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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, 2016
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
Fixed-to-Floating Rate Non-Cumulative Perpetual
Preferred Stock, Series E, par value $1.00 per share
Fixed-to-Floating Rate Non-Cumulative Perpetual
Preferred Stock, Series F, 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
New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
________________________________________
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Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
No
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 $638,256,138 as of
June 30, 2016, 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 28, 2017, 30,469,997 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 31, 2017 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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59
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96
179
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K, as well as other written or oral communications made from time to time by us, contains
forward-looking information within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform
Act of 1995. These statements relate to future events or future predictions, including events or predictions relating to future
financial performance, and are generally identifiable by the use of forward-looking terminology such as “believe,” “expect,”
“may,” “will,” “should,” “plan,” “intend,” or “anticipate” or the negative thereof or comparable terminology. Forward-looking
statements reflect numerous assumptions, estimates and forecasts as to future events. No assurance can be given that the
assumptions, estimates and forecasts underlying such forward-looking statements will accurately reflect future conditions, or
that any guidance, goals, targets or projected results will be realized. The assumptions, estimates and forecasts underlying such
forward-looking statements involve judgments with respect to, among other things, future economic, competitive, regulatory
and financial market conditions and future business decisions, which may not be realized and which are inherently subject to
significant business, economic, competitive and regulatory uncertainties and known and unknown risks, including the risks
described under “Risk Factors” in this Annual Report on Form 10-K, as such factors may be updated from time to time in our
filings with the SEC, including our Quarterly Reports on Form 10-Q. Our actual results may differ materially from those
reflected in the forward-looking statements.
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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Changes in external competitive market factors that might impact our results of operations;
Changes in laws and regulations, including without limitation changes in capital requirements under Basel III;
Changes in our 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, investment, or disposition transactions;
Constraints on our ability to consummate an attractive acquisition or investment transaction because of significant
competition for these opportunities;
Local, regional and national economic conditions and events and the impact they may have on us and our customers;
Costs and effects of regulatory and legal developments, including the results of regulatory examinations and the outcome
of regulatory or other governmental inquiries and proceedings, such as fines or restitutions on our business activities;
Our ability to attract deposits and other sources of liquidity;
Changes in the financial performance and/or condition of our 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;
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, including the products and services being developed and introduced to the market the BankMobile
division of Customers Bank;
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;
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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;
Our ability to successfully implement our growth strategy, control expenses and maintain liquidity;
Customers Bank’s ability to pay dividends to Customers Bancorp;
Risks related to our proposed sale of BankMobile to Flagship Bank, including:
•
•
•
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Our ability to successfully complete the proposed sale and the timing of completion;
The ability of Customers and Flagship Bank to meet all of the conditions to completion of the proposed sale;
The impact of the announcement of the proposed sale on the value of our securities, our business and our
relationship with employees and customers;
Our use of the proceeds from the sale;
The effect on Customers' business if the proposed sale is not completed and Customers is unable to sell or
otherwise dispose of BankMobile before exceeding $10 billion in assets;
•
Risks relating to BankMobile, including:
That integration of the Higher One Disbursement business with BankMobile may be less successful, more
difficult, time-consuming or costly than expected, and that BankMobile may be unable to realize anticipated
cost savings and revenue enhancements within the expected time frame or at all;
The number of existing student customers who transfer their accounts to BankMobile from one of Higher One's
former bank partners;
Material variances in the adoption rate of BankMobile's services by new students and/or the usage rate of
BankMobile's services by current student customers compared to our expectations;
Material variances in the number of BankMobile student accounts retained following graduation compared to
our expectations;
The levels of usage of other BankMobile student customers following graduation of additional product and
service offerings of BankMobile or Customers Bank, including mortgages and consumer loans, and the mix of
products and services used;
Our ability to implement changes to BankMobile's product and service offerings under current and future
regulations and governmental policies;
Our ability to effectively manage revenue and expense fluctuations that may occur with respect to BankMobile's
student-oriented business activities, which result from seasonal factors related to the higher-education academic
year;
Our ability to implement our strategy regarding BankMobile, including with respect to our intent to sell or
otherwise dispose of the BankMobile business in the future, depending upon market conditions and
opportunities; and
BankMobile's ability to successfully implement its growth strategy and control expenses.
You are cautioned not to place undue reliance on any forward-looking statements we make, which speak only as of the date
they are made. We do not undertake any obligation to release publicly or otherwise provide any revisions to any forward-
looking statements we may make, including any forward-looking financial information, to reflect events or circumstances
occurring after the date hereof or to reflect the occurrence of unanticipated events, except as may be required under applicable
law.
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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.
On March 7, 2017, Customers entered into a Purchase and Assumption Agreement (the “Purchase Agreement”) with Flagship
Community Bank (“Flagship Bank”). Subject to the terms and conditions of the Purchase Agreement, Customers will sell to
Flagship the assets, and Flagship will assume from Customers the liabilities, of the BankMobile division of Customers Bank.
In fourth quarter 2016, Customers announced its intent to sell BankMobile and, as a result, BankMobile has been classified as
“held for sale” on the consolidated balance sheets at December 31, 2016 and 2015 and BankMobile’s operating results have
been presented as discontinued operations in the consolidated financial statements included in this Annual Report on Form 10-
K. Although Customers currently anticipates that the sale of BankMobile to Flagship Bank will be completed in 2017, the
information included herein regarding BankMobile’s business, operations, strategy, and risk factors is included in this Annual
Report on Form 10-K to provide disclosure regarding Customers’ ownership and operation of BankMobile to date and through
the completion of the sale of BankMobile to Flagship Bank or another sale or disposition of BankMobile if the sale to Flagship
Bank is not completed.
For a description of certain risks relating to the proposed sale of BankMobile to Flagship Bank, please see “Risk Factors -
Risks Related to the Proposed Sale of BankMobile.”
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, 2016, Customers had total assets of $9.4 billion, including loans, net of the allowance for loan losses (including
held-for-sale loans) of $8.2 billion, total deposits of $6.8 billion, and shareholders’ equity of $0.9 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 commercial 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. As part of the BankMobile strategic initiative, on June 15, 2016, Customers completed the
acquisition of substantially all the assets and the assumption of certain liabilities of the OneAccount Student Checking and
Refund Management Disbursement Services business (the "Disbursement business") from Higher One Holdings, Inc. and
Higher One, Inc. (together, "Higher One"). Higher One was acquired by a subsidiary of Blackboard, Inc. in third quarter 2016
and we continue to refer to that combined business as “Higher One” throughout this document. BankMobile, including the
Disbursement business, 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 ATMs (and if the customer makes a monthly direct deposit into their BankMobile
account over 400,000 ATMs) across the U.S. Customers believed that consolidating BankMobile with the Disbursement
business would uniquely position it to become the graduating students "bank for life" and service each graduate's financial
needs throughout their life. BankMobile's revenues are largely derived from interchange charges paid by the product selling
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vendor and user based fees for specific activities (such as lost card replacement). It is BankMobile's strategy to disrupt
traditional banks' retail branch customer service delivery model and become the bank of choice for life of college students and
middle income and under-banked Americans using its low-cost digital delivery platform and superior deposit products, serve as
a white label deposit service customer to large companies, and disrupt payday lenders and high cost check lenders by making
low cost quality banking services available to key under-banked markets. BankMobile has obtained and is applying for patents
and copyrights to protect key elements of its products and delivery methods. This intellectual property will allow BankMobile
to continue to differentiate its business from potential competitors. In fourth quarter 2016, Customers announced its intent to
sell BankMobile and anticipates the sale to close in 2017. Accordingly, BankMobile has been classified as "held for sale" on
the consolidated balance sheets at December 31, 2016 and 2015 and BankMobile's operating results have been presented as
discontinued operations in the accompanying consolidated financial statements.
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. BankMobile is a division of Customers Bank, first marketing its deposit products
beginning in January 2015. As a division of Customers Bank, BankMobile's deposits are also insured by the Federal Deposit
Insurance Corporation.
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:
•
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.
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BankMobile products are delivered to customers nationwide, via its digital delivery channels, such as a smartphone or other
web-enable device. The BankMobile business is currently focused on millennials, now the largest generation in the United
States, developing white label relationships with large companies that wish to expand their relationships with their retail
customers and employees, and the under-banked who can utilize a low cost banking services provider. As a general retail
deposit product and related services provider, the BankMobile segment does not have a dependency on a particular customer,
but is focused on providing deposit services to college students who receive federal government loans or grants. BankMobile
currently provides deposit products and services to students on nearly 800 college and university campuses.
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, 2016, Customers had bank branches or limited purpose offices (“LPOs”)
in the following locations:
Market
Berks County, PA
New Haven, CT
Boston, Massachusetts
Mercer County, NJ
New York, NY
Philadelphia-Southeastern PA
Portsmouth, NH
Providence, RI
Suffolk County, NY
Westchester County, NY
Offices
Type
4
1
1
2
1
9
1
1
1
1
Branch
LPO
LPO
Branch/LPO
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.
The BankMobile suite of deposit products and services is provided nationally through digital delivery channels, such as a
smartphone or other web-enabled device. The BankMobile deposit products and services are available nationwide throughout
the United States. Customers believes that digital delivery without geographic limitations is the future of banking.
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. 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. The BankMobile suite of deposit products and services
is delivered through digital delivery channels, such as a smartphone or other web-enabled device across the United States. As
such, the product does not have geographic limitations. Currently, BankMobile is focused on the market for deposits, but is
developing loan products and relationships with market place lenders that will facilitate competing in loan markets
prospectively, either as a direct lender or referral to other lenders.
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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, Chief Financial Officer 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 33, 40,
and 25 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 40 years
of experience including oversight of the Mid-Atlantic commercial real estate group at Sovereign. In addition, the
residential lending group, which primarily includes commercial loans (warehouse facilities) to residential
mortgage originators and, to a lesser extent, mortgage loans to individuals 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-
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 smartphone
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 ATMs (and if the customer makes a monthly direct deposit over
400,000 ATMs) across the U.S. Customers believed that consolidating BankMobile with the acquired
Disbursement business uniquely positioned Customers 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 the Disbursement business, greatly accelerated 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).
• Unique product experience. As a digital bank, BankMobile provides a unique experience to a banking customer
in delivering a full banking experience through a smartphone or other web-enabled device. This alternative
delivery channel, available nationwide, provides Customers with access to a customer base today with the
opportunity to develop life long profitable banking relationships with a large population segment of what
reasonably is expected to be the higher income segment of the millennial generation.
• Attractive low credit 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 classified and non-performing assets. As of December 31,
2016, only $17.8 million, or 0.22%, 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 historically operated under one business segment, "Community Banking." However, beginning in third quarter
2016, Customers revised its segment financial reporting to reflect the manner in which its chief operating decision makers (our
Chief Executive Officer and Board of Directors) have begun allocating resources and assessing performance subsequent to
Customers' acquisition of the Disbursement business from Higher One and the combination of that business with the
BankMobile technology platform late in second quarter 2016.
Management has determined that Customers' operations consist of two reportable segments - Community Business Banking
and BankMobile. Each segment generates revenues, manages risk, and offers distinct products and services to targeted
customers through different delivery channels. The strategy, marketing, and analysis of these segments vary considerably. For
more information on Customers' reportable operating segments, see NOTE 25 - BUSINESS SEGMENTS.
In third quarter 2016, Customers announced its intent to sell BankMobile and anticipates a sale to close in 2017. Because
BankMobile met the criteria to be classified as held for sale at December 31, 2016, the assets and liabilities of BankMobile
have been presented as "Assets held for sale" and "Liabilities held for sale" on the consolidated balance sheets at December 31,
2016 and 2015. BankMobile's operating results and associated cash flows have been presented as "Discontinued operations"
within the accompanying consolidated financial statements and prior period amounts have been reclassified to conform with
the current period presentation. For more information on BankMobile discontinued operations, see NOTE 3 -
DISCONTINUED OPERATIONS.
The BankMobile operating segment results differ from the amounts reported as "Discontinued operations" on the consolidated
financial statements primarily because of the internal funds transfer pricing methodology used by management to allocate
interest income to BankMobile for the value provided to the Community Business Banking segment for the use of low/no cost
deposits.
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Products
Customers offers a broad range of traditional loan and deposit banking products and financial services, and 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 commercial mortgage
warehouse loans, multi-family and commercial real estate loans, small business 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, the acquisition of the Disbursement business from
Higher One and the combination of that business with the BankMobile platform, Customers is able to provide fee free banking
to millennials, students, middle class American families and underserved consumers throughout the United States.
BankMobile is focused on providing quality low cost deposit products and related services to its customers, such as no or low
fee checking, no overdraft charges, photo bill pay, no opening balance requirements, instant virtual debit cards, and similar
customer friendly technology enabled services. Customers can also obtain cash free of any fees from over 55,000 ATMs in the
United States. BankMobile looks to develop its capabilities to deliver retail loan products, such as automobile loans, credit
cards, and personal loans, to its customers, either as a referral or direct lender, as its technological capabilities develop.
Lending Activities
Customers Bank focuses its lending efforts on the following lending areas:
• Commercial Lending – our focus is on Business Banking (commercial and industrial lending), including 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 activities are 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 $100.0 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, 2016
and 2015, the Bank originated approximately $0.9 billion and $1.3 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
to mortgage companies 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 companies to meet a wider array of business needs. During the years ended December 31, 2016 and 2015, the
Bank funded $36.1 billion and $29.9 billion of mortgage loans, respectively, to mortgage originators via warehouse facilities.
