 30, 2014 in the form of an aggregate of 2,429,375 additional
shares.
In November 2013, the Bancorp announced that its Board of Directors had authorized a stock repurchase plan in which it could
acquire up to 5% of its current outstanding shares at prices not to exceed a 20% premium over the current book value. The
repurchase program may be suspended, modified or discontinued at any time, and the Bancorp has no obligation to repurchase
any amount of its common stock under the program. There was no stock repurchased during 2015 or 2014.
At December 31, 2015, there were warrants outstanding to purchase 627,673 shares of the Bancorp’s common stock. At
December 31, 2014, there were warrants outstanding to purchase 635,274 shares of the Bancorp’s common stock. The purchase
prices at December 31, 2015 and 2014 ranged from $9.55 per share to $73.01 per share.
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Table of Contents
NOTE 13 – EMPLOYEE BENEFIT PLANS
401(k) Plan
Customers Bank has a 401(k) profit sharing plan whereby eligible team members may contribute amounts up to the annual IRS
statutory contribution limit. Customers Bank provides a matching contribution equal to 50% of the first 6% of the contribution
made by the team member. Employer contributions for the years ended December 31, 2015, 2014, and 2013 were $1.1 million,
$1.0 million, and $0.6 million, respectively.
Supplemental Executive Retirement Plans
Customers Bank entered into a supplemental executive retirement plan (SERP) with its Chairman and Chief Executive Officer
that provides annual retirement benefits for a 15-year period upon the later of his reaching the age of 65 or when he terminates
employment. The SERP is a defined-contribution type of deferred compensation arrangement that is designed to provide a
target annual retirement benefit of $300,000 per year for 15 years starting at age 65, based on an assumed constant rate of
return of 7% per year. The level of retirement benefit is not guaranteed by the Bank, and the ultimate retirement benefit can be
less than or greater than the target. The Bank intends to fund its obligations under the SERP with the increase in cash surrender
value of a life insurance policy on the life of the Chairman and Chief Executive Officer which is owned by the Bank. The
present value of the amount owed as of December 31, 2015 was $3.6 million and was included in other liabilities.
NOTE 14 – SHARE-BASED COMPENSATION PLANS
Summary
During 2010, the shareholders of Customers Bancorp approved the 2010 Stock Option Plan (“2010 Plan”), and during 2012,
the shareholders of Customers Bancorp approved the 2012 Amendment and Restatement of the Customers Bancorp, Inc.
Amended and Restated 2004 Incentive Equity and Deferred Compensation Plan (“2004 Plan”). The purpose of these plans is to
promote the success and enhance the value of the Bancorp by linking the personal interests of the members of the Board of
Directors and employees, officers, and executives of Customers to those of the shareholders of Customers and by providing
such individuals with an incentive for outstanding performance in order to generate superior returns to shareholders of
Customers. The 2010 Plan and 2004 Plan are intended to provide flexibility to Customers in its ability to motivate, attract, and
retain the services of members of the Board of Directors, and employees, officers, and executives of Customers. Stock options
and restricted stock units normally vest on the third or fifth anniversary of the grant date provided the grantee remains
employed by Customers or continues to serve on the Board. With respect to certain stock options granted under the 2010 Plan,
vested options shall be exercisable only when Customers' fully diluted tangible book value will have increased by 50% from
the date of grant. Certain share-based awards provide for accelerated vesting if there is a change in control (as defined in the
Plans). No stock options may be exercisable for more than 10 years from the date of grant.
The 2010 and 2004 Plans are administered by the Compensation Committee of the Board of Directors. The 2010 Plan provides
exclusively for the grant of stock options, some or all of which may be structured to qualify as Incentive Stock Options, to
employees, officers and executives. The maximum number of shares of common stock which may be issued under the 2010
Plan is 3,666,667 shares. The 2004 Plan provides for the grant of options, some or all of which may be structured to qualify as
Incentive Stock Options if granted to employees, stock appreciation rights, restricted stock, restricted stock units, and
unrestricted stock to employees, officers, executives, and members of the Board of Directors. The maximum number of shares
of common stock which may be issued under the 2004 Plan is 2,750,000 shares. At December 31, 2015, the aggregate number
of shares of common stock available for grant under these plans was 1,812,837 shares.
On January 1, 2011, Customers initiated a Bonus Recognition and Retention Program (“BRRP”). This is a restricted stock unit
plan. Employees eligible to participate in the BRRP include the Chief Executive Officer and other management and highly
compensated employees as determined by the Compensation Committee at its sole discretion. Under the BRRP, a participant
may elect to defer not less than 25%, nor more than 50%, of his or her bonus payable with respect to each year of participation.
Shares of Voting Common Stock having a value equal to the portion of the bonus deferred by a participant are allocated to an
annual deferral account, and a matching amount equal to an identical number of shares of common stock is also allocated to the
annual deferral account. A participant becomes 100% vested in the annual deferral account on the fifth anniversary date of the
initial funding of the account, provided he or she remains continuously employed by Customers from the date of funding to the
anniversary date.
Vesting is accelerated in the event of involuntary termination other than for cause, retirement at or after age 65, death,
termination on account of disability, or a change in control of Customers. Participants were first eligible to make elections
under the BRRP with respect to their bonuses for 2011 which were payable in the first quarter of 2012. The BRRP does not
provide for a specific number of shares to be reserved; by its terms, the award of restricted stock units under this plan is limited
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by the amount of cash bonuses paid to the participants in the plan. At December 31, 2015, restricted stock units outstanding
under this plan totaled 254,821.
Share-based compensation expense relating to stock options and restricted stock units is recognized on a straight-line basis over
the vesting periods of the awards and is a component of salaries and employee benefits expense. Total share-based
compensation expense for 2015, 2014, and 2013 was $5.7 million, $5.2 million, and $3.4 million, respectively. At
December 31, 2015, there was $11.2 million of unrecognized compensation cost related to all non-vested share-based
compensation awards. This cost is expected to be recognized through December 2020.
In 2014, the shareholders of Customers Bancorp approved the 2014 Employee Stock Purchase Plan (the "ESPP"). The ESPP is
intended to encourage team member participation in the ownership and economic progress of Customers. This plan is intended
to qualify as an employee stock purchase plan within the meaning of the Internal Revenue Code and is administered by the
Compensation Committee of the Board of Directors.
Under the ESPP, team members may elect to purchase shares of Customers' common stock through payroll deduction. Since the
purchase price under the plan is 85% of the fair market value of a share of common stock on the first day of each quarterly
subscription period (a 15% discount to the market price), Customers' ESPP is considered to be a compensatory plan under
current accounting guidance. Therefore, the entire amount of the discount is recognizable compensation expense. ESPP
expense for 2015 and 2014 was $80.0 thousand and $12.0 thousand, respectively.
Stock Options
Customers estimated the fair value of each option on the date of grant using the Black-Scholes option pricing model. The risk-
free interest rate was based upon the zero-coupon Treasury rates in effect on the grant date of the options. Expected volatility
was based upon limited historical information because Customers' common stock has only been traded since February 2012.
Expected life was management’s estimate which took into consideration the five-year vesting requirement.
During 2015, options to purchase an aggregate of 596,995 shares of Customers Bancorp voting common stock were granted to
certain officers and team members. The exercise price for the options granted is equal to the closing price of Customers
Bancorp's voting common stock on the date of grant. The options are subject to a five-year cliff vesting and expire after ten
years. In addition to the five-year service requirement, one of the following conditions must be met in order for the options to
become exercisable:
• Total shareholder returns over the five-year vesting period must be a minimum of 50%, or
• Customers Bancorp must have achieved a compound annual growth rate in diluted EPS of at least 10% over the five-
year vesting period.
Customers evaluated the likelihood that at least one of these conditions would be met over the requisite service period and
determined that it was more likely than not that one of the conditions would be satisfied (based upon historical performance).
Accordingly, the grant-date fair value of these awards is being recognized as expense over the five-year vesting period.
The following table presents the weighted-average assumptions used and the resulting weighted-average fair value of each
option granted.