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As of December 31, 2016 and 2015, the Bank had $8.0 billion and $6.9 billion, respectively, in commercial loans outstanding,
composing approximately 96.4% and 94.6%, respectively, of its total loan portfolio, which includes loans held for sale. During
the years ended December 31, 2016 and 2015, the Bank originated $0.8 billion and $0.9 billion, respectively, of commercial
loans, exclusive of multi-family loan originations and loans to mortgage originators via warehouse facilities.
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, 2016 and 2015, the Bank had $298.7 million and $391.1 million, respectively, in consumer loans
outstanding, composing 3.6% and 5.4%, respectively, of the Bank’s total loan portfolio, which includes loans held for sale.
During the years ended December 31, 2016 and 2015, the Bank originated $59.3 million and $63.0 million of consumer loans,
respectively.
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 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 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.
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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. In June 2016,
Customers acquired the Disbursement business of Higher One and subsequently combined that business with the BankMobile
platform. The Disbursement business assists higher educational institutions in their distributions of Title IV monies to students.
In combining the businesses, Customers serviced over 1.2 million active deposit accounts at December 31, 2016. The
combined businesses also have the potential to add in excess of 400,000 new student deposit accounts annually.
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
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.
BankMobile competes for deposit customers with traditional bank branches that may have a physical presence near the
university and college campuses we serve, large national banks, as well as smaller regional or local banks, with other student
and disbursement businesses, both banks and prepaid card providers, and with local and national loan providers. Banks
providing student disbursement services include PNC, Wells Fargo Bank, and U.S. Bank. BankMobile is developing strategies
to white label deposit products to commercial entities, again competing with traditional bank deposit product branch delivery
channels.
Employees
As of December 31, 2016, Customers Bancorp had 739 full-time equivalent employees, including approximately 225
employees dedicated to the BankMobile business segment.
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
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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.
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.
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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
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.
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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. 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
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, planned to be 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 were:
(i) a common equity Tier 1 risk-based 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.
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.
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Effective January 1, 2016, the minimum capital level requirements (including the capital conservation buffer) applicable to the
Bancorp and the Bank under the final rules were:
(i) a common equity Tier 1 capital ratio of 5.125%;
(ii) a Tier 1 Risk based capital ratio of 6.625%; and
(iii) a Total Risk based capital ratio of 8.625%.
Effective January 1, 2017, the minimum capital level requirements (including the capital conservation buffer) applicable to the
Bancorp and the Bank under the final rules are:
(i) a common equity Tier 1 capital ratio of 5.75%;
(ii) a Tier 1 Risk based capital ratio of 7.25%; and
(iii) a Total Risk based capital ratio of 9.25%.
Considering the capital conservation buffer, to avoid limitations on certain actions or activities, banks will be required to
maintain the following ratios beginning January 1, 2019:
(i) a common equity Tier 1 capital ratio of 7.0%;
(ii) a Tier 1 Risk Based capital ratio of 8.5%; and
(iii) a Total Risk based capital ratio of 10.5%.
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 capital conservation 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
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 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%).
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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, 2016 and 2015, management believed that the Bank and Bancorp met all capital adequacy requirements to
which they were subject. For additional information on Customers' regulatory capital ratios, refer to “NOTE 19 –
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:
•
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•
•
•
•
•
•
•
•
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;
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.
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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.
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.
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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.
Item 1A.
Risk Factors
Risks Related to the Proposed Sale of BankMobile
Failure to complete the proposed sale of BankMobile could negatively impact our share price, our future business and
financial results.
We cannot assure you that our proposed sale of BankMobile to Flagship Bank will be completed in the time frame we currently
anticipate or at all. If we do not complete the proposed sale, we will not receive the expected benefits of such proposed sale
transaction but will have incurred significant costs in connection with our pursuit of the sale, including our own costs relating
to the proposed sale to Flagship Bank and the costs of Flagship Bank relating to the proposed sale and related matters, certain
of which we are obligated to pay even if the proposed sale is completed. In addition, we cannot assure you that alternative
opportunities to sell BankMobile will be available to us, or, if available, will be on terms at least as favorable to us as the terms
of the proposed sale to Flagship Bank. Market conditions, the possible need to secure regulatory, shareholder or other
approvals, and other factors will affect our ability to pursue alternative opportunities.
In addition, the value of our common and preferred stock may decline if the proposed sale is not completed, and uncertainty as
to whether alternative transactions may be available for the disposition of the BankMobile business, and as to the timing, form
and terms of any such alternative disposition may adversely affect analyst and shareholder views as to the value of the
BankMobile business, which could further adversely affect the value of our securities.
If we are unable to complete the sale of BankMobile before exceeding the $10 billion total asset threshold our business and
potential for future success could be materially adversely effected.
Our business and future prospects may suffer if we are unable to remain under $10 billion in total assets as of December 31 of
each year before we sell or otherwise dispose of the BankMobile business. If we are unable to complete the sale or other
disposition of BankMobile before exceeding the $10 billion total asset threshold, we would experience a significant reduction
in BankMobile interchange fee income. Under federal law and regulation, we must remain under $10 billion in total assets as of
December 31 of each year to qualify as a small issuer of debit cards and receive the optimal debit card processing fee. If we
were to lose this status, BankMobile would operate unprofitably unless we were able to generate additional fees to replace the
lost interchange fee revenue. As a result, our inability to complete the sale of BankMobile to Flagship Bank or otherwise in a
timely manner could materially and adversely affect our financial condition and results of operations.
Completion of the proposed sale of BankMobile is subject to a number of important conditions, some of which are not in
Customers’ control.
Completion of the proposed sale of BankMobile to Flagship Bank is subject to the fulfillment, or waiver (where permitted) of a
variety of conditions to closing. Certain of those conditions to closing are not within our control. If any of these conditions are
not fulfilled and the parties refuse to waive, or cannot waive, those conditions, we will be unable to complete the proposed sale.
The significant conditions to completing the propose sale include the receipt of all necessary regulatory approvals, the approval
by Flagship Bank’s shareholders of certain matters relating to the proposed sale, and Flagship obtaining financing in an amount
not less than $260 million.
We have broad discretion in using the net proceeds from the proposed sale of BankMobile and may use the proceeds in ways
with which you may not agree and in ways that may not enhance our operating results or the value of our securities.
Our management will retain broad discretion over the use of the net proceeds received on closing of the proposed sale of
BankMobile, and we may ultimately use the proceeds in ways that do not improve our results of operations or enhance the
value of our common and preferred stock or otherwise in ways with which you do not agree. If we do not invest or apply the
proceeds effectively and on a timely basis, it could have a material adverse effect on our business and could cause the value of
our securities to decline.
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The proposed sale of BankMobile, whether or not consummated, may adversely affect our business.
Our announcement of the proposed sale of BankMobile and steps we take to complete the sale may adversely affect our
relationships with BankMobile’s current and potential higher education institutions customers and our BankMobile employees,
and could result in the loss of customers and key employees. Further, the actions needed to complete the sale of BankMobile
may result in the diversion of our management’s attention from Customers’ day-to-day operations generally, which could
adversely affect Customers’ business.
Certain terms of our agreement with Flagship Bank may expose us to significant liabilities.
We have agreed to indemnify Flagship Bank and its directors and officers against losses and liabilities incurred by them in
connection with the proposed sale and to indemnify them and certain others in connection with certain additional matters
relating to the proposed sale. In addition, we have agreed to obtain, at our expense, director and officer liability insurance for
the benefit of Flagship Bank’s directors and officers to cover them for similar losses and liabilities. Although our agreement to
provide indemnification is subject to certain limitations and exceptions, including limitations on the dollar amount of losses
payable by us, significant indemnification claims by Flagship Bank or its directors and officers or other indemnitees could
materially and adversely affect our financial condition.
If we are unable to complete the sale of BankMobile in a timely fashion, or at all, we will continue to face the risks and
challenges associated with the BankMobile business.
If we do not complete the proposed sale of BankMobile to Flagship Bank in a timely fashion, or at all, we will continue to face
the risks and challenges associated with the BankMobile business, including those relating to the integration of the
Disbursement business, described in this Risk Factors discussion and elsewhere in this Annual Report on Form 10-K. We
cannot assure you that we will be able to address and manage these risks so as to preserve or increase the value of BankMobile,
and any failure to preserve or increase the value of BankMobile could adversely affect the business of Customers as a whole
and our ability to sell or otherwise dispose of BankMobile in an alternative transaction on favorable terms or at all.
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:
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•
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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, 2016, the Bancorp’s allowance for loan losses totaled $37.3 million, which represents 0.61% of total loans
held for investment. Management makes various assumptions and judgments about the collectability of our loan portfolio,
including the creditworthiness of our borrowers 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.
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.
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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
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 22 – LOSS CONTINGENCY, in first quarter 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 commercial 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, 2016, the Bank had $8.0 billion in commercial loans outstanding, composing approximately 96.4% 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
third quarter 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.
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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, 2016, the Bank held $51.3 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, 2016, the fair value of our investment securities portfolio was $493.5 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, such as a change in management's intent to hold the securities until
recovery in fair value, 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.
At December 31, 2016, management evaluated its equity holdings issued by Religare Enterprises Limited for other-than-
temporary impairment. Because management no longer has the intent to hold these securities until a recovery in fair value,
Customers recorded an other-than-temporarily impairment loss of $7.3 million in fourth quarter 2016 for the full amount of the
decline in fair value below the cost basis. The fair value of the equity securities at December 31, 2016 of $15.2 million became
the new cost basis of the securities.
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
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. 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 recently issued a new 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.
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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 2016, 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.
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.
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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 a 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
an 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.
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.
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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
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.
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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
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.
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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, 2016, the directors and executive officers of Customers Bancorp as a group owned a total of 2,051,523
shares of Voting Common Stock and exercisable options and warrants to purchase up to an additional 1,086,718 shares of
Voting Common Stock, which potentially gives them, as a group, the ability to control approximately 10.00% of the issued and
outstanding Voting Common Stock. In addition, a director of Customers Bank who is not a director of Customers Bancorp
owns an additional 14,706 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 10.05% 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. 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.
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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 business and future success may suffer if we are unable to remain under $10 billion in total assets as of December 31
of each year before we sell or otherwise dispose of the BankMobile business, including the Disbursement business.
Under federal law and regulation, we must remain under $10 billion in total assets as of December 31 of each year to qualify as
a small issuer of debit cards and receive the optimal debit card processing fee. Failure to qualify for the small issuer exception
would result in a significant reduction in interchange fee income and would mean we would operate unprofitably or additional
fees would need to be charged to students to replace the lost revenue. To optimize the value of the Customers franchise to
shareholders, we have stated our intention to sell BankMobile before crossing the $10 billion total asset threshold. Market
conditions, regulatory and legal conditions, BankMobile’s performance and other factors, some of which are not in our control,
may limit, delay or prevent our planned sale, and prevent us from remaining under the $10 billion total asset threshold before
the planned disposition. Accordingly, this could materially and adversely affect our financial condition and results of
operations.
In connection with the Disbursement business, we depend on our relationship with higher education institutions and, in turn,
student usage of our products and services for future growth of our BankMobile business.
The future growth of our BankMobile business depends, in part, on our ability to enter into agreements with higher education
institutions. Our contracts with these clients can generally be terminated at will and, therefore, there can be no assurance that we
will be able to maintain these clients. We may also be unable to maintain our agreements with these clients on terms and conditions
acceptable to us. In addition, we may not be able to continue to establish new relationships with higher education institution clients.
The termination of our current client contracts or our inability to continue to attract new clients could have a material adverse
effect on our business, financial condition and results of operations.
Establishing new client relationships and maintaining current ones are also essential components of our strategy for attracting
new student customers, deepening the relationship we have with existing customers and maximizing customer usage of our
products and services. A reduction in enrollment, a failure to attract and maintain student customers, as well as any future
demographic or other trends that reduce the number of higher education students could materially and adversely affect
BankMobile's capability for both revenue and cash generation and, as a result, could have a material adverse effect on our
business, financial condition and results of operations.
BankMobile's Disbursement business depends on the current government financial aid regime that relies on the
outsourcing of financial aid disbursements through higher education institutions.
In general, the U.S. federal government distributes financial aid to students through higher education institutions as
intermediaries. BankMobile's Disbursement business provides our higher education institution clients an electronic system for
improving the administrative efficiency of this refund disbursement process. If the government, through legislation or
regulatory action, restructures the existing financial aid regime in such a way that reduces or eliminates the intermediary role
played by financial institutions serving higher education institutions or limits or regulates the role played by service providers
such as us, our business, results of operations and BankMobile's prospects for future growth could be materially and adversely
affected.
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A change in the availability of financial aid, as well as U.S. budget constraints, could materially and adversely affect our
financial performance by reducing demand for BankMobile's services.
The higher education industry depends heavily upon the ability of students to obtain financial aid. As part of our contracts with
our higher education institution clients that use BankMobile's Disbursement business services, students’ financial aid and other
refunds are sent to us for disbursement. The fees that we charge most of our Disbursement business higher education institution
clients are based on the number of financial aid disbursements that we make to students. In addition, our relationships with
Disbursement business higher education institution clients provide us with a market for BankMobile. Consequently, a change in
the availability or amount of financial aid that restricted client use of our Disbursement business service or otherwise limited
our ability to attract new higher education institution clients could materially and adversely affect our financial performance.
Also, decreases in the amount of financial aid disbursements from higher education institutions to students could materially and
adversely affect our financial performance. Future legislative and executive branch efforts to reduce the U.S. federal budget
deficit or worsening economic conditions may require the government to severely curtail its financial aid spending, which
could materially and adversely affect our business, financial condition and results of operations.