Weighted-average risk-free interest rate
Expected dividend yield
Weighted-average expected volatility
Weighted-average expected life (in years)
Weighted-average fair value of each option granted
2015
2014
2013
1.90%
—%
21.18%
7.00
2.16%
—%
18.00%
7.00
$
6.42
$
4.52
$
1.42%
—%
13.77%
7.00
3.17
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The following summarizes stock option activity for the year ended December 31, 2015:
Outstanding, January 1, 2015
Granted
Exercised
Forfeited
Expired
Outstanding, December 31, 2015
Exercisable at December 31, 2015
Number
of Shares
Weighted-
average
Exercise
Price
Weighted-
average
Remaining
Contractual
Term
in Years
Aggregate
Intrinsic
Value
(dollars in thousands, except Weighted-average Exercise Price)
3,168,067
$
599,745
(31,168)
(2,200)
(2,683)
3,731,761
707,745
$
$
12.61
23.36
10.53
17.65
29.33
14.33
9.19
455
6.78
4.38
$
$
48,086
12,760
Cash received from the exercise of options during the year ended December 31, 2015 was $0.3 million with a related tax
benefit of $0.2 million.
A summary of the status of Customers' non-vested options at December 31, 2015 and changes during the year ended
December 31, 2015 is as follows:
Non-vested at January 1, 2015
Granted
Vested
Forfeited
Non-vested at December 31, 2015
Restricted Stock Units
$
Options
3,154,384
599,745
(725,163)
(2,200)
3,026,766
Weighted-
average
exercise price
12.59
23.36
12.50
17.65
15.53
The fair value of restricted stock units granted under the 2004 Plan is determined based on the market price of Customers'
common stock on the date of grant. The fair value of restricted stock units granted under the BRRP is measured as of the date
on which such portion of the bonus would have been paid had the deferral not been elected.
In February 2012, the Compensation Committee recommended and the Board of Directors approved a restricted stock award
that had two vesting requirements. The first requirement is that the recipient remains an employee or director through
December 31, 2016. The second requirement is that Customers' Voting Common Stock will have traded at a price greater than
$17.18 per share (adjusted for any stock splits or stock dividends) for at least five consecutive trading days during the five-year
period ending December 31, 2016. This second requirement was satisfied during the fourth quarter of 2013. These criteria
apply only to the 2012 restricted stock award.
There were 158,581 restricted stock units granted during the year ended December 31, 2015. Of the aggregate restricted stock
units granted, 84,392 were granted under the Bonus Recognition and Retention Program and are subject to five-year cliff
vesting. The remaining units were granted under the Bancorp's Restated and Amended 2004 Incentive Equity and Deferred
Compensation Plan and are subject to either a three-year waterfall vesting (with one third of the amount vesting annually) or a
three-year cliff vesting.
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The table below presents the status of the restricted stock units at December 31, 2015 and changes during the year ended
December 31, 2015:
Outstanding and unvested at January 1, 2015
Granted
Vested
Forfeited
Outstanding and unvested at December 31, 2015
Restricted
Stock Units
Weighted-
average grant-
date fair value
788,971
158,581
(65,218)
(9,070)
873,264
$
$
13.00
19.67
12.02
17.15
14.24
Customers has a policy that permits its directors to elect to receive shares of Voting Common Stock in lieu of their cash
retainers. During the year ended December 31, 2015, Customers issued 27,674 shares of Voting Common Stock with a fair
value of $0.7 million to the directors as compensation for their services. The fair values were determined based on the opening
price of the common stock on the day the shares were issued.
NOTE 15 – INCOME TAXES
The components of income tax expense were as follows:
(amounts in thousands)
Current
Deferred
Total
For the Years Ended December 31,
2015
2014
2013
$
$
40,004
(10,092)
29,912
$
$
26,361
(6,187)
20,174
$
$
15,394
2,210
17,604
Effective tax rates differ from the federal statutory rate of 35%, which is applied to income before income tax expense, due to
the following:
For the Years Ended December 31,
2015
2014
2013
Amount
% of
pretax
income
Amount
% of
pretax
income
Amount
% of
pretax
income
(amounts in thousands)
Federal income tax at statutory rate
State income tax
Tax-exempt interest, net of
disallowance
Bank-owned life insurance
Other
Effective income tax rate
$
$
30,973
1,434
35.00% $
1.62
22,185
1,355
35.00% $
17,604
2.14
353
(277)
(2,422)
204
29,912
(0.31)
(2.73)
0.22
33.80% $
(249)
(1,296)
(1,821)
20,174
(0.39)
(2.04)
(2.88)
31.83% $
(148)
(868)
663
17,604
35.00%
0.70
(0.30)
(1.73)
1.33
35.00%
Customers accounts for income taxes under the liability method of accounting for income taxes. The income tax accounting
guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to
be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of
deductions over revenues. Customers determines deferred income taxes using the liability (or balance sheet) method. Under
this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases
of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur.
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A tax position is recognized if it is more likely than not, based on the technical merits, that the tax position will be realized or
sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined
and upon examination also include resolution of the related appeals or litigation process, if any. A tax position that meets the
more likely than not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a
greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all
relevant information. The determination of whether or not a tax position has met the more likely than not recognition threshold
considers the facts, circumstances, and information available at the reporting date and is subject to management’s judgment.
At December 31, 2015 and 2014, Customers had no ASC 740-10 unrecognized tax benefits. Customers does not expect the
total amount of unrecognized tax benefits to significantly increase within the next twelve months. Customers recognizes
interest and penalties on unrecognized tax benefits in other expense.
Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of sufficient
taxable income within the carry-back period. A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, management considers
the scheduled reversal of the deferred tax liabilities, the level of historical taxable income, and the projected future taxable
income over the periods in which the temporary differences comprising the deferred tax assets will be deductible. Based on its
assessment, management determined that no valuation allowance is necessary at December 31, 2015 and 2014.
Deferred income taxes reflect temporary differences in the recognition of revenue and expenses for tax reporting and financial
statement purposes, principally because certain items are recognized in different periods for financial reporting and tax return
purposes. The following represents the Bancorp's deferred tax asset and liabilities as December 31, 2015 and 2014:
(amounts in thousands)
Deferred tax assets:
Allowance for loan losses
Net unrealized losses on securities
OREO expenses
Non-accrual interest
Net operating losses
Deferred compensation
Equity-based compensation
Fair value adjustments on acquisitions
Cash flow hedge
Incentive compensation
Other
Total deferred tax assets
Deferred tax liabilities:
Fair value adjustments on acquisitions
Net unrealized gains on securities
Net deferred loan fees
Bank premises and equipment
Other
Total deferred tax liabilities
Net deferred tax asset
December 31,
2015
2014
$
13,248
$
11,555
3,112
728
840
2,290
1,337
5,196
428
1,679
2,497
1,374
32,729
—
—
(2,688)
(875)
(592)
(4,155)
28,574
$
—
588
541
1,892
1,361
3,751
—
681
1,558
1,120
23,047
(2,002)
(615)
(4,524)
(1,009)
(1,140)
(9,290)
13,757
$
Customers had approximately $6.5 million of federal net operating loss carryovers at December 31, 2015, that expire in 2025
through 2031.
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Customers is subject to U.S. federal income tax as well as income tax in various state and local taxing jurisdictions. Generally,
Customers is no longer subject to examination by federal, state and local taxing authorities for years prior to December 31,
2012.
NOTE 16 – TRANSACTIONS WITH EXECUTIVE OFFICERS, DIRECTORS, AND PRINCIPAL SHAREHOLDERS
Customers has had, and may be expected to have in the future, banking transactions in the ordinary course of business with its
executive officers, directors, principal shareholders, their immediate families and affiliated companies (commonly referred to as
related parties). The activity relating to loans to such persons was as follows:
(amounts in thousands)
Balance – January 1
Additions
Repayments
Balance – December 31
For the Years Ended December 31,
2015
2014
2013
$
$
9
$
7,273
$
2,218
(2,007)
220
$
5
(7,269)
9
$
3,272
9,280
(5,279)
7,273
At December 31, 2015, Customers Bank had an outstanding commitment to provide short-term commercial real estate
financing, subject to certain terms and conditions, not to exceed $8.0 million, and an available line of credit of $1.8 million
with one of its related parties.
Some current directors, nominees for director and executive officers of Customers and entities or organizations in which they
were executive officers or the equivalent or owners of more than 10% of the equity were customers of and had transactions
with or involving Customers in the ordinary course of business during the fiscal year ended December 31, 2015. None of these
transactions involved amounts in excess of 5% of the Customers' gross revenues during 2015 nor was Customers indebted to
any of the foregoing persons or entities in an aggregate amount in excess of 5% of Customers' total assets at December 31,
2015. Additional transactions with such persons and entities may be expected to take place in the ordinary course of business in
the future.
At December 31, 2015 and 2014, the Bank had approximately $14.0 million and $11.7 million, respectively, in deposits from
related parties, including directors and certain executive officers.