Providing disbursement services to higher education institutions is an uncertain business; if the market for BankMobile's
products does not continue to develop, we will not be able to grow this portion of our business.
The success of BankMobile's Disbursement business will depend, in part, on our ability to generate revenues by providing
financial transaction services to higher education institutions and their students. The market for these services has evolved and
the long-term viability and profitability of this market is unproven. Our business will be materially and adversely affected if we
do not develop and market products and services that achieve and maintain market acceptance. Outsourcing disbursement
services may not become as widespread in the higher education industry as we anticipate, and our products and services may
not achieve continued commercial success. In addition, higher education institution clients could discontinue using our services
and return to in-house disbursement solutions. If outsourcing disbursement services does not become as widespread as we
anticipate or if higher education institution clients return to their prior methods of disbursement, our growth prospects,
business, financial condition and results of operations could be materially and adversely affected.
Our business will suffer if we fail to successfully integrate the Disbursement businesses and technologies or to appropriately
assess the risks associated with that transaction.
The successful integration of the Disbursement business, on a cost-effective basis, may be critical to our future performance.
There are a number of risks and uncertainties associated with such integration, including: we may not be able to achieve
expected synergies and operating efficiencies regarding the Disbursement business acquisition within the expected time-frames
or at all and to successfully integrate the Disbursement business operations; such integration may be more difficult, time-
consuming or costly than expected; we may not be successful in converting new clients gained through the acquisition to our
own; revenues following the transaction may be lower than expected; operating costs, client and customer loss and business
disruption (including, difficulties in maintaining relationships with employees, customers, clients or suppliers) may be greater
than expected following the acquisition; we may have difficulty retaining certain key employees in the acquired Disbursement
business; we may be subject to legal proceedings that may be instituted against the parties and others related to the acquisition
agreement; and the amount of the costs, fees, expenses and charges related to the acquisition may be greater than anticipated. If
we do not successfully integrate the Disbursement business, or if the benefits of this transaction do not meet the expectations of
financial or industry analysts, the market price of our common stock may decline. Even if we successfully integrate the
Disbursement business, we may incur substantial expenses and devote significant management time and resources in seeking to
complete the integration and the acquired Disbursement business may not perform as we expect or enhance the value of our
business as a whole.
Our business and future success may suffer if we are unable to successfully implement our strategy to combine the Disbursement
business with BankMobile.
A significant component of our growth strategy is dependent on our ability to have students of our higher education institution
clients select BankMobile during the refund disbursement selection process and to convert those student BankMobile customers,
along with the existing student customers we acquired through the Disbursement business acquisition, into lifetime customers
with BankMobile as their primary banking relationship. In particular, our growth strategy depends on our ability to successfully
cross-sell our core banking products and services to these student customers after they graduate from college. We may not be
successful in implementing this strategy because these student customers and potential student customers may believe our products
and services unnecessary or unattractive. Our failure to sell our products and services to students after they graduate and to attract
new student customers could have a material adverse effect on our prospects, business, financial condition and results of operations.
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If the integration of the Disbursement business disrupts our business operations and prevents us from realizing intended
benefits, our business may be harmed.
The integration of the Disbursement business may disrupt the operation of our business and prevent us from realizing the intended
benefits of the Disbursement business as a result of a number of obstacles, such as the loss of key employees, customers or business
partners, the failure to adjust or implement our business strategies, additional expenditures required to facilitate the integration
and the diversion of management’s attention from our day-to-day operations.
Breaches of security measures, unauthorized access to or disclosure of data relating to our higher education institution
clients or BankMobile and student BankMobile account holders, computer viruses or unauthorized software (malware),
fraudulent activity, and infrastructure failures could materially and adversely affect our reputation or harm our business.
Companies that process and transmit cardholder information have been specifically and increasingly targeted by sophisticated
criminal organizations in an effort to obtain the information and utilize it for fraudulent transactions. The encryption software
and the other technologies we use to provide security for storage, processing and transmission of confidential customer and
other information may not be effective to protect against data security breaches. The risk of unauthorized circumvention of our
security measures has been heightened by advances in computer capabilities and the increasing sophistication of hackers.
Unauthorized access to our computer systems, or those of our third-party service providers, could result in the theft or
publication of the information or the deletion or modification of sensitive records, and could cause interruptions in our
operations. Any inability to prevent security breaches could damage our relationships with our higher education institution
customers, cause a decrease in transactions by individual cardholders, expose us to liability for unauthorized purchases, and
subject us to network fines. These claims also could result in protracted and costly litigation. If unsuccessful in defending that
litigation, we might be forced to pay damages and/or change our business practices. Further, a significant data security breach
could lead to additional regulation, which could impose new and costly compliance obligations. Any material increase in our
costs resulting from litigation or additional regulatory burdens being imposed upon us or litigation could have a material
adverse effect on our operating revenues and profitability.
In addition, our higher education institution clients and student BankMobile account holders disclose to us certain “personally
identifiable” information, including student contact information, identification numbers and the amount of credit balances,
which they expect we will maintain in confidence. It is possible that hackers, customers or employees acting unlawfully or
contrary to our policies, or other individuals, could improperly access our or our vendors’ systems and obtain or disclose data
about our customers. Further, because customer data may also be collected, stored, or processed by third-party vendors, it is
possible that these vendors could intentionally, negligently or otherwise disclose data about our clients or customers.
We rely to a large extent upon sophisticated information technology systems, databases, and infrastructure, and take reasonable
steps to protect them. However, due to their size, complexity, content and integration with or reliance on third-party systems
they are vulnerable to breakdown, malicious intrusion, natural disaster and random attack, all of which pose a risk of exposure
of sensitive data to unauthorized persons or to the public.
A cybersecurity breach of our information systems could lead to fraudulent activity such as identity theft, losses on the part of
our banking customers, additional security costs, negative publicity and damage to our reputation and brand. In addition, our
customers could be subject to scams that may result in the release of sufficient information concerning themselves or their
accounts to allow others unauthorized access to their accounts or our systems (e.g., “phishing” and “smishing”). Claims for
compensatory or other damages may be brought against us as a result of a breach of our systems or fraudulent activity. If we are
unsuccessful in defending against any resulting claims against us, we may be forced to pay damages, which could materially
and adversely affect our financial condition and results of operations.
Because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently
and often are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement
adequate preventative measures.
Further, computer viruses or malware could infiltrate our systems, thus disrupting our delivery of services and making our
applications unavailable. Although we utilize several preventative and detective security controls in our network, they may be
ineffective in preventing computer viruses or malware that could damage our relationships with our merchant customers, cause
a decrease in transactions by individual cardholders, or cause us to be in non-compliance with applicable network rules and
regulations.
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In addition, a significant incident of fraud or an increase in fraud levels generally involving our products could result in
reputational damage to us, which could reduce the use of our products and services. Such incidents could also lead to a large
financial loss as a result of the protection for unauthorized purchases we provide to BankMobile customers given that we may
be liable for any uncollectible account holder overdrafts and any other losses due to fraud or theft. Such incidents of fraud
could also lead to regulatory intervention, which could increase our compliance costs. Compliance with the various complex
laws and regulations is costly and time consuming, and failure to comply could have a material adverse effect on our business.
Additionally, increased regulatory requirements on our services may increase our costs, which could materially and adversely
affect our business, financial condition and results of operations. Accordingly, account data breaches and related fraudulent
activity could have a material adverse effect on our future growth prospects, business, financial condition and results of
operations.
A disruption to our systems or infrastructure could damage our reputation, expose us to legal liability, cause us to lose
customers and revenue, result in the unintentional disclosure of confidential information or require us to expend significant
efforts and resources or incur significant expense to eliminate these problems and address related data and security concerns.
The harm to our business could be even greater if such an event occurs during a period of disproportionately heavy demand for
our products or services or traffic on our systems or networks.
Prior to our acquisition of the Disbursement business, the Federal Reserve Board and FDIC took regulatory enforcement
action against Higher One, which 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 until the acquisition of the Disbursement business, Customers provided deposit accounts and services to
college students through Higher One, which had relationships with colleges and universities in the United States, using Higher
One’s technological services. Because Higher One was not a bank, it had to partner with one or more banks to provide the
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 Federal Reserve Board 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, 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.
Customers 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 understands that the total amount of fees that Higher One collected from students who opened accounts at
Customers 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 paid the
restitution, and deposited such monies to pay the required restitution, Customers does not expect that backup restitution will be
required.
Nonetheless, as previously disclosed, Customers had been in discussions with the Federal Reserve Board regarding these
matters from 2013 and in an effort to move forward, on December 6, 2016, Customers agreed to the issuance by the Federal
Reserve Board of a combined Order to Cease and Desist and Order of Assessment of a Civil Money Penalty Issued Upon
Consent Pursuant to the Federal Deposit Insurance Act, as amended (the "Order") and agreed to a penalty of $960,000.
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Customers remains subject to the jurisdiction and examination of the Federal Reserve Board and further action could be taken
to the extent we do not comply with the terms of the Order or if the Federal Reserve Board were to identify additional
violations of applicable laws and regulations. Any further action could have a material adverse effect on our business, financial
conditions and/or results of operations, or our reputation.
Termination of, or changes to, the MasterCard association registration could materially and adversely affect our business,
financial condition and results of operations.
The student checking account debit cards issued in connection with the Disbursement business are subject to MasterCard association
rules that could subject us to a variety of fines or penalties that may be levied by MasterCard for acts or omissions by us or
businesses that work with us. The termination of the card association registration held by us or any changes in card association or
other network rules or standards, including interpretation and implementation of existing rules or standards, that increase the cost
of doing business or limit our ability to provide our products and services could materially and adversely affect our business,
financial condition and results of operations.
Our business and future success may suffer if we are unable to continue to successfully implement our strategy for
BankMobile.
The effective use of technology can increase efficiency and enable financial institutions to better serve customers and to reduce
costs. However, some new technologies, including BankMobile, are not fully tested and we may incur substantial expenses and
devote significant management time and resources in order for BankMobile to compete effectively. Revenue generated from
BankMobile’s no fee or very low fee banking strategy may not perform as well as we expect or enhance the value of our
business as a whole and it could materially and adversely affect our financial condition and results of operations. Additionally,
if the benefits of BankMobile do not meet the expectations of financial or industry analysts, the market price of our common
stock may decline.
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.
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.
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.
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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
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:
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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;
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scale our technology and other systems’ platforms;
• maintain and attract appropriate staffing;
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operate profitably 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.
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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
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 and municipal deposits were 56.3.% of total deposits at December 31,
2016. Our gross loan to deposit ratio was 120.6% at December 31, 2016 and our loan to deposit ratio excluding the mortgage
warehouse portfolio funded by short term FHLB borrowings was 89.7% at December 31, 2016. 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
interest-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.
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The amount of funds 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 41.4% of our deposit base as of December 31, 2016 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, 2016, $2.0 billion, or 72.3%, of our
total time deposits, are scheduled to mature through December 31, 2017. 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
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. In fourth quarter 2016, we announced our decision to exit our investment in Religare. As a result of that
decision, we recorded an impairment loss of $7.3 million in earnings in fourth quarter 2016 and adjusted our cost basis of the
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Religare securities to their estimated fair value of $15.2 million at December 31, 2016. To the extent we are unable to exit the
Religare investment as planned, and pursuant to the terms contemplated, further declines in the market price per share of the
Religare common stock and adverse changes in foreign currency exchange rates, may have an adverse effect on our financial
condition and results of operations.
We are 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 currently subject to risk weighting of 100% 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.
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:
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•
•
•
•
•
•
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.”
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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
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
continues to evaluate 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
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 generally accepted accounting principles. 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
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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 on 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
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 latest 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 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
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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.
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 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
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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.
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.
In connection with Customers’ acquisition of the Disbursement business, Customers is subject to further substantial federal
and state governmental regulation related to the Disbursement business that could change and thus force us to make
modifications to the Disbursement business. Compliance with the various complex laws and regulations is costly and time
consuming, and failure to comply could have a material adverse effect on our business. Additionally, increased regulatory
requirements on the Disbursement business may increase costs, which could materially and adversely affect our business,
financial condition and/or operating results.
As a third party servicer under the Title IV regulations, we are directly or indirectly subject to a variety of federal and state laws
and regulations. Our contracts with most of our higher education institution clients require us to comply with applicable laws and
regulations, including:
• Title IV of the Higher Education Act of 1965, or Title IV;
•
•
•
the Family Educational Rights and Privacy Act of 1975, or FERPA;
the USA PATRIOT Act and related anti-money laundering requirements; and
certain federal rules regarding safeguarding personal information, including rules implementing the privacy
provisions of Gramm-Leach-Bliley Act of 1999, or GLBA.
Higher Education Regulations
Third-Party Servicer. Because of the services we provide to some institutions with regard to the handling of Title IV funds, we
are considered a “third-party servicer” under the Title IV regulations. Those regulations require a third-party servicer annually to
submit a compliance audit conducted by outside independent auditors that cover the servicer’s Title IV activities. Each year we
must submit a “Compliance Attestation Examination of the Title IV Student Financial Assistance Programs” audit to the Department
of Education (“ED”), which includes a report by an independent audit firm. This yearly compliance audit submission to ED
provides comfort to our higher education institution clients that we are in compliance with the third-party servicer regulations that
may apply to us. We also provide this compliance audit report to clients upon request to help them fulfill their compliance audit
obligations as Title IV participating institutions.
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Under ED’s regulations, a third party servicer that contracts with a Title IV institution acts in the nature of a fiduciary in the
administration of Title IV programs. Among other requirements, the regulations provide that a third-party servicer is jointly and
severally liable with its client institution for any liability to ED arising out of the servicer’s violation of Title IV or its implementing
regulations, which could subject us to material fines related to acts or omissions of entities beyond our control. ED is also empowered
to limit, suspend or terminate the violating servicer’s eligibility to act as a third-party servicer and to impose significant civil
penalties on the violating servicer.