For the years ended December 31, 2015, 2014, and 2013, Customers paid $27,300, $46,900 and $45,800 to Jaxxon Promotions,
Inc., a company in which a Bancorp director owns 25% interest.
NOTE 17 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
Customers is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to extend credit and letters of credit. Those
instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance
sheets.
Customers' exposure to credit loss in the event of nonperformance by the other party to the financial instrument for
commitments to extend credit is represented by the contractual amount of those instruments. Customers uses the same credit
policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
The following financial instruments were outstanding whose contract amounts represent credit risk:
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(amounts in thousands)
Commitments to fund loans
Unfunded commitments to fund mortgage warehouse loans
Unfunded commitments under lines of credit
Letters of credit
Other unused commitments
December 31,
2015
2014
$
537,380
$
1,302,759
436,550
42,002
6,360
231,294
713,619
430,995
36,206
7,685
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established
in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment
amounts do not necessarily represent future cash requirements. Mortgage warehouse loan commitments are agreements to
purchase mortgage loans from mortgage bankers that agree to purchase the loans back in a short period of time. These
commitments generally fluctuate monthly as existing loans are repurchased by the mortgage bankers and new loans are
purchased by Customers.
Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Customers
evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by
Customers upon extension of credit, is based on management’s credit evaluation. Collateral held varies but may include
personal or commercial real estate, accounts receivable, inventory and equipment.
Outstanding letters of credit written are conditional commitments issued by Customers to guarantee the performance of a
customer to a third party. The majority of these standby letters of credit expire within the next year. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending other loan commitments. Customers requires
collateral supporting these letters of credit as deemed necessary. Management believes that the proceeds obtained through a
liquidation of such collateral would be sufficient to cover the maximum potential amount of future payments required under the
corresponding guarantees. The current amount of the liabilities as of December 31, 2015 and 2014 for guarantees under standby
letters of credit issued is not material.
NOTE 18 – REGULATORY MATTERS
The Bank and the Bancorp are subject to various regulatory capital requirements administered by the federal banking agencies.
Failure to meet the minimum capital requirements can result in certain mandatory, and possibly additional discretionary, actions
by regulators that, if undertaken, could have a direct material effect on Customers' financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank and Bancorp must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items, as calculated under
the regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the
regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank
holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Bank and Bancorp to maintain minimum
amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to
average assets (as defined in the regulations). At December 31, 2015 and 2014, the Bank and Bancorp met all capital adequacy
requirements to which they were subject.
The Dodd-Frank Act required the FRB to establish minimum consolidated capital requirements for bank holding companies
that are as stringent as those required for insured depositary subsidiaries. In 2013, the federal banking agencies approved rules
that implemented the Dodd-Frank requirements and certain other regulatory capital reforms effective January 1, 2015, that (i)
introduced a new capital ratio pursuant to the prompt corrective action provisions, the common equity tier 1 capital to risk rated
assets ratio, (ii) increased the adequately capitalized and well capitalized thresholds for the Tier 1 risk based capital ratios to 6%
and 8%, respectively, (iii) changed the treatment of certain capital components for determining Tier 1 and Tier 2 capital, and
(iv) changed the risk weighting of certain assets and off balance sheet items in determining risk weighted assets.
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To be categorized as well capitalized, an institution must maintain minimum common equity Tier 1, total risk based, Tier 1 risk
based and Tier 1 leveraged ratios as set forth in the following table:
(amounts in thousands)
December 31, 2015
Common equity Tier 1 (to risk-
weighted assets)
Customers Bancorp, Inc.
Customers Bank
Total capital (to risk-weighted assets)
Customers Bancorp, Inc.
Customers Bank
Tier 1 capital (to risk-weighted assets)
Customers Bancorp, Inc.
Customers Bank
Tier 1 capital (to average assets)
Customers Bancorp, Inc.
Customers Bank
December 31, 2014
Total capital (to risk-weighted assets)
Customers Bancorp, Inc.
Customers Bank
Tier 1 capital (to risk-weighted assets)
Customers Bancorp, Inc.
Customers Bank
Tier 1 capital (to average assets)
Customers Bancorp, Inc.
Customers Bank
Actual
For Capital Adequacy
Purposes
To Be Well Capitalized
Under
Prompt Corrective Action
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
$500,624
$565,217
7.61% $ 296,014
8.62% $ 294,916
4.5%
N/A
4.5% $ 425,990
$698,323
10.62% $ 526,247
8.0%
N/A
$710,864
10.85% $ 524,295
8.0% $ 655,369
$556,193
$565,217
8.46% $ 394,685
8.62% $ 393,221
N/A
6.0%
6.0% $ 524,295
$556,193
$565,217
7.16% $ 310,812
4.0%
N/A
7.30% $ 309,883
4.0% $ 387,353
$578,644
11.09 %
$ 417,473
8.0 %
N/A
$621,894
11.98 %
$ 415,141
8.0 % $ 518,926
$437,712
$480,963
8.39 %
9.27 %
$ 208,737
$ 207,570
4.0 %
N/A
4.0 % $ 311,356
$437,712
$480,963
6.69 %
7.39 %
$ 261,622
$ 260,462
4.0 %
N/A
4.0 % $ 325,577
N/A
6.5%
N/A
10.0%
N/A
8.0%
N/A
5.0%
N/A
10.0 %
N/A
6.0 %
N/A
5.0 %
The new risk-based capital rules adopted effective January 1, 2015 require that banks and holding companies maintain a
"capital conservation buffer" of 250 basis points in excess of the "minimum capital ratio." The minimum capital ratio is equal
to the prompt corrective action adequately capitalized threshold ratio. The capital conservation buffer will be phased in over
four years beginning on January 1, 2016, with a maximum buffer of 0.625% of risk weighted assets for 2016, 1.25% for 2017,
1.875% for 2018, and 2.5% for 2019 and thereafter. Failure to maintain the required capital conservation buffer will result in
limitations on capital distributions and on discretionary bonuses to executive officers.
NOTE 19 – DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Customers uses fair value measurements to record fair value adjustments to certain assets and liabilities and to disclose the fair
value of its financial instruments. FASB ASC 825, Financial Instruments, requires disclosure of the estimated fair value of an
entity’s assets and liabilities considered to be financial instruments. For Customers, as for most financial institutions, the
majority of its assets and liabilities are considered to be financial instruments. However, many of these instruments lack an
available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. For fair
value disclosure purposes, Customers utilized certain fair value measurement criteria under the FASB ASC 820, Fair Value
Measurements and Disclosures, as explained below.
In accordance with ASC 820, the fair value of a financial instrument is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best
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determined based upon quoted market prices. However, in many instances, there are no quoted market prices for Customers’
various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using
present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate
settlement of the instrument.
The fair value guidance provides a consistent definition of fair value, focusing on an exit price in an orderly transaction (that is,
not a forced liquidation or distressed sale) between market participants at the measurement date under current market
conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in
valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at
which willing market participants would transact at the measurement date under current market conditions depends on the facts
and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is
most representative of fair value under current market conditions.
The fair value guidance also establishes a fair value hierarchy and describes the following three levels used to classify fair
value measurements:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for
identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or
indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value
measurement and unobservable (i.e., supported with little or no market activity).
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair
value measurement.
The following methods and assumptions were used to estimate the fair values of Customers’ financial instruments as of
December 31, 2015 and 2014:
Cash and cash equivalents:
The carrying amounts reported on the balance sheet for cash and cash equivalents approximate those assets’ fair values. These
assets are included as Level 1 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Investment securities:
The fair values of investment securities available for sale are determined by obtaining quoted market prices on nationally
recognized and foreign securities exchanges (Level 1), matrix pricing (Level 2), which is a mathematical technique used widely
in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities, but rather
by relying on the securities’ relationship to other benchmark quoted prices, or externally developed models that use
unobservable inputs due to limited or no market activity of the instrument (Level 3). These assets are included as Level 1, 2, or
3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
The carrying amount of FHLB, Federal Reserve Bank, and other restricted stock approximates fair value, and considers the
limited marketability of such securities. These assets are included in Level 2 fair values, based upon the lowest level of input
that is significant to the fair value measurements.
Loans held for sale - Residential mortgage loans:
The Bank generally estimates the fair values of residential mortgage loans held for sale based on commitments on hand from
investors within the secondary market for loans with similar characteristics. These assets are included as Level 2 fair values,
based upon the lowest level of input that is significant to the fair value measurements.
Loans held for sale - Mortgage warehouse loans:
The fair value of mortgage warehouse loans is the amount of cash initially advanced to fund the mortgage, plus accrued interest
and fees, as specified in the respective agreements. The loan is used by mortgage companies as short-term bridge financing
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between the funding of mortgage loans and the finalization of the sale of the loans to an investor. Changes in fair value are not
expected to be recognized since at inception of the transaction the underlying loans have already been sold to an approved
investor. Additionally, the interest rate is variable, and the transaction is short-term, with an average life of 19 days from
purchase to sale. These assets are included as Level 2 fair values, based upon the lowest level of input that is significant to the
fair value measurements.
Loans held for sale - Multi-family loans:
The fair values of multi-family loans held for sale are estimated using pricing indications from letters of intent with third party
investors, recent sale transactions within the secondary markets for loans with similar characteristics, or non-binding indicative
bids from brokers. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the
fair value measurements.
Loans receivable, net of allowance for loan losses:
The fair values of loans held for investment are estimated using discounted cash flows, using market rates at the balance sheet
date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon
contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that
reprice frequently and with no significant change in credit risk, fair values are based on carrying values. These assets are
included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Impaired loans:
Impaired loans are those that are accounted for under ASC 450, Contingencies, in which the Bank has measured impairment
generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party
appraisals of the properties that collateralize the loans, or discounted cash flows based upon the expected proceeds. These assets
are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Other real estate owned:
The fair value of OREO is determined using appraisals, which may be discounted based on management’s review and changes
in market conditions. All appraisals must be performed in accordance with the Uniform Standards of Professional Appraisal
Practice. Appraisals are certified to the Bank and performed by appraisers on the Bank’s approved list of appraisers.
Evaluations are completed by a person independent of management. The content of the appraisal depends on the complexity of
the property. Appraisals are completed on a “retail value” and an “as is value”. These assets are included as Level 3 fair values,
based upon the lowest level of input that is significant to the fair value measurements.
Deposit liabilities:
The fair values disclosed for interest and non-interest checking, passbook savings and money market deposit accounts are, by
definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). These liabilities are
included as Level 1 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates
currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits.
These liabilities are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value
measurements.
Federal funds purchased:
For these short-term instruments, the carrying amount is considered a reasonable estimate of fair value. These liabilities are
included as Level 1 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Borrowings:
Borrowings consist of long-term and short-term FHLB advances, 5-year senior unsecured notes, and subordinated debt. For the
short-term borrowings, the carrying amount is considered a reasonable estimate of fair value and is included as Level 1.
Fair values of long-term FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new
FHLB advances with similar credit risk characteristics, terms and remaining maturity. The prices obtained from this active
market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party. Fair
values of privately placed subordinated and senior unsecured debt are estimated by a third-party financial adviser using
discounted cash flow analysis, based on market rates currently offered on such debt with similar credit-risk characteristics,
terms and remaining maturity. These liabilities are included as Level 2 fair values, based upon the lowest level of input that is
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significant to the fair value measurements. The $63 million senior unsecured notes issued during third quarter 2013 are traded
on the New York Stock Exchange, and their price can be obtained daily. This fair value measurement is classified as Level 1.
Derivatives (Assets and Liabilities):
The fair values of interest rate swaps and credit derivatives are determined using models that incorporate readily observable
market data into a market standard methodology. This methodology nets the discounted future fixed cash receipts and the
discounted expected variable cash payments. The discounted variable cash payments are based on expectations of future
interest rates derived from observable market interest rate curves. In addition, fair value is adjusted for the effect of
nonperformance risk by incorporating credit valuation adjustments for the Bank and its counterparties. These assets and
liabilities are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value
measurements.
The fair values of the residential mortgage loan commitments are derived from the estimated fair values that can be generated
when the underlying mortgage loan is sold in the secondary market. The Bank uses commitments on hand from third party
investors to estimate an exit price, and adjusts for the probability of the commitment being exercised based on the Bank’s
internal experience (i.e., pull-through rate). These assets and liabilities are included as Level 3 fair values, based upon the
lowest level of input that is significant to the fair value measurements.
Off-balance-sheet financial instruments:
Fair values of unused commitments to lend and standby letters of credit are considered to be the same as their contractual
amounts.
The following information should not be interpreted as an estimate of Customers' fair value in its entirety because fair value
measurements are only provided for a limited portion of Customers’ assets and liabilities. Due to a wide range of valuation
techniques and the degree of subjectivity used in making these estimates, comparisons between Customers’ disclosures and
those of other companies may not be meaningful.
The estimated fair values of Customers’ financial instruments were as follows at December 31, 2015 and 2014.
(amounts in thousands)
Assets:
Cash and cash equivalents
Investment securities, available for sale
Loans held for sale
Loans receivable, net of allowance for loan
losses
FHLB, Federal Reserve Bank and other
restricted stock
Derivatives
Liabilities:
Deposits
Federal funds purchased
FHLB advances
Other borrowings
Subordinated debt
Derivatives
Fair Value Measurements at December 31, 2015
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Amount
Estimated
Fair Value
$ 264,593
$
264,593
$
264,593
$
— $
560,253
1,797,064
560,253
1,797,458
19,212
—
541,041
1,757,807
—
—
39,651
5,417,832
5,353,903
90,841
9,295
90,841
9,295
—
—
—
90,841
9,250
—
5,353,903
$ 5,909,501
$ 5,911,754
$ 3,561,905
$ 2,349,849
$
70,000
70,000
70,000
1,625,300
1,625,468
1,365,300
88,250
110,000
13,932
93,804
110,825
13,932
68,867
—
—
—
260,168
24,937
110,825
13,932
137
—
45
—
—
—
—
—
—
Table of Contents
(amounts in thousands)
Assets:
Cash and cash equivalents
Investment securities, available for sale
Loans held for sale
Loans receivable, net of allowance for loan
losses
FHLB and Federal Reserve Bank, and other
restricted stock
Derivatives
Liabilities:
Deposits
FHLB advances
Other borrowings
Subordinated debt
Derivatives
Fair Value Measurements at December 31, 2014
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Carrying
Amount
Estimated
Fair Value
$ 371,023
416,685
1,435,459
$
371,023
416,685
1,436,460
$
371,023
24,270
—
$
— $
392,415
1,335,668
—
—
100,792
4,281,241
4,285,537
82,002
7,552
82,002
7,552
—
—
—
82,002
7,509
—
4,285,537
$ 4,532,538
1,618,000
88,250
110,000
$ 4,540,507
1,619,858
92,069
111,925
$ 2,820,875
1,298,000
66,944
—
$ 1,719,632
321,858
25,125
111,925
$
9,716
9,716
—
9,716
—
43
—
—
—
—
—
For financial assets and liabilities measured at fair value on a recurring and non-recurring basis, the fair value measurements by
level within the fair value hierarchy used at December 31, 2015 and 2014 were as follows:
December 31, 2015
Fair Value Measurements at the End of the Reporting Period Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
(amounts in thousands)
Measured at Fair Value on a Recurring Basis:
Assets
Available-for-sale securities:
Mortgage-backed securities
Corporate notes
Equity securities
Derivatives (1)
Loans held for sale – fair value option
Total assets - recurring fair value measurements
Liabilities
Derivatives (2)
Measured at Fair Value on a Nonrecurring Basis:
Assets
Impaired loans, net of specific reserves of $2,273
Other real estate owned
Total assets - nonrecurring fair value measurements
$
$
$
$
$
138
— $
500,974
$
— $
500,974
—
19,212
—
—
40,067
—
9,250
1,757,807
19,212
$
2,308,098
— $
13,932
$
$
—
—
45
40,067
19,212
9,295
— 1,757,807
45
$ 2,327,355
— $
13,932
— $
—
— $
— $
—
— $
4,346
358
4,704
$
$
4,346
358
4,704
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December 31, 2014
Fair Value Measurements at the End of the Reporting Period Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Significant Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
(amounts in thousands)
Measured at Fair Value on a Recurring Basis:
Assets
Available-for-sale securities:
Mortgage-backed securities
Corporate notes
Equity securities
Derivatives (1)
Loans held for sale – fair value option
Total assets - recurring fair value measurements
Liabilities
Derivatives (2)
Measured at Fair Value on a Nonrecurring Basis:
Assets
Impaired loans, net of specific reserves of $1,342
Other real estate owned
Total assets - nonrecurring fair value measurements
(1)
(2)
Included in Other Assets
Included in Other Liabilities
$
$
$
$
$
— $
377,311
$
— $
377,311
—
24,270
—
—
15,104
—
7,509
1,335,668
24,270
$
1,735,592
— $
9,716
$
$
—
—
43
15,104
24,270
7,552
— 1,335,668
43
$ 1,759,905
— $
9,716
— $
—
— $
— $
—
2,380
9,149
— $
11,529
$
$
2,380
9,149
11,529
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis at December 31, 2015 and 2014 were as
follows:
(amounts in thousands)
Balance at January 1,
Issuances
Settlements
Balance at December 31,
For the Years Ended December 31,
2015
2014
Residential Mortgage Loan Commitments
$
$
43
$
273
(271)
45
$
240
235
(432)
43
Customers' policy is to recognize transfers between fair value levels when events or circumstances warrant transfers. There
were no transfers between levels during the years ended December 31, 2015 and 2014.