Additionally, on behalf of our higher education institution clients, we are required to comply with ED’s cash management regulations
regarding payment of financial aid credit balances to students and providing bank accounts to students that may be used for
receiving such payments. In the event ED concluded that we had violated Title IV or its implementing regulations and should be
subject to one or more of these sanctions, our business and results of operations could be materially and adversely affected. There
is limited enforcement and interpretive history of Title IV regulations.
On May 18, 2015, ED published its Notice of Proposed Rulemaking, or NPRM on program integrity and improvement issues.
Final rules relating to Title IV Cash Management were published in the Federal Register on October 30, 2015. The Final Rules
included, among others, provisions related to (i) restrictions on the ability of higher education institutions and third party servicers
like us to market financial products to students including sending unsolicited debit cards to students, (ii) prohibitions on the
assessment of certain types of account fees on student account holders and (iii) requirements related to ATM access for student
account holders that became effective as of July 1, 2016. Although the complete impact of the Final Rules are unknown, there
could be a significant negative impact on the Disbursement business and, in turn, Customers’ business.
FERPA. Our higher education institution clients are subject to FERPA, which provides, with certain exceptions, that an educational
institution that receives any federal funding under a program administered by ED may not have a policy or practice of disclosing
education records or “personally identifiable information” from education records, other than directory information, to third parties
without the student’s or parent’s written consent. Our higher education institution clients that use the Disbursement business
services disclose to us certain non-directory information concerning their students, including contact information, student
identification numbers and the amount of students’ credit balances. We believe that our higher education institution clients may
disclose this information to us without the students’ or their parents’ consent pursuant to one or more exceptions under FERPA.
However, if ED asserts that we do not fall into one of these exceptions or if future changes to legislation or regulations require
student consent before our higher education institution clients can disclose this information to us, a sizable number of students
may cease using our products and services, which could materially and adversely affect our business, financial condition and
results of operations.
Additionally, as we are indirectly subject to FERPA, we may not permit the transfer of any personally identifiable information
to another party other than in a manner in which a higher education institution may disclose it. In the event that we re-disclose
student information in violation of this requirement, FERPA requires our clients to suspend our access to any such information
for a period of five years. Any such suspension could have a material adverse effect on our business, financial condition and
results of operations.
State Laws. We may also be subject to similar state laws and regulations, including those that restrict higher education
institutions from disclosing certain personally identifiable information of students. State attorneys general and other
enforcement agencies may monitor our compliance with state and federal laws and regulations that affect our business,
including those pertaining to higher education and banking, and conduct investigations of our business that are time consuming
and expensive and could result in fines and penalties that have a material adverse effect on our business, financial condition and
results of operations.
Additionally, individual state legislatures may propose and enact new laws that restrict or otherwise affect our ability to offer
our products and services as we currently do, which could have a material adverse effect on our business, financial condition
and 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
2013 through 2015, and (2) state taxing authorities are 2011 through 2015. 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.
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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. 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.
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 anticipate our bank’s total assets will exceed $10 billion in the near
future. 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.
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, Series D, Series E, and Series F Preferred Stock before any dividends can be paid on our common stock.
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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
2016, we issued 2,641,677 shares of Voting Common Stock in public offerings.
We have also made grants of restricted stock units and stock options with respect to shares of 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 184,706 warrants held by certain investors at December 31, 2016, 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.
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.
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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
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.
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Risks Relating to Our Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C, Series D, Series E, and
Series F
The shares of our Series C, Series D, Series E, and Series F Preferred Stock are equity securities and are subordinate to our
existing and future indebtedness.
The shares of Series C, Series D, Series E, and Series F 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, Series D, Series E, and Series F
Preferred Stock then outstanding.
We may not pay dividends on the shares of Series C, Series D, Series E, and Series F Preferred Stock.
Dividends on the shares of Series C, Series D, Series E, and Series F 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, Series D, Series E, and Series F Preferred Stock are non-cumulative.
Dividends on the shares of Series C, Series D, Series E, and Series F 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, Series D, Series E, and Series F 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, Series D,
Series E, and Series F Preferred Stock, the market prices of the shares of Series C, Series D, Series E, and Series F Preferred
Stock may decline.
Our ability to pay dividends on the shares of Series C, Series D, Series E, and Series F Preferred Stock 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, Series D, Series
E, and Series F 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, Series D, Series E, and Series F 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, Series D, Series E, and Series F Preferred Stock are effectively subordinated to all existing and future liabilities and any
preferred equity of our subsidiaries.
Holders of Series C, Series D, Series E, and Series F Preferred Stock should not expect us to redeem their shares when they
first become 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, Series D, Series E, and Series F Preferred Stock are perpetual equity securities, meaning that the Series C, Series
D, Series E, and Series F 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
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C, Series D, Series E, and Series F 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, Series D, Series E, and Series F 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, Series D, Series E, and Series F 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, Series D, Series E, and Series F Preferred Stock before their initial redemption
dates upon a “regulatory capital treatment event.”
We may be able to redeem the Series C, Series D, Series E, and Series F 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,
Series D, Series E, and Series F 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, Series D, Series E, and Series F Preferred stock have limited voting rights.
Holders of Series C, Series D, Series E, and Series F Preferred Stock have no voting rights with respect to matters that
generally require the approval of voting shareholders. However, holders of Series C, Series D, Series E, and Series F 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, Series D, Series E, and Series F Preferred Stock, as
applicable, and with respect to certain fundamental changes in the terms of the Series C, Series D, Series E, and Series F
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, Series D, Series
E, and Series F Preferred Stock.
There can be no assurance regarding the market prices for the Series C, Series D, Series E, and Series F 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, Series D, Series E, and
Series F 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, Series D, Series E, and Series F Preferred Stock may not have an active trading market.
Although the shares of Series C, Series D, Series E, and Series F 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, Series D, Series E, and Series F Preferred Stock may be junior or equal in rights and preferences to preferred
stock we may issue in the future.
Our Series C, Series D, Series E, and Series F Preferred Stock rank equally. Although we do not currently have outstanding
preferred stock that ranks senior to the Series C, Series D, Series E, and Series F Preferred Stock, the Series C, Series D, Series
E, and Series F 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, Series D, Series E, and Series F Preferred Stock, although the affirmative vote
48
Table of Contents
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, Series D, Series E, and Series F 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, Series D, Series E, and Series F Preferred Stock do not generally require
the approval of holders of the Series C, Series D, Series E, and Series F 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.
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.
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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 all Customers' locations. It includes our leased branch, limited purpose and administrative office
properties, by county and state, as of December 31, 2016.
Bank Branches
County
Berks (1)
Bucks
Chester (2)
Delaware
Westchester
Mercer
State
PA
PA
PA
PA
NY
NJ
Leased
4
3
3
2
1
1
14
50
Table of Contents
County
Berks (3)
Bucks (6)
Chester (2)
Delaware (7)
Lancaster (14)
Philadelphia (8)
Fairfax (9)
Mercer (4)
Morris (14)
New Haven (16)
New York (10)
Westchester (5)
Suffolk (13)
Providence (11)
Rockingham (15)
Suffolk (12)
Limited Purpose and Administrative Offices
State
PA
PA
PA
PA
PA
PA
VA
NJ
NJ
CT
NY
NY
NY
RI
NH
MA
Leased
3
1
2
1
1
1
1
1
1
1
2
2
1
1
1
1
21
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
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 office for Customers personnel in Shillington, PA, expiring in 2018.
Includes 7,327 square feet of leased space in Hamilton, NJ from which we conduct our mortgage warehouse activities.
The 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 offices. One location is currently sublet to a third party (expires in 2020). Our new
location, utilized for Customers personnel, expires in 2027.
(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 2017.
(15) Represents limited purpose office for Customers personnel. The lease on this location expires in 2018.
(16)
Includes facilities utilized by BankMobile for the acquired Disbursement business. Usage of the facility through June
30, 2017 is included in the Transition Services Agreement. See NOTE 2 - ACQUISITION ACTIVITY for more
information.
The Bank branch locations, which range in size from approximately 1,500 to 6,100 square feet, have leases on these locations
which expire between 2017 and 2025.
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Table of Contents
The total minimum net cash lease payments for our current branches, administrative offices and mortgage warehouse lending
locations amount to approximately $325,000 per month.
Item 3.
Legal Proceedings
Halbreiner Matter
On December 16, 2016, Elizabeth Halbreiner and Robert Halbreiner (“Plaintiffs”) filed a Second Amended Complaint
captioned Elizabeth Halbreiner and Robert Halbriener, v. Customers Bank, Robert B.White, Richard A. Ehst, Thomas Jastrem,
Timothy D. Romig, Andrew Bowman, Michael Fuoco, Saldutti Law Group f/k/a Saldutti, LLC a/k/a Saldutti Law, LLC, Robert
L. Saldutti, LLC, Robert L. Saldutti, Esquire, Brian J. Schaffer, Esquire, Robert Lieber, Jr., Esquire, Jay Sidhu, James Zardecki,
Zardecki Associates LLC, No. 01419 in the First Judicial District of Pennsylvania, Court of Common Pleas of Philadelphia,
Trial Division. In this Second Amended Complaint, the Plaintiffs generally allege that Customers Bank, and the other named
defendants, conspired to misuse the legal system for improper purposes and it also alleges defamation, false light, tortious
interference with contractual relations, infliction of emotional distress, negligent infliction of emotional distress and loss of
consortium. On January 6, 2017, Customers Bank filed Preliminary Objections to the Complaint seeking dismissal of
Plaintiff’s claims against Customers Bank and the employees of Customers Bank named as co-defendants. Customers Bank
intends to vigorously defend itself against these allegations but is currently unable to predict the outcome of this lawsuit and
therefore cannot determine the likelihood of loss nor estimate a range of possible loss.
Lifestyle Healthcare Group, Inc. Matter
On January 9, 2017, Lifestyle Healthcare Group, Inc., et al (“Plaintiffs”) filed a Complaint captioned Lifestyle Healthcare
Group, Inc.; Fred Rappaport; Victoria Rappaport; Lifestyle Management Group, LLC Trading as Lifestyle Real Estate I, LP;
Lifestyle Real Estate I GP, LLC; Daniel Muck; Lifestyle Management Group, LLC; Lifestyle Management Group, LLC Tradign
as Lyfestyle I, LP D/B/A Lifestyle Medspa, Plaintiffs v. Customers Bank, Robert White; Saldutti Law, LLC a/k/a Saldutti Law
Group; Robert L. Saldutti, Esquire; and Michael Fuoco, Civil Action No. 01206, in the First Judicial District of Pennsylvania,
Court of Common Pleas of Philadelphia. In this Complaint, which is related to the Halbreiner Matter described above, the
Plaintiffs generally allege wrongful use of civil proceedings and abuse of process in connection with a case filed and later
dismissed in federal court, titled, Customers Bank v. Fred Rappaport, et al., U.S.D.C.E.D. Pa., No. 15-6145. On January 30,
2017, Customers Bank filed Preliminary Objections to the Complaint seeking dismissal of Plaintiff’s claims against Customers
Bank and Robert White, named as co-defendants. In response to the Preliminary Objections, Lifestyle filed an Amended
Complaint against Customers Bank and Robert White. Customers Bank intends to vigorously defend itself against these
allegations but is currently unable to predict the outcome of this lawsuit and therefore cannot determine the likelihood of loss
nor estimate a range of possible loss.
Civil Money Penalty Resolution
As previously disclosed, Customers Bank had been in discussions with the Board of Governors of the Federal Reserve (the
"Federal Reserve Board") staff regarding certain compliance matters relating to certain past activities of Higher One Holdings,
Inc. To settle these matters from 2013 and to move forward, on December 6, 2016, Customers Bank agreed to the issuance by
the Federal Reserve Board of a combined Order to Cease and Desist and Order of Assessment of a Civil Money Penalty Issued
Upon Consent Pursuant to the Federal Deposit Insurance Act, as amended (the "Order") with respect to these matters. Pursuant
to the terms of the Order, Customers Bank was, among other things, assessed a civil money penalty of $960,000. Customers
had previously set aside a reserve for the civil money penalty and made payment in 2016. Therefore, the civil money penalty,
and other provisions of the Order, will not have a material adverse effect on Customers' results of operations or the conduct of
Customers' business prospectively.
Item 4.
Mine Safety Disclosures
Not Applicable.
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Table of Contents
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
Our common stock is traded on the New York Stock Exchange under the symbol “CUBI.”
Market Price of Voting Common Stock
The chart below displays the high and low closing sale prices of the common stock of Customers Bancorp as reported on the
New York Stock Exchange for each of the four quarters of 2016 and 2015.
2017
First quarter (through February 28, 2017)
2016
Fourth quarter
Third quarter
Second quarter
First quarter
2015
Fourth quarter
Third quarter
Second quarter
First quarter
High
Low
36.21
$
33.83
$
$
36.68
$
26.24
27.27
26.50
$
31.00
$
29.02
27.49
24.65
24.49
23.99
22.34
21.78
24.30
22.51
24.05
17.96
As of February 28, 2017, there were 449 shareholders of record and 30,469,997 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 foreseeable 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 Customers Bancorp's issued and outstanding shares of preferred stock,
and other factors deemed relevant by the board of directors.