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The following table summarizes financial assets and financial liabilities measured at fair value as of December 31, 2015 and
2014 for which Customers utilized Level 3 inputs to measure fair value:
December 31, 2015
(dollars in thousands)
Impaired loans
Other real estate owned
Residential mortgage
loan commitments
December 31, 2014
(dollars in thousands)
Impaired loans
Other real estate owned
Residential mortgage
loan commitments
Quantitative Information about Level 3 Fair Value Measurements
Fair Value
Estimate
Valuation Technique
Unobservable Input
Range (Weighted
Average) (3)
$
4,346 Collateral appraisal (1)
Liquidation expenses (2)
358 Collateral appraisal (1)
Liquidation expenses (2)
45
Adjusted market bid
Pull-through rate
Quantitative Information about Level 3 Fair Value Measurements
Fair Value
Estimate
Valuation Technique
Unobservable Input
Range (Weighted
Average) (3)
$
2,380 Collateral appraisal (1)
Liquidation expenses (2)
9,149 Collateral appraisal (1)
Liquidation expenses (2)
43
Adjusted market bid
Pull-through rate
(8)%
(8)%
94 %
(8)%
(8)%
80 %
(1)
(2)
(3)
Obtained from approved independent appraisers. Appraisals are current and in compliance with credit policy. The Bank
does not generally discount appraisals.
Fair value is adjusted for estimated costs to sell.
Presented as a percentage of the value determined by appraisal for impaired loans and other real estate owned.
NOTE 20 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Risk Management Objectives of Using Derivatives
Customers is exposed to certain risks arising from both its business operations and economic conditions. Customers manages
economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and durations of
its assets and liabilities. Specifically, Customers enters into derivative financial instruments to manage exposures that arise
from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which
are determined by interest rates. Customers’ derivative financial instruments are used to manage differences in the amount,
timing, and duration of Customers’ known or expected cash receipts and its known or expected cash payments principally
related to certain fixed-rate borrowings. Customers also has interest-rate derivatives resulting from a service provided to certain
qualifying customers, and therefore, they are not used to manage Customers’ interest-rate risk in assets or liabilities. Customers
manages a matched book with respect to its derivative instruments used in this customer service in order to minimize its net
risk exposure resulting from such transactions.
Cash Flow Hedges of Interest Rate Risk
Customers’ objectives in using interest-rate derivatives are to add stability to interest expense and to manage exposure to
interest rate movements. To accomplish this objective, Customers sometimes uses interest rate swaps as part of its interest-rate-
risk management strategy. Interest-rate swaps designated as cash flow hedges involve the receipt of variable amounts from a
counterparty in exchange for Customers making fixed-rate payments over the life of the agreements without exchange of the
underlying notional amount.
The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in
accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged
forecasted transaction affects earnings. During 2015 and 2014, such derivatives were used to hedge the variable cash flows
associated with a forecasted issuance of debt. The ineffective portion of the change in fair value of the derivatives is to be
recognized directly in earnings. During 2015 and 2014, Customers did not record any hedge ineffectiveness.
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Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as
interest payments are made on Customers’ variable-rate debt. Customers expects to reclassify $1.7 million from accumulated
other comprehensive income to interest expense during the next 12 months.
Customers is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of
24 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).
At December 31, 2015 and 2014, Customers had one outstanding interest rate derivative with a notional amount of $150.0
million that was designated as a cash flow hedge of interest rate risk. The hedge expires in April 2019.
Derivatives Not Designated as Hedging Instruments
Customers executes interest rate swaps with commercial banking customers to facilitate the customer's respective risk
management strategies (typically the loan customers will swap a floating rate loan to a fixed rate loan). The customer interest
rate swaps are simultaneously offset by interest rate swaps that Customers executes with a third party in order to minimize
interest rate risk exposure resulting from such transactions. Because the interest rate swaps associated with this program do not
meet the hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting third-party
market swaps are recognized directly in earnings. At December 31, 2015, Customers had 62 interest rate swaps with an
aggregate notional amount of $461.0 million related to this program. At December 31, 2014, Customers had 44 interest rate
swaps with an aggregate notional amount of $251.9 million related to this program.
Customers enters into residential mortgage loan commitments in connection with its consumer mortgage banking activities to
fund mortgage loans at specified rates and times in the future. These commitments are short-term in nature and generally expire
in 30 to 60 days. The residential mortgage loan commitments that relate to the origination of mortgage loans that will be held
for sale are considered derivative instruments under applicable accounting guidance and are reported at fair value, with changes
in fair value recorded directly to earnings. At December 31, 2015 and 2014, Customers had an outstanding notional balance of
residential mortgage loan commitments of $2.8 million and $3.8 million, respectively.
Customers also purchased credit derivatives to hedge the performance risk associated with one of its counterparties. These
derivatives are not designated as hedging instruments and are reported at fair value, with changes in fair value reported directly
in earnings. At December 31, 2015 and 2014, Customers had an outstanding notional balance of credit derivatives of $19.3
million and $13.4 million, respectively.
Fair Value of Derivative Instruments on the Balance Sheet
The following table presents the fair value of Customers’ derivative financial instruments as well as the classification on the
balance sheet at December 31, 2015 and 2014.
(amounts in thousands)
Derivatives designated as cash flow hedges:
Interest rate swaps
Total
Derivatives not designated as hedging instruments:
Interest rate swaps
Credit contracts
Residential mortgage loan commitments
Total
December 31, 2015
Derivative Assets
Derivative Liabilities
Balance Sheet
Balance Sheet
Location
Fair Value
Location
Fair Value
Other assets
Other assets
Other assets
Other assets
$
$
$
$
— Other liabilities
—
9,088
Other liabilities
Other liabilities
Other liabilities
162
45
9,295
$
$
$
$
4,477
4,477
9,455
—
—
9,455
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(amounts in thousands)
Derivatives designated as cash flow hedges:
Interest rate swaps
Total
Derivatives not designated as hedging instruments:
Interest rate swaps
Credit contracts
Residential mortgage loan commitments
Total
December 31, 2014
Derivative Assets
Derivative Liabilities
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
Other assets
Other assets
Other assets
Other assets
$
$
$
$
— Other liabilities
—
7,332
177
43
7,552
Other liabilities
Other liabilities
Other liabilities
$
$
$
$
1,945
1,945
7,771
—
—
7,771
Effect of Derivative Instruments on Comprehensive Income
The following table presents the effect of Customers' derivative financial instruments on comprehensive income for the years
ended December 31, 2015 and 2014.
For the Year Ended December 31, 2015
Income Statement Location
Amount of income (loss)
recognized in earnings
(amounts in thousands)
Derivatives not designated as hedging instruments:
Interest rate swaps
Credit contracts
Other non-interest income
Other non-interest income
Residential mortgage loan commitments
Mortgage loan and banking income
Total
$
$
1,889
(15)
2
1,876
For the Year Ended December 31, 2014
Income Statement Location
Amount of income (loss)
recognized in earnings
(amounts in thousands)
Derivatives not designated as hedging instruments:
Interest rate swaps
Credit contracts
Other non-interest income
Other non-interest income
Residential mortgage loan commitments
Mortgage loan and banking income
Total
$
$
550
(91)
(197)
262
(amounts in thousands)
Derivatives not designated as hedging instruments:
Interest rate swaps
Residential mortgage loan commitments
Total
For the Year Ended December 31, 2013
Income Statement Location
Amount of income (loss)
recognized in earnings
Other non-interest income
Mortgage loan and banking income
$
$
711
240
951
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For the Year Ended December 31, 2015
Location of Gain
Amount of Gain (Loss)
Amount of Loss
(Loss) Reclassified
Reclassified from
Recognized in OCI on
from Accumulated
Accumulated OCI into
Derivatives (Effective
OCI into Income
Income (Effective
Portion) (1)
(Effective Portion)
Portion)
(amounts in thousands)
Derivatives in cash flow hedging relationships:
Interest rate swaps
$
(1,534)
Interest expense
$
—
For the Year Ended December 31, 2014
Location of Gain
Amount of Gain (Loss)
Amount of Loss
(Loss) Reclassified
Reclassified from
Recognized in OCI on
from Accumulated
Accumulated OCI into
Derivatives (Effective
OCI into Income
Income (Effective
Portion) (1)
(Effective Portion)
Portion)
(amounts in thousands)
Derivative in cash flow hedging relationship:
Interest rate swaps
$
(1,264)
Interest expense
$
—
(1) Amounts presented are net of taxes
Credit-risk-related Contingent Features
By entering into derivative contracts, Customers is exposed to credit risk. The credit risk associated with derivatives executed
with customers is the same as that involved in extending the related loans and is subject to the same standard credit policies. To
mitigate the credit-risk exposure to major derivative dealer counterparties, Customers only enters into agreements with those
counterparties that maintain credit ratings of high quality.
Agreements with major derivative dealer counterparties contain provisions whereby default on any of Customers' indebtedness
would be considered a default on its derivative obligations. Customers also has entered into agreements that contain provisions
under which the counterparty could require Customers to settle its obligations if Customers fails to maintain its status as a well/
adequately-capitalized institution. As of December 31, 2015, the fair value of derivatives in a net liability position (which
includes accrued interest but excludes any adjustment for nonperformance-risk) related to these agreements was $14.3 million.
In addition, Customers has collateral posting thresholds with certain of these counterparties and at December 31, 2015, had
posted $14.3 million of cash as collateral. Customers records cash posted as collateral as a reduction in the outstanding balance
of cash and cash equivalents and an increase in the balance of other assets.
Disclosures about Offsetting Assets and Liabilities
The following tables present derivative instruments that are subject to enforceable master netting arrangements. Customers'
interest rate swaps with institutional counterparties are subject to master netting arrangements and are included in the table
below. Interest rate swaps with commercial banking customers and residential mortgage loan commitments are not subject to
master netting arrangements and are excluded from the table below. Customers has not made a policy election to offset its
derivative positions.
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(amounts in thousands)
Description
Interest rate swap derivatives
with institutional
counterparties
(amounts in thousands)
Description
Interest rate swap derivatives
with institutional
counterparties
Offsetting of Financial Assets and Derivative Assets at
December 31, 2015
Gross Amounts Not Offset in
the Consolidated Balance Sheet
Gross
Amount of
Recognized
Assets
Gross
Amounts
Offset in the
Consolidated
Balance
Sheet
Net
Amounts of
Assets
Presented
in the
Consolidated
Balance
Sheet
Financial
Instruments
Cash
Collateral
Received
Net
Amount
$
— $
— $
— $
— $
— $ —
Offsetting of Financial Assets and Derivative Assets at
December 31, 2014
Gross Amounts Not Offset in
the Consolidated Balance Sheet
Gross
Amount of
Recognized
Assets
Gross
Amounts
Offset in the
Consolidated
Balance
Sheet
Net
Amounts of
Assets
Presented
in the
Consolidated
Balance
Sheet
Financial
Instruments
Cash
Collateral
Received
Net
Amount
$
192
$
— $
192
$
192
$
— $ —
Offsetting of Financial Liabilities and Derivative Liabilities at
December 31, 2015
Gross Amounts Not Offset in
the Consolidated Balance Sheet
Gross
Amount of
Recognized
Liabilities
Gross
Amounts
Offset in the
Consolidated
Balance
Sheet
Net
Amounts of
Liabilities
Presented
in the
Consolidated
Balance
Sheet
Financial
Instruments
Cash
Collateral
Pledged
Net
Amount
(amounts in thousands)
Description
Interest rate swap derivatives
with institutional
counterparties
$
13,932
$
— $
13,932
$
— $
13,932
$ —
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Offsetting of Financial Liabilities and Derivative Liabilities at
Gross
Amount of
Recognized
Liabilities
Gross
Amounts
Offset in the
Consolidated
Balance
Sheet
December 31, 2014
Net
Amounts of
Liabilities
Presented
in the
Consolidated
Balance
Sheet
Financial
Instruments
Cash
Collateral
Pledged
Net
Amount
(amounts in thousands)
Description
Interest rate swap derivatives
with institutional
counterparties
$
9,703
$
— $
9,703
$
192
$
9,511
$ —
NOTE 21 — LOSS CONTINGENCY
During the first quarter of 2013, a suspected fraud was discovered in the Bank’s held-for-sale loan portfolio. Total loans
involved in this fraud initially was estimated to be $5.2 million, and management believed the range of possible loss to have
been between $1.5 million and $3.2 million. Accordingly, management provided a loss contingency of $2.0 million at
March 31, 2013. During the second quarter of 2013, Customers determined that an aggregate of $1.0 million of the loans were
not involved in the fraud, and these loans were subsequently sold. In addition, Customers recovered $1.5 million in cash from
the alleged perpetrator. Because it was determined that the remaining asset no longer met the definition of “a loan,” and
because Customers is pursuing restitution through the involved parties, Customers determined this to be a receivable. As a
result, the remaining aggregate of $2.7 million of loans and the related $2.0 million reserve were transferred to other assets. As
of December 31, 2015, the net amount of the receivable and reserve of $0.6 million remains in other assets.
NOTE 22 – CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
The following tables present the condensed financial statements for Customers Bancorp, Inc. (parent company only)
Balance Sheets
(amounts in thousands)
Assets
Cash in subsidiary bank
Investment securities available for sale, at fair value
Investments in and receivables due from subsidiaries
Other assets
Total assets
Liabilities and Shareholders’ equity
Borrowings
Other liabilities
Total liabilities
Shareholders’ equity
December 31,
2015
2014
$
54,567
$
16,465
5
583,875
4,190
5
509,465
6,678
$
642,637
$
532,613
88,250
485
88,735
553,902
88,250
1,218
89,468
443,145
532,613
Total Liabilities and Shareholders’ Equity
$
642,637
$
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Income and Comprehensive Income Statements
(amounts in thousands)
Operating income:
Other
Total operating income
Operating expense:
Interest
Other
Total operating expense
Income (loss) before taxes and undistributed income of subsidiaries
Income tax benefit
Income (loss) before undistributed income of subsidiaries
Equity in undistributed income of subsidiaries
Net income
Preferred stock dividends
Net income available to common shareholders
Comprehensive income
Statements of Cash Flows
(amounts in thousands)
Cash Flows from Operating Activities:
Net income
Adjustments to reconcile net income to net cash used in operating
activities:
Equity in undistributed earnings of subsidiaries, net of dividends
received from Bank
(Increase) decrease in other assets
Increase (decrease) in other liabilities
Net Cash Provided By (Used in) Operating Activities
Cash Flows from Investing Activities:
Purchases of investment securities available for sale
Payments for investments in and advances to subsidiaries
Net Cash Used in Investing Activities
Cash Flows from Financing Activities:
Proceeds from issuance of common stock
Proceeds from issuance of preferred stock
Proceeds from issuance of long-term debt
Exercise and redemption of warrants
Payments on partial shares for stock dividend
Preferred stock dividends paid
Purchase of treasury stock
Net Cash Provided by Financing Activities
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents – Beginning
Cash and Cash Equivalents – Ending
$
146
For the Years Ended December 31,
2015
2014
2013
$
90
90
758
758
$
18,545
$
18,545
5,854
4,604
10,458
8,087
3,516
11,603
46,980
58,583
2,493
56,090
5,251
5,611
10,862
(10,772)
3,797
(6,975)
50,189
43,214
—
43,214
$
50,721
$
51,210
$
1,923
3,395
5,318
(4,560)
1,596
(2,964)
35,658
32,694
—
32,694
23,512
For the Years Ended December 31,
2015
2014
2013
$
58,583
$
43,214
$
32,694
(46,980)
2,488
(112)
13,979
—
(30,036)
(30,036)
904
55,569
—
—
—
(2,314)
—
54,159
38,102
16,465
54,567
$
(50,189)
(1,354)
1,497
(6,832)
—
(15,032)
(15,032)
77
—
25,000
6
(8)
—
—
25,075
3,211
13,254
16,465
$
(35,658)
(1,465)
(281)
(4,710)
—
(177,068)
(177,068)
97,507
—
60,336
264
—
—
(7,754)
150,353
(31,425)
44,679
13,254
Table of Contents
NOTE 23 – SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly data for the years ended December 31, 2015 and 2014. Quarterly data may not
agree to full year results.