In addition, as a bank holding company, Customers Bancorp is subject to general regulatory restrictions on the payment of cash
dividends. Federal bank regulatory agencies have the authority to prohibit bank holding companies from engaging in unsafe or
unsound practices in conducting their business, which depending on the financial condition and liquidity of the holding
company at the time, could include the payment of dividends. Further, various federal and state statutory provisions limit the
amount of dividends that bank subsidiaries can pay to their parent holding company without regulatory approval. Generally,
subsidiaries are prohibited from paying dividends when doing so would cause them to fall below the regulatory minimum
capital levels, and limits exist on paying dividends in excess of net income for specified periods.
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Table of Contents
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.
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 2016.
EQUITY COMPENSATION PLANS
The following table provides certain summary information as of December 31, 2016 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)
4,605,545
$
15.25
1,360,280 (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 Bancorp, 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, 2016, 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.
54
Table of Contents
The graph below is furnished under this Part II, Item 5 of this Annual Report on 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
55
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, 2016, 2015, 2014, 2013, and 2012 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 below have been reclassified to conform to the 2016
presentation, including the presentation of BankMobile as discontinued operations.
2016
2015
2014
2013
2012
(dollars in thousands, except per share information)
For the Years Ended December 31,
Interest income
Interest expense
Net interest income
Provision for loan losses
Total non-interest income
Total non-interest expense
Income from continuing operations before
income tax expense
Income tax expense
Net income from continuing operations
Loss from discontinued operations before
income taxes (1)
Income tax benefit from discontinued
operations
Net loss from discontinued operations
Net income
Preferred stock dividends
Net income attributable to common
shareholders
Earnings per common share:
Basic earnings per common share from
continuing operations
Basic earnings per common share
Diluted earnings per common share from
continuing operations
Diluted earnings per common share
$
$
$
$
$
$
322,539
$
249,850
$
190,427
$
128,156
$
73,023
249,516
2,345
23,165
131,217
139,119
51,412
87,707
53,551
196,299
20,566
27,572
107,568
95,737
32,664
63,073
38,504
151,923
14,747
25,126
96,788
65,514
20,982
44,532
24,301
103,855
2,236
22,703
73,676
50,646
17,736
32,910
(14,524)
(7,242)
(2,126)
(348)
(5,519)
(9,005)
78,702
9,515
69,187
2.83
2.51
2.61
2.31
$
$
$
$
$
(2,752)
(4,490)
58,583
2,493
56,090
2.26
2.09
2.11
1.96
$
$
$
$
$
(808)
(1,318)
43,214
—
43,214
1.67
1.62
1.59
1.55
$
$
$
$
$
(132)
(216)
32,694
—
32,694
1.34
1.34
1.31
1.30
$
$
$
$
$
93,814
21,761
72,053
14,270
28,958
50,651
36,090
12,272
23,818
—
—
—
23,818
—
23,818
1.61
1.61
1.57
1.57
At Period End
Total assets
Cash and cash equivalents
Investment securities
Loans held for sale (2)
Loans receivable
Allowance for loan losses
FDIC loss sharing receivable (3)
Deposits
Deposits (classified in liabilities held for
sale)
Borrowings (4)
Liabilities held for sale
$ 9,382,736
$ 8,398,205
$ 6,821,500
$ 4,150,493
$ 3,201,234
244,709
493,474
2,117,510
6,142,390
37,315
—
264,593
560,253
1,797,064
5,452,895
35,647
—
371,023
416,685
1,435,459
4,311,374
30,932
2,320
233,068
497,573
747,593
2,464,158
23,998
10,046
186,016
129,093
1,439,889
1,324,467
25,837
12,343
6,846,980
5,662,433
4,296,242
2,959,922
2,440,818
456,795
247,068
236,297
1,147,706
1,890,442
1,812,380
484,797
247,139
236,297
236,481
782,070
236,481
—
478,000
—
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Table of Contents
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)
$
$
855,872
620,780
553,902
494,682
443,145
439,481
386,623
382,947
269,475
265,786
0.86%
12.41%
21.08
20.49
$
$
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
Common shares outstanding
30,289,917
26,901,801
26,745,529
26,646,566
20,305,452
Net interest margin
Equity to assets
Tangible common equity to tangible assets
(5)
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
2.84%
9.12%
6.63%
9.23%
9.07%
2.81%
6.60%
5.89%
7.30%
7.16%
2.86%
6.50%
6.45%
7.39%
6.69%
3.13%
9.32%
9.23%
10.81%
10.11%
3.21%
8.42%
8.31%
7.74%
9.30%
11.63%
8.62%
9.27%
13.33%
8.50%
11.41%
8.46%
8.39%
12.44%
10.23%
13.61%
10.85%
11.98%
14.11%
9.53%
13.05%
10.62%
11.09%
13.21%
11.26%
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
$
17,792
$
10,771
$
11,733
$
19,163
$
32,851
0.29%
0.22%
0.20%
0.15%
0.27%
0.20%
0.78%
0.60%
2.48%
1.19%
$
3,108
$
5,057
$
20,900
15,828
$
15,371
27,104
$
12,265
31,428
8,114
40,965
0.22%
0.19%
0.40%
0.76%
1.28%
0.61%
0.65%
0.72%
0.97%
1.95%
209.73%
330.95%
263.63%
125.23%
78.65%
Net charge-offs
$
1,662
$
11,979
$
3,124
$
6,894
$
5,466
Net charge-offs to average total loans
receivable
0.03%
0.26%
0.09%
0.37%
0.38%
1.
2.
3.
4.
5.
BankMobile's results are reflected in discontinued operations.
In 2016, 2015 and 2014, loans held for sale included $2,116,815, $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.
Borrowings includes FHLB advances, Federal funds purchased, Subordinated debt, and other borrowings
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.
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Table of Contents
A reconciliation of shareholders’ equity to tangible common equity and other related amounts is set forth below.
(in thousands, except per share data)
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
2016
2015
2014
2013
2012
$
855,872
$
(17,621)
(217,471)
620,780
30,290
21.08
(0.59)
20.49
$
$
$
$
$
$
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
$ 9,382,736
(17,621)
$ 9,365,115
$ 8,398,205
(3,651)
$ 8,394,554
$ 6,821,500
(3,664)
$ 6,817,836
$ 4,150,493
(3,676)
$ 4,146,817
$ 3,201,234
(3,689)
$ 3,197,545
Equity to assets
Tangible common equity to tangible assets
9.12%
6.63%
6.60%
5.89%
6.50%
6.45%
9.32%
9.23%
8.42%
8.31%
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Table of Contents
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Management's Discussion and Analysis should be read in conjunction with “Business – Executive Summary” and the
Bancorp’s consolidated financial statements and related notes for the year ended December 31, 2016. Certain amounts
reported in the 2015 and 2014 financial statements have been reclassified to conform to the 2016 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 4 - 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 and Other-Than-
Temporary Impairment Analysis, Fair Values of Financial Instruments, Accounting for Purchased-Credit-Impaired (PCI) Loans,
Deferred Income Taxes, and Goodwill and Other Intangible Assets.
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 the 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.
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Table of Contents
Unrealized Gains and Losses on Securities Available for Sale and Other-Than-Temporary Impairment Analysis
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 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.
At December 31, 2016, management evaluated its available-for-sale debt securities for other-than-temporary impairment. The
unrealized losses associated with the available-for-sale debt securities were not considered to be other-than-temporarily
impaired at December 31, 2016 because the losses were related to changes in interest rates and did not affect the expected cash
flows of the underlying collateral or issuer. Customers does not intend to sell these securities and it is not more likely than not
that Customers will be required to sell the securities before recovery of the amortized cost basis.
At December 31, 2016, management evaluated its equity holdings issued by a foreign entity for other-than-temporary
impairment. Management determined it no longer had the intent to hold the securities until a recovery in fair value.
Accordingly, Customers recognized an other-than-temporarily impairment loss of $7.3 million on these securities for the year
ended December 31, 2016.
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 values of financial instruments 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 rates or discount rates, 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 20 – 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.
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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 in the estimated cash flows of the loan will generally result in a provision for loan losses. 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
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.
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.
Goodwill and Other Intangible Assets
Goodwill represents the excess of cost over the identifiable net assets of businesses acquired. Other intangible assets represent
purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal
rights. Intangible assets that have finite lives, such as customer and university relationship intangibles and non-compete
agreements, are amortized over their estimated useful lives and subject to periodic impairment testing. Goodwill and other
intangible assets recognized as part of the Disbursement business acquisition were based on a preliminary allocation of the
purchase price. In fourth quarter 2016, Customers recorded adjustments to the estimated fair values of the net assets acquired,
which resulted in a $1.0 million increase in goodwill. For more information regarding the net assets acquired and goodwill
recorded upon acquisition of the Disbursement business, see NOTE 2 - ACQUISITION ACTIVITY.
Goodwill and other intangible assets are reviewed for impairment annually as of October 31 and between annual tests when
events and circumstances indicate that impairment may have occurred. Impairment of goodwill is a condition that exists when
the carrying amount exceeds its implied fair value. A qualitative factor test can be performed to determine whether it is
necessary to perform the two-step quantitative 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.
Intangible assets subject to amortization are reviewed for impairment under ASC 360 which requires that a long-lived asset or
asset group be tested for recoverability whenever events or changes in circumstances indicate that the carrying value may not
be recoverable. The carrying value of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset.
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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 the 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.
BankMobile, a division of Customers Bank, derives the majority of its revenue from interchange and card revenue earned from
the Disbursement business acquired from Higher One. In fourth quarter 2016, Customers decided to sell BankMobile and
anticipates the sale to close in third quarter 2017. Accordingly, BankMobile has been classified as "held for sale" on the
consolidated balance sheets and BankMobile's operating results have been presented as discontinued operations in the
accompanying consolidated financial statements.
2017 Economic Outlook
U.S. Real GDP is forecast to grow 2.0% to 3.0% during 2017. Additionally, a dichotomy could develop between the U.S. and
global economies as a result of President Trump’s policies (e.g., higher tariffs on trade, curbing illegal immigration, increased
federal stimulus, and tax cuts for corporations and Americans), with the U.S. getting a short-term pickup in GDP growth while
global growth is dampened by U.S. economic policy. Sectors tied closely to the domestic economy should fare better than
those sectors that are more closely tied to the global economy. The U.S. economy is forecast to expand 2.2% in 2017 from
around 1.6% in 2016, as consumer spending is bolstered by healthy employment and wage prospects, despite continued weak
business investment.
While inflation has remained below the Federal Reserve's target of 2% (1.7% through the 12 months ended November 30, 2016
as published by the U.S. government on December 15, 2016), it is expected to climb to 2.2% in 2017 and 2.4% in 2018. If
current projections are correct, it would be the first stretch of sustained inflation above 2% since before the recession of 2007 to
2009.
Since “lift off” in mid-December 2015 and an additional 25 basis points interest rate increase in mid-December 2016, it is
expected that the Federal Reserve will continue to raise the overnight rate, increasing it three times during 2017. For these
interest rate hikes to occur, the CPI and PCE deflators will need to continue 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 in the short run, the Trump administration’s policies are likely to result in
higher U.S. interest rates and a stronger dollar, which could have a significantly adverse impact on the global economy. In the
longer run, however, these policies could also have a negative impact on U.S. growth as the boost from the fiscal stimulus
diminishes and President Trump’s other policies (e.g., higher tariffs, curtailed immigration, and tighter monetary policy by the
Federal Reserve) ultimately begin to weigh on domestic growth. In Customers Bancorp's market area, management sees
continued moderate (2.0% to 3.0%) growth in 2017, 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 the Bank's
commercial and industrial, multi-family and commercial real estate loan portfolios, although the market for multi-family loans
is expected to be down by 25% to 30% in 2017 (with the Bank being down approximately 20% because it is better positioned
than the large banks with exposure to a lot of potential refinance activity). As the Trump administration is only beginning to
take shape, the political uncertainty in the U.S. and the challenges associated with that uncertainty will continue over the next
few years. Overall, management is optimistic that 2017 will show a continuation of the improving economic environment
experienced in 2016, providing the caveat that the political uncertainty surrounding the Trump administration’s ability to
execute its policies could have a significant impact on the continued economic recovery.
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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 4 - 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, 2016 and 2015
Net income available to common shareholders increased $13.1 million, or 23.3%, to $69.2 million for the year ended
December 31, 2016, compared to $56.1 million for the year ended December 31, 2015. The increased net income available to
common shareholders resulted from an increase in net interest income of $53.2 million and a decrease in provision for loan
losses of $18.2 million, partly offset by a decrease in non-interest income of $4.4 million and increases in non-interest expense
of $23.6 million, tax expense of $18.7 million, net loss from discontinued operations of $4.5 million, and preferred stock
dividends of $7.0 million.
Net interest income from continuing operations increased $53.2 million, or 27.1%, for the year ended December 31, 2016 to
$249.5 million, compared to $196.3 million for the year ended December 31, 2015. The increase in net interest income was
driven by an increase in the average balance of loans and securities of $1.8 billion, from $6.7 billion in 2015 to $8.5 billion in
2016, as well as the expansion of net interest margin (tax equivalent) by 3 basis points (from 2.81% in 2015 to 2.84% in 2016).
The provision for loan losses from continuing operations declined $18.2 million to $2.3 million for the year ended
December 31, 2016, compared to $20.6 million for the same period in 2015. The decrease in the provision for loan losses
during 2016 was primarily attributable to a provision expense of $9.0 million recorded in 2015 for a fraudulent loan that was
charged off in its entirety during 2015, greater growth in loans held for investment in 2015 as compared to 2016, a benefit of
$0.3 million in 2016 attributable to FDIC loss sharing arrangements versus expense of $3.9 million in 2015, and recoveries
totaling $2.7 million in 2016 compared to recoveries of $1.4 million in 2015.