Quarter Ended
(amounts in thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expenses
Income before income taxes
Provision for income taxes
Net income
Preferred stock dividend
Net income available to common shareholders
Earnings per common share:
Basic
Diluted
$
$
December 31
September 30
June 30
March 31
2015
$
67,713
$
63,736
$
59,683
$
14,245
53,468
6,173
9,420
31,514
25,201
7,415
17,786
1,006
16,780
0.62
0.58
$
$
13,125
46,558
9,335
6,393
25,660
17,956
6,400
11,556
507
11,049
0.41
0.39
$
$
13,802
49,934
2,094
6,171
30,307
23,704
8,415
15,289
980
14,309
0.53
0.50
$
$
2014
58,718
12,388
46,330
2,964
5,733
27,465
21,634
7,682
13,952
—
13,952
0.52
0.49
Quarter Ended
(amounts in thousands, except per share data)
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expenses
Income before income taxes
Provision for income taxes
Net income available to common shareholders
Earnings per common share:
Basic
Diluted
December 31
September 30
June 30
March 31
36,874
7,082
29,792
4,368
7,310
21,169
11,565
3,429
8,136
0.30
0.29
$
57,161
$
51,298
$
45,092
$
12,175
44,986
2,459
5,804
27,864
20,467
7,289
13,178
0.49
0.47
$
$
11,084
40,214
5,035
5,102
24,679
15,602
3,940
11,662
0.44
0.42
$
$
8,162
36,930
2,886
6,911
25,205
15,750
5,517
10,233
0.38
0.37
$
$
$
$
147
Table of Contents
NOTE 24 – SUBSEQUENT EVENTS
On January 22, 2016, Customers announced the pricing of its public offering of 1,000,000 shares of Fixed-to-Floating Rate
Non-Cumulative Perpetual Preferred Stock, Series D (the "Series D Preferred Stock") at a price of $25.00 per share. Dividends
on the Series D Preferred Stock will accrue and be payable quarterly in arrears, at a fixed rate per annum equal to 6.50% from
the original issue date to, but excluding, March 15, 2021, and thereafter at a floating rate per annum equal to three-month
LIBOR on the related dividend determination date plus a spread of 5.09% per annum. The offering closed on January 29, 2016,
and was subject to customary closing conditions.
Customers received net proceeds before expenses of $24.2 million from the offering, after deducting offering costs. The net
proceeds will be used for general corporate purposes, which may include working capital and the funding of organic growth at
Customers Bank.
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Table of Contents
MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS AND REPORT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
Management of Customers Bancorp, Inc. (the “Customers Bancorp”) is responsible for the integrity and objectivity of all
information presented in this report. The consolidated financial statements were prepared in conformity with United States
generally accepted accounting principles. Management believes that the consolidated financial statements of Customers
Bancorp, Inc. fairly reflect the form and substance of transactions and that the financial statements fairly represent Customers
Bancorp’s financial position and results of operations. Management has included in Customers Bancorp’s financial statements
amounts that are based on estimates and judgments which it believes are reasonable under the circumstances.
The independent registered public accounting firm of BDO USA, LLP audits Customers Bancorp’s consolidated financial
statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).
The Board of Directors of Customers Bancorp has an Audit Committee composed of three independent Directors. The
Committee meets periodically with financial management, the internal auditors and the independent registered public
accounting firm to review accounting, internal control, auditing, corporate governance and financial reporting matters. The
Audit Committee is responsible for the engagement of the independent auditors. The independent auditors and internal auditors
have access to the Audit Committee.
Management of Customers Bancorp, Inc. is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of
management, including the Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our
evaluation under the framework in Internal Control – Integrated Framework, management concluded that our internal control
over financial reporting was effective as of December 31, 2015. The effectiveness of our internal control over financial
reporting as of December 31, 2015 has been audited by BDO USA, LLP, an independent registered public accounting firm, as
stated in their report which is included herein.
149
Table of Contents
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Controls and Procedures
Evaluation of Disclosure Controls and Procedures. We have established disclosure controls and procedures to ensure that
material information relating to us, including our consolidated subsidiaries, is made known to the officers who certify our
financial reports and to other members of senior management and the Board of Directors.
We carried out an evaluation, under the supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, of the design and operating effectiveness of our disclosure controls and
procedures, as defined in Exchange Act Rule 13a-15. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of December 31, 2015, our disclosure controls and procedures are effective.
Management’s Responsibility for Financial Statements and Report on Internal Control over Financial Reporting are included in
Part II, Item 8, “Financial Statements and Supplementary Data,” and are incorporated by reference herein.
Our independent registered public accounting firm, BDO USA, LLP, also attested to, and reported on, the effectiveness of
internal control over financial reporting as of December 31, 2015. BDO USA, LLP’s attestation report, which appears in Part
II, Item 8, "Financial Statements and Supplementary Data," is incorporated herein by reference.
Changes in Internal Control over Financial Reporting
During fourth quarter 2015, there have been no changes in the Bancorp’s internal control over financial reporting that have
materially affected or are reasonably likely to materially affect the Bancorp’s internal control over financial reporting.
Item 9B.
Other Information
On February 26, 2016, Customers and Steven Issa, Customers’ Executive Vice President, New England President and Market
Chief Lending Officer entered into an amendment to Mr. Issa’s employment agreement to eliminate the provision requiring
Customers to provide a tax gross-up payment to Mr. Issa in the event of a transaction involving a change in control. All of the
other provisions of the employment agreement remain in full force and effect.
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Table of Contents
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item will be included in the Proxy Statement for the 2016 annual meeting in the sections titled
“Our Board of Directors and Management,” and “Board Governance,” and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this Item will be included in the Proxy Statement for the 2016 annual meeting in the sections titled
“Director Compensation,” “Executive Officer Compensation,” and “Board Governance,” and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item will be included in the Proxy Statement for the 2016 annual meeting in the sections titled
“Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item will be included in the Proxy Statement for the 2016 annual meeting in the sections titled
“Certain Relationships and Related Transactions” and “Board Governance” and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services
The information required by this Item will be included in the Proxy Statement for the 2016 annual meeting in the section titled
“Proposal 2 — Ratification of Appointment of Independent Registered Public Accounting Firm,” and is incorporated herein by
reference.
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Table of Contents
Item 15
Exhibits and Financial Statement Schedules
PART IV
(a)
(b)
1. Financial Statements
Consolidated financial statements are included under Item 8 of Part II of this Form 10-K.
2. Financial Statements Schedules
Financial statements schedules are omitted because the required information is either not applicable, not
required or is shown in the respective financial statements or in the notes thereto.
(c)
Exhibits
Exhibit
No.
Description
2.1
2.2
2.3
3.1
3.2
3.3
3.4
3.5
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
Purchase and Assumption Agreement, dated as of July 9, 2010, by and among Customers Bank, the FDIC as
Receiver of USA Bank, and the FDIC acting in its corporate capacity, incorporated by reference to Exhibit 2.3 to
the Customers Bancorp Form S-1/A filed with the SEC on January 13, 2011
Purchase and Assumption Agreement, dated as of September 17, 2010, by and among Customers Bank, the FDIC as
Receiver of ISN Bank, and the FDIC acting in its corporate capacity, incorporated by reference to Exhibit 2.4 to the
Customers Bancorp Form S-1/A filed with the SEC on January 13, 2011
Asset Purchase Agreement dated as of December 15, 2015 by and among Customers Bancorp, Customers Bank,
Higher One, Inc. and Higher One Holdings, Inc.