Non-interest income from continuing operations declined $4.4 million, or 16.0%, for the year ended December 31, 2016 to
$23.2 million, compared to $27.6 million for the year ended December 31, 2015. The decrease resulted primarily from an
impairment charge of $7.3 million recorded in 2016 due to Customers' change in intent to hold certain equity securities until the
market price of the securities recovered and a decrease in bank-owned life insurance income of $2.3 million as a result of a
$2.4 million benefit received on a bank-owned life insurance policy in 2015. These decreases were offset in part by increased
mortgage warehouse transactional fees of $1.2 million resulting from higher transaction volumes in 2016 as compared to 2015
and a $2.2 million recovery of a previously recorded loss during 2016.
Non-interest expense from continuing operations increased $23.6 million, or 22.0%, during the year ended December 31, 2016
to $131.2 million, compared to $107.6 million during the year ended December 31, 2015. The increase was primarily driven
by increases in salaries and employee benefits of $11.5 million, technology, communications and bank operations of $3.5
million, FDIC assessments, non-income taxes, and regulatory fees of $2.5 million, professional services of $1.6 million,
occupancy expenses of $1.4 million, and one-time charges of $1.4 million associated with legal matters. Much of the increased
non-interest expense was attributable to the increased level of staff and other operating expenses necessary to support and
operate a $9.4 billion bank.
Income tax expense from continuing operations increased $18.7 million for the year ended December 31, 2016 to $51.4
million, compared to $32.7 million in the same period in 2015. The increase in income tax expense was driven primarily from
increased pre-tax income of $43.4 million in 2016 and an increase in our effective tax rate of 2.84%, partially offset by the
early adoption of ASU 2016-09, Improvements to Employee Share Based Accounting, which decreased income tax expense by
$4.1 million for the year ended December 31, 2016.
The loss from discontinued operations increased $7.3 million for the year ended December 31, 2016 to $14.5 million,
compared to $7.2 million in the same period in 2015. The increase was primarily driven by additional expenses realized as a
result of the acquisition of the Disbursement business in June 2016. The loss from discontinued operations provided a tax
benefit of $5.5 million for the year ended December 31, 2016, compared to $2.8 million for the same period of 2015.
Preferred stock dividends increased $7.0 million for 2016 due to the issuance of the Series D, Series E and Series F Preferred
Stock during 2016 with an aggregate principal balance of $167.5 million and an average dividend yield of 6.23%.
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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 available to common
shareholders resulted from increases in net interest income of $44.4 million and non-interest income of $2.4 million, partly
offset by increases in the provision for loan losses of $5.8 million, non-interest expense of $10.8 million, tax expense of $11.7
million, net loss from discontinued operations of $3.2 million, and preferred stock dividends of $2.5 million.
Net interest income from continuing operations 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 a fraudulent loan identified by Customers in third quarter 2015 that was charged off in its
entirety during 2015.
Non-interest income from continuing operations increased $2.4 million, or 9.7%, during the year ended December 31, 2015 to
$27.6 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 from continuing operations increased $10.8 million, or 11.1%, during the year ended December 31, 2015
to $107.6 million, compared to $96.8 million during the year ended December 31, 2014. The increases in salaries and employee
benefits of $10.3 million, professional services of $2.2 million, and technology of $0.9 million resulted from growth of
Customers' business, which required additional team members, services, and support. These increases were offset in part by
decreased assessments and regulatory fees of $1.0 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 from continuing operations increased $11.7 million for the year ended December 31, 2015 to $32.7
million, compared to $21.0 million in the same period in 2014. The increase in income tax expense was driven primarily from
increased pre-tax income of $30.2 million in 2015, offset in part by the benefit received on a bank-owned life insurance policy
of $2.4 million, which was not taxable.
The loss from discontinued operations increased $5.1 million for the year ended December 31, 2015 to $7.2 million, compared
to $2.1 million in the same period of 2014. The increase was driven by additional expenses incurred due to the launch of
BankMobile in January 2015. The loss from discontinued operations provided a tax benefit of $2.8 million for the year ended
December 31, 2015, compared to $0.8 million for the same period in 2014.
Preferred stock dividends increased $2.5 million for 2015 due to the accrual of dividends on Customers' Series C Preferred
Stock issued in second quarter 2015.
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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 Customers' net interest income and related spread and margin for the periods indicated.
2016
2015
For the Years Ended December 31,
Average
balance
Interest
income or
expense
Average
yield or
cost
Average
balance
Interest
income or
expense
Average
yield or
cost
Average
balance
2014
Interest
income or
expense
Average
yield or
cost
0.25%
2.30%
3.38%
4.00%
3.41%
3.58%
0.57%
0.61%
0.42%
0.96%
0.76%
1.11%
0.86%
(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
Assets held for sale
Total assets
Liabilities
$ 225,409
$
1,218
0.54 % $ 271,201
$
718
0.26 % $ 228,668
$
577
540,532
1,967,436
14,293
69,469
2.64 %
427,638
3.53 % 1,589,176
10,405
51,553
2.43 %
3.24 %
451,932
911,506
10,386
30,801
5,971,530
233,349
3.91 % 4,635,136
182,280
3.93 % 3,655,938
146,388
84,797
4,210
4.96 %
72,693
4,894
6.73 %
66,669
2,275
8,789,704
322,539
3.67 % 6,995,844
249,850
3.57 % 5,314,713
190,427
272,253
40,160
$9,102,117
263,997
2,690
$7,262,531
223,404
1,337
$5,539,454
Interest checking accounts
Money market deposit accounts
$ 190,279
3,085,140
1,069
19,233
0.56 % $ 123,527
686
0.56 %
62,840
361
0.62 % 2,412,958
12,548
0.52 % 1,712,896
10,391
Other savings accounts
Certificates of deposit
Total interest-bearing deposits
Borrowings
Total interest-bearing liabilities
Non-interest-bearing deposits
Non-interest-bearing deposits held for
sale
Total deposits and borrowings
Other non-interest-bearing liabilities
Liabilities held for sale
Total liabilities
Shareholders’ equity
36,548
2,633,425
5,945,392
1,498,899
7,444,291
496,571
377,028
8,317,890
69,442
17,884
8,405,216
696,901
Total liabilities and shareholders’
equity
$9,102,117
Net interest earnings
Tax-equivalent adjustment (C)
Net interest earnings
Interest spread
Net interest margin
Net interest margin tax
equivalent (C)
76
0.21 %
35,659
102
0.29 %
40,795
27,871
48,249
24,774
73,023
1.06 % 2,087,641
0.81 % 4,659,785
1.65 % 1,369,841
0.98 % 6,029,626
20,637
33,973
19,578
53,551
0.99 % 1,403,774
0.73 % 3,220,305
1.43 % 1,264,860
0.89 % 4,485,165
172
13,530
24,454
14,050
38,504
379,196
312,963
288,565
331,820
0.88 % 6,721,785
0.80 % 5,105,550
0.75%
30,348
1,207
6,753,340
509,191
$7,262,531
17,905
—
5,123,455
415,999
$5,539,454
249,516
390
$ 249,906
196,299
449
$ 196,748
151,923
405
$ 152,328
2.79 %
2.84 %
2.84 %
2.77 %
2.81 %
2.81 %
2.83%
2.86%
2.87%
(A)
(B)
(C)
For presentation in this table, balances and the corresponding average rates for investment securities are based upon
historical cost, adjusted for other than temporary impairment and 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.
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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.
2016 vs. 2015
Increase (decrease) due
to change in
2015 vs. 2014
Increase (decrease) due
to change in
Rate
Volume
Total
Rate
Volume
Total
(amounts in thousands)
Interest income:
Interest-earning deposits
Investment securities
Loans held for sale
Loans receivable
Other interest-earning assets
Total interest income
Interest expense:
Interest checking accounts
Money market deposit accounts
Other savings accounts
Certificates of deposit
Total interest-bearing deposits
Borrowings
Total interest expense
Net interest income
500
$
29
$
$
$
639
961
(139) $
2,927
4,854
(1,160)
(1,416)
3,878
8
2,784
(29)
1,539
4,302
3,243
7,545
13,062
52,229
732
68,811
375
3,901
3
5,695
9,974
1,953
11,927
3,888
17,916
51,069
(684)
72,689
383
6,685
(26)
7,234
14,276
5,196
19,472
$
(3,667) $
56,884
$
53,217
$
594
(1,279)
(2,659)
2,396
(919)
(12)
(1,640)
(49)
355
(1,346)
4,288
2,942
(3,861) $
$
112
(575)
22,031
38,551
223
60,342
337
3,797
(21)
6,752
10,865
1,240
12,105
48,237
$
141
19
20,752
35,892
2,619
59,423
325
2,157
(70)
7,107
9,519
5,528
15,047
44,376
For the years ended December 31, 2016 and 2015
Net interest income from continuing operations was $249.5 million for the year ended December 31, 2016, an increase of $53.2
million, or 27.1%, when compared to net interest income for the year ended December 31, 2015 of $196.3 million. The increase
in net interest income in 2016 was primarily attributable to an increase of $1.8 billion in the average balance of interest-earning
assets. Customers' net interest margin also expanded to 2.84% for the year ended December 31, 2016 from 2.81% for the year
ended December 31, 2015.
For the years ended December 31, 2015 and 2014
Net interest income from continuing operations was $196.3 million for the year ended December 31, 2015, 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. The increase
in net interest income was primarily attributable to an increase of $1.6 billion in the average balance of loans and securities.
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 increase 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 4 – 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, 2016 and 2015
During 2016, the provision for loan losses from continuing operations was $2.3 million, a decrease of $18.2 million from a
provision of $20.6 million in 2015. The 2015 provision for loan losses included $9.0 million for a fraudulent loan that was
charged off in its entirety and reflected greater growth in loans held for investment. The held-for-investment loan portfolio
grew approximately $0.7 billion in 2016 compared to $1.1 billion in 2015, resulting in less provision for new loans of
approximately $2.5 million. The 2016 provision included a benefit of $0.3 million attributable to FDIC loss share arrangements
versus expense of $3.9 million in 2015. Recoveries in 2016 totaled $2.7 million compared to recoveries of $1.4 million in 2015.
There were no significant changes in Customers' methodology for estimating its allowance for loan losses and the provision for
loan losses in 2016.
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 $9.0 million for a fraudulent loan identified by Customers in third quarter
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.
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NON-INTEREST INCOME
The chart below shows the various components of non-interest income for the years ended December 31, 2016, 2015 and 2014.
(amounts in thousands)
Mortgage warehouse transactional fees
Bank-owned life insurance
Gains on sales of loans
Deposit fees
Mortgage loan and banking income
Interchange and card revenue
Gain (loss) on sales of investment securities
Impairment loss on investment securities
Other
Total non-interest income
For the years ended December 31, 2016 and 2015
For the Years Ended December 31,
2016
2015
2014
$
$
11,547
4,736
3,685
1,140
969
620
25
(7,262)
7,705
23,165
$
$
10,394
7,006
4,047
943
741
536
(85)
—
3,990
27,572
$
$
8,233
3,702
3,125
801
2,048
532
3,191
—
3,494
25,126
Non-interest income from continuing operations declined $4.4 million, or 16.0%, for the year ended December 31, 2016 to
$23.2 million, compared to $27.6 million for the year ended December 31, 2015. The decrease resulted primarily from an
impairment charge of $7.3 million recorded in 2016 due to Customers' change in intent to hold certain equity securities until the
market price of the securities recovered, and a decrease in bank-owned life insurance income of $2.3 million as a result of a
$2.4 million benefit received on a bank-owned life insurance policy in 2015. These decreases were offset in part by increased
mortgage warehouse transactional fees of $1.2 million resulting from higher transaction volumes in 2016 as compared to 2015
and a $2.2 million recovery of a previously recorded loss during 2016.
For the years ended December 31, 2015 and 2014
Non-interest income from continuing operations increased $2.4 million, or 9.7%, for the year ended December 31, 2015 to
$27.6 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.
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The below chart shows the various components of non-interest expense for the years ended December 31, 2016, 2015, and
2014.
NON-INTEREST EXPENSE
(amounts in thousands)
Salaries and employee benefits
Technology, communication and bank operations
FDIC assessments, taxes, and regulatory fees
Professional services
Occupancy
Loan workout
Other real estate owned
Advertising and promotion
Other
Total non-interest expense
For the years ended December 31, 2016 and 2015
For the Years Ended December 31,
2016
2015
2014
$
$
67,877
12,888
12,568
11,017
9,846
2,063
1,953
576
12,429
131,217
$
$
56,341
9,379
10,110
9,386
8,467
1,127
2,516
697
9,545
107,568
$
$
46,083
8,466
11,116
7,218
8,063
1,706
3,601
1,180
9,355
96,788
Non-interest expense from continuing operations was $131.2 million for the year ended December 31, 2016, which was an
increase of $23.6 million over non-interest expense of $107.6 million for the year ended December 31, 2015.
Salaries and employee benefits, which represent the largest component of non-interest expense, increased $11.5 million, or
20.5%, to $67.9 million for the year ended December 31, 2016 from $56.3 million for the year ended December 31, 2015. The
increase was primarily related to headcount growth to support the larger multi-family, commercial real estate and commercial
and industrial loan portfolios, and the increased deposits.
Technology, communication and bank operations expense increased $3.5 million to $12.9 million for the year ended
December 31, 2016 from $9.4 million for the year ended December 31, 2015, primarily attributable to the organic growth of the
Bank.