Amended and Restated Articles of Incorporation of Customers Bancorp, Inc., incorporated by reference to Exhibit
3.1 to the Customers Bancorp Form 8-K filed with the SEC on April 30, 2012
Amended and Restated Bylaws of Customers Bancorp, Inc., incorporated by reference to Exhibit 3.2 to the
Customers Bancorp Form 8-K filed with the SEC on April 30, 2012
Articles of Amendment to the Amended and Restated Articles of Incorporation of Customers Bancorp, Inc.,
incorporated by reference to Exhibit 3.1 to the Customers Bancorp Form 8-K filed with the SEC on July 2, 2012
Statement with Respect to Shares relating to the Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock,
Series C, incorporated by reference to Exhibit 3.1 to the Customers Bancorp Form 8-K filed with the SEC on May
18, 2015
Statement with Respect to Shares relating to the Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock,
Series D, incorporated by reference to Exhibit 3.1 to the Customers Bancorp Form 8-K filed with the SEC on
January 29, 2016
Specimen stock certificate of Customers Bancorp, Inc. Voting Common Stock and Class B Non-Voting Common
Stock, incorporated by reference to Exhibit 4.1 to the Customers Bancorp Form S-1/A filed with the SEC on May 1,
2012
Form of Warrant issued to investors in New Century Bank’s March and February 2010 private offerings, 2009
private offering, and in partial exchange for New Century Bank’s shares of 10% Series A Non-Cumulative
Perpetual Convertible Preferred Stock in June 2009, incorporated by reference to Exhibit 4.8 to the Customers
Bancorp Form S-1 filed with the SEC on April 22, 2010
Warrants issued to Jay S. Sidhu, June 30, 2009, incorporated by reference to Exhibit 4.9 to the Customers Bancorp
Form S-1 filed with the SEC on April 22, 2010
Indenture, dated as of July 30, 2013, by and between Customers Bancorp, Inc., as Issuer, and Wilmington Trust,
National Association, as Trustee, incorporated by reference to Exhibit 4.1 to the Customers Bancorp 8-K filed with
the SEC on July 31, 2013
First Supplemental Indenture, dated as of July 30, 2013, by and between Customers Bancorp, Inc., as Issuer, and
Wilmington Trust, National Association, as Trustee, incorporated by reference to Exhibit 4.2 to the Customers
Bancorp 8-K filed with the SEC on July 31, 2013
6.375% Global Note in aggregate principal amount of $55,000,000, incorporated by reference to Exhibit 4.3 to the
Customers Bancorp 8-K filed with the SEC on July 31, 2013
Amendment to First Supplemental Indenture, dated August 27, 2013, by and between Customers Bancorp, Inc. and
Wilmington Trust Company, National Association, as trustee, incorporated by reference to Exhibit 4.1 to the
Customers Bancorp 8-K filed with the SEC on August 29, 2013
6.375% Global Note in aggregate principal amount of $8,250,000, incorporated by reference to Exhibit 4.2 to the
Customers Bancorp 8-K filed with the SEC on August 29, 2013
152
Table of Contents
Exhibit
No.
4.9
10.1+
10.2+
10.3+
10.4+
10.5+
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
Description
Form of Note Subscription Agreement (including form of Subordinated Note Certificate and Senior Note
Certificate) incorporated by reference to Exhibit 10.1 to the Customers Bancorp 8-K filed with the SEC on June 26,
2014
New Century Bank Management Stock Purchase Plan, incorporated by reference to Exhibit 10.1 to the Customers
Bancorp Form S-1 filed with the SEC on April 22, 2010
Amended and Restated Customers Bancorp, Inc. 2010 Stock Option Plan, incorporated by reference to Exhibit 10.2
to the Customers Bancorp Form 10-K filed with the SEC on March 21, 2012
Amended and Restated Employment Agreement, dated as of March 26, 2012, by and between Customers Bancorp,
Inc. and Jay S. Sidhu, incorporated by reference to Exhibit 10.3 to the Customers Bancorp Form S-1 filed with the
SEC on March 28, 2012
Amended and Restated Employment Agreement, dated as of March 26, 2012, by and between Customers Bancorp,
Inc. and Richard Ehst, incorporated by reference to Exhibit 10.4 to the Customers Bancorp Form S-1 filed with the
SEC on March 28, 2012
Amended and Restated Customers Bancorp, Inc. 2004 Incentive Equity and Deferred Compensation Plan,
incorporated by reference to Exhibit 10.7 to the Customers Bancorp Form 10-K filed with the SEC on March 21,
2012
Form of Restricted Stock Unit Award Agreement for Employees relating to the 2012 Special Stock Reward
Program, incorporated by reference to Exhibit 10.25 to the Customers Bancorp Form S-1/A filed with the SEC on
May 1, 2012
Amended and Restated Customers Bancorp, Inc. Bonus Recognition and Retention Plan, incorporated by reference
to Exhibit 10.15 to the Customers Bancorp Form 10-K filed with the SEC on March 21, 2012
Supplemental Executive Retirement Plan of Jay S. Sidhu, incorporated by reference to Exhibit 10.15 to the
Customers Bancorp Form S-1/A filed with the SEC on April 18, 2011
Form of Restricted Stock Unit Award Agreement for Directors relating to the 2012 Special Stock Reward Program,
incorporated by reference to Exhibit 10.26 to the Customers Bancorp Form S-1/A filed with the SEC on May 1,
2012
Form of Stock Option Agreement, incorporated by reference to Exhibit 10.18 to the Customers Bancorp Form 10-K
filed with the SEC on March 21, 2012
Form of Restricted Stock Unit Agreement, incorporated by reference to Exhibit 10.17 to the Customers Bancorp
Form 10-K filed with the SEC on March 21, 2012
10.12+ Change of Control Agreement, dated as of January 30, 2013, by and between Customers Bancorp, Inc. and Glenn
Hedde, incorporated by reference to Exhibit 10.29 to Customers Bancorp’s Form 10-K filed with the SEC on
March 18, 2013
10.13+ Change of Control Agreement, dated as of January 30, 2013, by and between Customers Bancorp, Inc. and Warren
Taylor, incorporated by reference to Exhibit 10.30 to Customers Bancorp’s Form 10-K filed with the SEC on
March 18, 2013
10.14+ Change of Control Agreement, dated as of December 22, 2012, by and between Customers Bancorp, Inc. and Ken
Keiser
10.15+
Employment Agreement, dated as of August 5, 2013, by and between Customers Bancorp, Inc. and Robert
Wahlman
10.16+
Employment Agreement, dated as of March 1, 2014, by and between Customers Bancorp, Inc. and Steven Issa
10.17+ Amendment to Employment Agreement, dated as of February 26, 2016, by and between Customers Bancorp, Inc.
and Steven Issa
10.18
Termination and Non-Renewal Agreement, dated as of April 4, 2013, by and among Customers Bancorp, Inc.,
Acacia Life Insurance Company, and Ameritas Life Insurance Corp., incorporated by reference to Exhibit 10.1 to
the Customers Bancorp Form 8-K filed with the SEC on April 10, 2013
153
Table of Contents
Exhibit
No.
10.19
At Market Issuance Sales Agreement dated as of December 23, 2015, by and among the Company, FBR Capital
Markets & Co., MLV & Co. LLC and Maxim Group LLC, incorporated by reference to Exhibit 10.1 to the
Customers Bancorp Form 8-K filed with the SEC on December 23, 2015
Description
10.20
Termination of At Market Issuance Sales Agreement dated as of January 20, 2016
21.1
23.1
31.1
31.2
32.1
32.2
101
List of Subsidiaries of Customers Bancorp, Inc.
Consent of BDO USA, LLP, filed herewith
Certification of the Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a)
Certification of the Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a)
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
Interactive Data Files regarding (a) Balance Sheets as of December 31, 2015 and 2014, (b) Statements of Income
for the years ended December 31, 2015, 2014 and 2013, (c) Statements of Comprehensive Income for the years
ended December 31, 2015, 2014 and 2013, (d) Statements of Cash Flows for the years ended December 31, 2015,
2014 and 2013, (e) Statements of Changes in Shareholders’ Equity for the years ended December 31, 2015, 2014
and 2013 and (f) Notes to Financial Statements for the years ended December 31, 2015, 2014 and 2013.
+
Management Contract or compensatory plan or arrangement
154
Table of Contents
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
February 26, 2016
February 26, 2016
Customers Bancorp, Inc.
By:
/s/ Jay S. Sidhu
Name:
Jay S. Sidhu
Title:
Chairman and Chief Executive Officer
Customers Bancorp, Inc.
By:
/s/ Robert E. Wahlman
Name: Robert E. Wahlman
Title:
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature:
/s/ Jay S. Sidhu
Jay S. Sidhu
/s/ Robert E. Wahlman
Robert E. Wahlman
/s/ Carla A. Leibold
Carla A. Leibold
Title(s):
Chairman, Chief Executive Officer and Director (principal executive officer)
Date:
February 26, 2016
Executive Vice President and Chief Financial Officer (principal financial
officer)
February 26, 2016
Senior Vice President - Chief Accounting Officer and Controller (principal
accounting officer)
February 26, 2016
/s/ Daniel K. Rothermel Director
Daniel K. Rothermel
/s/ Bhanu Choudhrie
Director
Bhanu Choudhrie
/s/ John R. Miller
Director
John R. Miller
/s/ T. Lawrence Way
Director
T. Lawrence Way
/s/ Steven J. Zuckerman Director
Steven J. Zuckerman
155
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016
February 26, 2016