FDIC assessments, taxes, and regulatory fees increased $2.5 million to $12.6 million for the year ended December 31, 2016
from $10.1 million for the year ended December 31, 2015. The primary reason for the 2016 increase was an adjustment in
2015 that reduced the Pennsylvania shares tax expense by $2.3 million.
Professional services expense increased by $1.6 million to $11.0 million for the year ended December 31, 2016 from $9.4
million for the year ended December 31, 2015, primarily attributable to increases in consulting, lending service fees, and other
professional services expenses to support a $9.4 billion bank.
Occupancy expense increased by $1.4 million to $9.8 million for the year ended December 31, 2016 from $8.5 million for the
year ended December 31, 2015. This increase was driven by increased business activity in existing and new markets which
required additional team members and facilities.
Other expense increased by $2.9 million to $12.4 million for the year ended December 31, 2016 from $9.5 million for the year
ended December 31, 2015. The increase was primarily attributable to one-time charges of $1.4 million associated with legal
matters. In addition, 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, 2015 and 2014
Non-interest expense from continuing operations was $107.6 million for the year ended December 31, 2015, which was an
increase of $10.8 million over non-interest expense of $96.8 million for the year ended December 31, 2014.
Salaries and employee benefits, which represent the largest component of non-interest expense, increased $10.3 million, or
22.3%, to $56.3 million for the year ended December 31, 2015 from $46.1 million for the year ended December 31, 2014. Most
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of the increased expense is attributable to increased salaries and other compensation costs, as well as increased level of staff
necessary to run a larger bank. 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 $2.2 million to $9.4 million for the year ended December 31, 2015 from $7.2
million for the year ended December 31, 2014 due to 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 $1.0 million to $10.1 million for the year ended December 31, 2015
from $11.1 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 expense increased $0.9 million to $9.4 million for the year ended December
31, 2015 from $8.5 million for the year ended December 31, 2014. This increase was primarily attributable to technology
related expenses driven by the organic growth of the Bank.
Occupancy expense increased by $0.4 million to $8.5 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.
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.
INCOME TAXES
For the years ended December 31, 2016 and 2015
The income tax expense and effective tax rate include both federal and state income taxes. In 2016, income tax expense from
continuing operations was $51.4 million with an effective tax rate of 36.96%, compared to an expense of $32.7 million and an
effective tax rate of 34.12% for 2015. Income tax expense was driven primarily by net income before taxes of $139.1 million
and $95.7 million, for the years ended December 31, 2016 and 2015, respectively. In 2016, the effective tax rate was higher
due to state income tax items totaling $5.0 million, or a 3.58% effective tax rate increase, driven by a greater proportion of
income producing assets domiciled in New York, particularly in New York City, an unrecorded basis difference in a foreign
subsidiary of $2.8 million, or 2.03%, related to an other-than-temporary impairment charge recorded on a equity investment in
fourth quarter 2016, partially offset by an equity-based compensation benefit of $3.7 million or a 2.67% effective tax rate
reduction, from the early adoption of Accounting Standards Update No. 2016-09, Improvements to Employee Share-Based
Accounting, and a reduction of $1.7 million, or a 1.23% effective tax rate reduction, due to a tax benefit resulting from bank-
owned life insurance income. In 2015, the effective tax rate was reduced due to a tax benefit resulting from bank-owned life
insurance income of $2.4 million, or 2.53%.
For the years ended December 31, 2015 and 2014
The income tax expense and effective tax rate include both federal and state income taxes. In 2015, income tax expense from
continuing operations was $32.7 million with an effective tax rate of 34.12%, compared to an expense of $21.0 million and an
effective tax rate of 32.03% for 2014. Income tax expense was driven primarily by net income before taxes of $95.7 million
and $65.5 million, for the years ended December 31, 2015 and 2014, respectively. n 2015, the effective tax rate was lower due
to non-taxable bank-owned life income and a non-taxable death benefit received totaling $2.4 million, or a 2.53% 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 1.98% effective tax rate reduction, and a benefit of $1.8 million, or a 2.77% effective tax rate reduction,
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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, 2016 and 2015
DISCONTINUED OPERATIONS
The loss from discontinued operations before income taxes increased $7.3 million for the year ended December 31, 2016 to
$14.5 million, compared to $7.2 million in the same period in 2015. The increase was primarily driven by additional net
expense incurred as a result of the acquisition of the Disbursement business in June 2016. The loss from discontinued
operations provided a tax benefit of $5.5 million for the year ended December 31, 2016, compared to $2.8 million for the same
period in 2015, due to the larger operating loss from the business.
For the years ended December 31, 2015 and 2014
The loss from discontinued operations before income taxes increased $5.1 million for the year ended December 31, 2015 to
$7.2 million, compared to $2.1 million in the same period in 2014. The increase was driven by increased expenses for salaries
and employee benefits, technology-related expenses and professional services due to the growth of BankMobile as Customers
invested in a new business. The loss from discontinued operations provided a tax benefit of $2.8 million for the year ended
December 31, 2015, compared to $0.8 million for the same period in 2014.
FINANCIAL CONDITION
GENERAL
Total assets were $9.4 billion at December 31, 2016. This represented a $1.0 billion, or 11.7%, increase from total assets of
$8.4 billion at December 31, 2015. The major change in our financial position occurred as a result of organic growth in loans
receivable, which increased by $0.7 billion, or 12.6%, to $6.1 billion at December 31, 2016, from $5.5 billion at December 31,
2015.
In 2016, Customers moderated its efforts to increase loan balances in order to focus on building a stronger balance sheet,
capital base, and risk management infrastructure, and build BankMobile into a successful company that could be divested so
both Customers and BankMobile can grow and thrive, without Durbin Amendment restrictions. Multi-family loans increased
by $0.3 billion to $3.2 billion at December 31, 2016. Commercial loans and lines of credit to mortgage companies increased by
$0.4 billion to $2.2 billion at December 31, 2016. Additionally, commercial and industrial loans, including owner-occupied
commercial real estate, increased by $0.3 billion to $1.3 billion at December 31, 2016.
Total liabilities were $8.5 billion at December 31, 2016. This represented a $0.7 billion, or 8.7%, increase from total liabilities
of $7.8 billion at December 31, 2015. The increase in total liabilities resulted primarily from a higher level of deposits in 2016
compared to 2015. Total deposits grew by $1.2 billion, or 20.9%, to $6.8 billion at December 31, 2016 from $5.7 billion at
December 31, 2015. Transaction deposits increased by $0.7 billion, or 21.1%, to $4.0 billion at December 31, 2016 from $3.3
billion at December 31, 2015, with non-interest bearing deposits increasing by $104 million. Certificates of deposit accounts
increased by $0.5 billion, or 20.6%, to $2.8 billion at December 31, 2016 from $2.3 billion at December 31, 2015.
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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 $2,117,510 and $1,757,807 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
Liabilities held for sale
Total liabilities
Total shareholders’ equity
Total liabilities and shareholders’ equity
December 31,
2016
2015
$
244,709
493,474
2,117,510
6,142,390
6,105,075
9,382,736
6,846,980
83,000
868,800
87,123
108,783
484,797
8,526,864
855,872
9,382,736
264,593
560,253
1,797,064
5,452,895
5,417,248
8,398,205
5,662,433
70,000
1,625,300
86,457
108,685
247,139
7,844,303
553,902
8,398,205
CASH AND CASH EQIVALENTS
Cash and due from banks consists mainly of vault cash and cash items in the process of collection. These balances totaled $17.5
million at December 31, 2016. This represents a $36.1 million decrease from $53.6 million at December 31, 2015. These
balances vary from day to day, primarily due to variations in customers’ deposits with the Bank.
Interest earning deposits consist mainly of deposits at the Federal Reserve Bank of Philadelphia. These deposits totaled $227.2
million at December 31, 2016, which was a $16.2 million increase from $211.0 million at December 31, 2015. This balance
varies from day to day, depending on several factors, such as variations in customers’ deposits with the Bank, payment of
checks drawn on customers’ accounts, and strategic investment decisions made to maximize net interest income, while
effectively managing interest-rate risk and liquidity.
INVESTMENT SECURITIES
The investment securities portfolio is an important source of interest income and liquidity. It consists 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 interest-earning assets. The portfolio is
structured to maximize net interest income, given changes in the economic environment, liquidity position and balance sheet
mix.
At December 31, 2016, investment securities were $493.5 million compared to $560.3 million at December 31, 2015. The
decrease was primarily the result of principal payments received on agency-guaranteed residential mortgage-backed securities
and a decision to use the net proceeds from payments to invest in higher yielding loans.
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.
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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
Commercial real estate mortgage-backed securities
Corporate notes (1)
Equity securities (2)
December 31,
2016
2015
$
$
233,002
204,689
44,932
15,246
497,869
$
$
299,392
206,719
39,925
22,514
568,550
(1)
(2)
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.
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, 2016
Amortized Cost
<
1yr
1 -5
years
5 -10
years
After 10
years
No
Specific
Maturity
Total
$ — $
— $ — $ — $ 233,002
$ 233,002
$
—
—
—
—
—
$ — $
—%
—
37,932
—
—
5.58%
—
—
—
—
—
— $ 37,932
—%
5.58%
2.65%
2.65%
204,689
$ 204,689
2.80%
—
—
15,246
—%
2.80%
44,932
5.57%
15,246
—%
$ 452,937
$ 497,869
$
2.63%
2.89%
—
7,000
5.54%
—
—
$ 7,000
5.54%
Fair
Value
Total
231,263
—
201,817
—
45,148
—
15,246
—
493,474
(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
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, and commercial and industrial loans. The Bank continues to focus on small
and middle market business loans to grow its commercial lending efforts, expand its specialty mortgage warehouse lending
business, and expand its multi-family/commercial real estate lending business, and maintain its consumer portfolio.
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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 $100 million, which
typically have credit requirements between $0.5 million and $10 million.
The small and middle market business banking platform originates loans, including Small Business Administration loans,
through the branch network sales force and a team of dedicated relationship managers. The support administration of this
platform is centralized including risk management, product management, marketing, performance tracking and overall strategy.
Credit and sales training has been established for Customers' sales force, ensuring that it has small business experts in place
providing appropriate financial solutions to the small business owners in its communities. A division approach focuses on
industries that offer high asset quality and are deposit rich to drive profitability.
In 2009, Customers launched its lending to mortgage banking businesses products, which primarily provides financing to
mortgage bankers for residential mortgage originations from loan closing until sale in the secondary market. Many providers of
liquidity in this segment exited the business in 2009 during a period of market turmoil. Customers saw an opportunity to
provide liquidity to this business segment at attractive spreads. There was also the opportunity to attract escrow deposits and to
generate fee income in this business.
The goal of the mortgage banking business 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, 2016,
loans in the warehouse lending portfolio totaled $2.1 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, 2016, Customers had multi-family loans of $3.2 billion outstanding, comprising approximately
39.0% of the total loan portfolio, compared to $2.9 billion, or approximately 40.7% of the total loan portfolio, at December 31,
2015.
As of December 31, 2016, Customers had $8.0 billion in commercial loans outstanding, composing approximately 96.4% of its
total loan portfolio, which includes loans held for sale, compared to $6.9 billion, composing approximately 94.6% at
December 31, 2015.
Consumer Lending
Customers provides home equity and residential mortgage loans to customers. Underwriting standards for home equity lending
are conservative and lending is offered to solidify customer relationships and grow relationship revenues in the long term. This
lending is important in Customers' efforts to grow total relationship revenues for its consumer households. As of December 31,
2016, Customers had $298.7 million in consumer loans outstanding, or 3.6% of the 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.
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Table of Contents
The composition of loans held for sale was as follows:
2016
2015
December 31,
2014
2013
2012
(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
$
2,116,815
$
1,754,950
$
1,332,019
$
740,694
$
1,439,889
—
39,257
99,791
—
—
2,116,815
1,794,207
1,431,810
740,694
1,439,889
695
2,117,510
$
2,857
1,797,064
$
3,649
1,435,459
$
6,899
747,593
$
—
1,439,889
$
Because the FDIC loss sharing agreements were terminated in 2016, and the balance of covered loans was 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 2016, 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:
2016
2015
December 31,
2014
2013
2012
(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
$
$
$
3,214,999
1,370,853
1,193,715
64,789
—
5,844,356
193,502
101,730
2,726
297,958
6,142,314
2,909,439
1,111,400
956,255
87,240
—
5,064,334
271,613
113,490
3,124
388,227
5,452,561
2,208,405
785,669
839,310
49,718
—
3,883,102
297,395
126,731
3,634
427,760
4,310,862
$
1,064,059
296,595
753,591
42,917
—
2,157,162
163,920
139,471
4,517
307,908
2,465,070
363,336
126,333
489,332
45,554
9,565
1,034,120
129,960
153,429
5,801
289,190
1,323,310
Deferred costs (fees) and
unamortized premiums (discounts),
net
Allowance for loan losses
Loans receivable, net of allowance $
76
(37,315)
6,105,075
$
334
(35,647)
5,417,248
$
512
(30,932)
4,280,442
$
(912)
(23,998)
2,440,160
$
1,157
(25,837)
1,298,630
(a)
(b)
(c)
Includes owner occupied commercial real estate loans for 2016, 2015 and 2014.
Includes non-owner occupied commercial real estate loans for 2016, 2015 and 2014. For 2013 and 2012, 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.
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Table of Contents
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 $2.1 billion and $1.8 billion at December 31, 2016 and 2015,
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 $0.7 billion to $6.1 billion at December 31, 2016 from $5.4
billion at December 31, 2015. 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 $0.3 billion, $0.3 billion, and $0.2 billion, respectively, from
December 31, 2015. 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, 2016, in terms of contractual
maturity date and interest rate characteristics:
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
$
96,048
$
2,404,520
$
714,431
$
3,214,999
145,407
82,669
14,625
338,749
177,131
161,618
338,749
$
$
$
711,928
740,261
18,050
3,874,759
3,223,407
651,352
3,874,759
$
$
$
513,518
370,785
32,114
1,630,848
617,275
1,013,573
1,630,848
$
$
$
1,370,853
1,193,715
64,789
5,844,356
4,017,813
1,826,543
5,844,356
$
$
$
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 $2.3 million, $20.6 million, and $14.7 million for the years ended December 31, 2016, 2015
and 2014, 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 $37.3 million, or 0.61% of total loans
receivable, at December 31, 2016 and $35.7 million, or 0.65% of total loans receivable, at December 31, 2015. The percentage
of the allowance of loan losses to total loans receivable declined during 2016 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 $1.7 million for the year ended December 31, 2016, a decrease
of $10.3 million compared to $12.0 million for the year ending December 31, 2015. The decrease 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.
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Table of Contents
Customers had no loans that were covered under loss share arrangements with the FDIC as of December 31, 2016. Customers
had approximately $13.8 million in loans that were covered under loss share arrangements with the FDIC as of December 31,
2015. On July 11, 2016, Customers entered into an agreement to terminate all existing rights and obligations pursuant to the
loss sharing agreements with the FDIC. In connection with the termination agreement, Customers paid the FDIC $1.4 million
as final payment under these agreements. The negotiated settlement amount was based on net losses incurred on the covered
assets through September 30, 2015, adjusted for cash payments to and receipts from the FDIC as part of the December 31, 2015
and March 31, 2016 certifications. Consequently, loans and other real estate owned previously reported as covered assets
pursuant to the loss sharing agreements were no longer presented as covered assets as of June 30, 2016.
Customers Bank considered the covered loans in estimating the allowance for loan losses and considered recovery of estimated
credit losses from the FDIC in the FDIC indemnification asset. Refer to “NOTE 4 – 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
Charge-offs for BankMobile loans (4)
Total Loan 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 (5)
Provision for BankMobile loans (4)
Ending Balance
Net charge-offs as a percentage of average
loans receivable
For the Years Ended December 31,
2016
2015
2014
2013
2012
$
35,647
$
30,932
$
23,998
$
25,837
$
15,032
—
2,947
140
493
129
696
1,064
11,709
327
276
36
—
895
1,637
1,715
667
33
—
2,096
1,387
3,358
410
87
—
2,507
522
2,462
649
26
—
4,405
13,412
4,947
7,338
6,166
1,854
381
130
367
11
2,743
1,662
2,634
696
204
562
575
92
1,433
11,979
16,694
13
736
801
265
8
1,823
3,124
10,058
—
—
—
391
42
2
9
444
6,894
5,055
—
4
514
63
5
114
700
5,466
16,271
—
$
37,315
$
35,647
$
30,932
$
23,998
$
25,837
0.03%
0.26%
0.09%
0.37%
0.38%
(1)
(2)
(3)
(4)
(5)
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 2016, 2015 and 2014.
Includes non-owner occupied commercial real estate loans for 2016, 2015 and 2014. For 2013 and 2012, includes
owner occupied and non-owner occupied commercial real estate loans.
Includes activities for BankMobile related loans, primarily overdrawn deposit accounts.
The provision amounts exclude the (cost)/benefit of the FDIC loss share arrangements of $0.3 million, $(3.9) million,
$(4.7) million, $2.8 million, and $2.0 million, respectively.
The allowance for loan losses is based on a quarterly 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 4 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION” for further discussion
on management's methodology for estimating the allowance for loan losses.
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Table of Contents
Approximately 80% of the Bank’s commercial real estate, commercial and residential construction, consumer residential and
commercial and industrial loan types have real estate as collateral (collectively, “the real estate portfolio”). The Bank’s lien
position on the real estate collateral will vary on a loan-by-loan basis and will change as a result of changes in the value of the
collateral. Current appraisals providing current value estimates of the property are received when the Bank’s credit group
determines that the facts and circumstances have significantly changed since the date of the last appraisal, including that real
estate values have deteriorated. The credit committee and loan officers review loans that are fifteen or more days delinquent
and all non-accrual loans on a periodic basis. In addition, loans where the loan officers have identified a “borrower of interest”
are discussed to determine if additional analysis is necessary to apply the risk rating criteria properly. The risk ratings for the
real estate loan portfolio are determined based upon the current information available, including but not limited to discussions
with the borrower, updated financial information, economic conditions within the geographic area and other factors that may
affect the cash flow of the loan. If a loan is individually evaluated for impairment, the collateral value or discounted cash flow
analysis is used to determine the estimated fair value of the underlying collateral and compared, net of estimated selling costs,
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 over time and as a
result of changing economic conditions or other factors. Pursuant to ASC 310-10-35 Loan Impairment 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:
2016
2015
December 31,
2014
2013
2012
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
$
840
2.3% $ 1,074
3.0% $ 1,047
3.4% $ 2,385
9.9% $ 3,991
15.4%
13,233
35.4% 10,212
28.6%
9,120
29.5%
2,674
11.2%
1,477
5.7%
7,894
11,602
21.2%
8,420
31.0% 12,016
23.6%
33.7%
3,342
118
9.0%
0.3%
3,298
133
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%
286
0.8%
494
1.4%
262
0.8%
614
2.6%
750
2.9%
(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
—
—
$ 37,315
—%
—%
—
—
100.0% $ 35,647
—%
—%
—
—
100.0% $ 30,932
—%
—%
—
—
100.0% $ 23,998
—%
—%
71
722
100.0% $ 25,837
0.3%
2.8%
100.0%
(a) Includes owner occupied commercial real estate loans for 2016, 2015 and 2014.
(b) Includes non-owner occupied commercial real estate loans for 2016, 2015 and 2014. For 2013 and 2012, includes owner
occupied and non-owner occupied commercial real estate loans.
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Table of Contents
ASSET QUALITY
Customers divides its loan portfolio into two categories to analyze and understand loan activity and performance: loans that
were originated, and loans that were acquired. Customers' originated loans were subject to the current underwriting standards
that were put in place in 2009. Management believes this additional information provides a better understanding of the risk in
the portfolio and the various types of reserves that are available to absorb loan losses that may 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, 2016
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
$3,211,516
$ 3,198,943
$12,573
$
— $
— $ — $ —
Commercial & Industrial (1)
1,271,237
1,260,565
487
Commercial Real Estate Non-Owner
Occupied
Residential
Construction
Other Consumer
1,158,531
1,158,531
—
114,510
64,789
190
112,969
1,200
64,789
190
—
—
Total Originated Loans
5,820,773
5,795,987
14,260
Loans Acquired
Bank Acquisitions
Loan Purchases
Total Loans Acquired
Unearned Origination Fees
167,946
153,595
321,541
76
157,994
143,454
301,448
76
3,262
3,861
7,123
—
Total Loans Receivable
6,142,390
6,097,511
21,383
Total Loans Held for Sale
2,117,510
2,117,510
—
—
—
—
—
—
—
1,660
4,044
5,704
—
5,704
—
10,185
371
10,556
—
341
—
—
—
—
—
—
—
341
—
—
—%
0.80%
—%
0.30%
—%
—%
—%
0.83%
—%
0.30%
—%
—%
10,526
371
10,897
0.18%
0.19%
5,030
2,236
7,266
—
2,360
377
7,390
2,613
2,737
10,003
—
—
3.00%
1.46%
2.26%
4.34%
1.70%
3.08%
17,792
3,108
20,900
0.29%
0.34%
—
—
—
Total Portfolio
$8,259,900
$ 8,215,021
$21,383
$
5,704
$
17,792
$ 3,108
$ 20,900
0.22%
0.25%
(1) Commercial & industrial loans, including owner occupied commercial real estate.
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Table of Contents
Asset Quality at December 31, 2016 (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
$
3,211,516
$
— $ 11,602
$
— $
11,602
1,271,237
1,158,531
114,510
64,789
190
10,185
12,560
—
341
—
—
4,569
2,270
772
12
Total Originated Loans
5,820,773
10,526
31,785
Loans Acquired
Bank Acquisitions
Loan Purchases
Total Loans Acquired
Unearned Origination Fees
Total Loans Held for Investment
Total Loans Held for Sale
167,946
153,595
321,541
76
5,030
2,236
7,266
5,244
286
5,530
6,142,390
2,117,510
17,792
37,315
—
—
—
—
—
—
—
—
—
993
993
993
—
12,560
4,569
2,270
772
12
31,785
5,244
1,279
6,523
38,308
—
0.36%
0.99%
0.39%
1.98%
1.19%
6.32%
0.55%
3.12%
0.83%
2.03%
n/a
123.32%
n/a
665.69%
n/a
n/a
301.97%
104.25%
57.20%
89.77%
0.62%
215.31%
Total Portfolio
$
8,259,900
$ 17,792
$ 37,315
$
993
$
38,308
0.46%
215.31%
Originated Loans
Post 2009 originated loans (excluding held-for-sale loans) totaled $5.8 billion, or 70.5%, of total loans at December 31, 2016,
compared to $5.0 billion, or 69.0%, at December 31, 2015. The new management team adopted new underwriting standards
that management believes better limits risks of loss. Only $10.5 million, or 0.18%, of the post 2009 loans were non-performing
at December 31, 2016. Only $3.6 million, or 0.07%, of the post 2009 loans were non-performing at December 31, 2015. The
post 2009 originated loans were supported by an allowance for loan losses of $31.8 million (0.55% of post 2009 originated
loans) and $27.7 million (0.55% of post 2009 originated loans) at December 31, 2016 and 2015, respectively.
Loans Acquired
At December 31, 2016, Customers reported $0.3 billion of acquired loans, which was 3.9% of total loans, compared to $0.5
billion, or 6.2%, of total loans at December 31, 2015. Non-performing acquired loans totaled $7.3 million at December 31,
2016 and $7.2 million at December 31, 2015. When loans are acquired, they are recorded on the balance sheet at fair value.
Acquired loans include purchased portfolios, FDIC failed-bank acquisitions, and unassisted acquisitions. Of the manufactured
housing loans purchased from Tammac prior to 2012, $57.6 million were supported by a $1.0 million cash reserve at December
31, 2016, compared to $63.4 million supported by a cash reserve of $1.2 million at December 31, 2015. The cash reserve was
created as part of the purchase transaction to absorb losses and is maintained in a demand deposit account at 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 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, 2016, $36.6 million of these loans
were outstanding, compared to $41.9 million at December 31, 2015.
Many of the acquired loans were purchased at a discount. The price paid considered management’s judgment as to the credit
and interest rate risk inherent in the portfolio at the time of purchase. Every quarter, management reassesses the risk and adjusts
the cash flow forecast to incorporate changes in the credit outlook. Generally, a decrease in forecasted cash flows for a
purchased loan will result in a provision for loan losses, and absent charge-offs, an increase in the allowance for loan losses.
Acquired loans have a significantly higher percentage of non-performing loans than loans originated after September 2009.
Management acquired these loans with the expectation that non-performing loan levels would be elevated, and therefore
incorporated that expectation into the price paid. 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 $6.5
million (2.03% of total acquired loans) and $9.1 million (2.03% of total acquired loans), respectively, at December 31, 2016
and 2015.
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Held-for-Sale Loans
At December 31, 2016, loans held for sale were $2.1 billion, or 25.6%, of the total loan portfolio, compared to $1.8 billion, or
24.8% of the total loan portfolio at December 31, 2015. The loans held-for-sale portfolio at December 31, 2016 included $2.1
billion of loans to mortgage banking businesses and $0.7 million of residential mortgage loans, compared to $1.8 billion of
loans to mortgage banking businesses, $39.3 million of multi-family loans and $2.9 million of residential mortgages loans at
December 31, 2015. 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, 2016 and 2015, non-performing loans to total loans were 0.22% and 0.15%, respectively. Total reserves to non-
performing loans were 215.3% and 341.7%, respectively, at December 31, 2016 and 2015.
The tables below set forth non-accrual loans and non-performing assets and asset quality ratios:
2016
2015
December 31,
2014
2013
2012
(amounts in thousands)
Loans 90+ days delinquent still
accruing (1)
Non-accrual loans
OREO
Total non-performing assets
$
$
(1)
Excludes purchased-credit-impaired loans.
2,813
$
2,805
$
4,388
$
3,772
$
1,966
17,792
3,108
20,900
$
10,771
5,057
15,828
$
11,733
15,371
27,104
$
19,163
12,265
31,428
$
32,851
8,114
40,965
Non-accrual loans to total loans receivable
Non-accrual loans to total loans
Non-performing assets to total assets
Non-accrual loans and 90+ days delinquent to total
assets
Allowance for loan losses to:
Total loans receivable
Non-accrual loans
2016
2015
2014
2013
2012
December 31,
0.29%
0.20%
0.27%
0.78%
2.48%
0.22%
0.15%
0.20%
0.60%
1.19%
0.22%
0.19%
0.40%
0.76%
1.28%
0.22%
0.16%
0.24%
0.55%
1.09%
0.61%
0.65%
0.72%
0.97%
209.73%
330.95%
263.63%
125.23%
1.95%
78.65%
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The table below sets forth loans that were non-performing at December 31, 2016, 2015, 2014, 2013 and 2012.
(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
2016
2015
December 31,
2014
2013
2012
$
$
$
8,443
2,039
$
1,973
2,700
$
2,513
2,514
$
125
11,615
2,057
—
2,959
2,236
58
17,792
$
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
0
19,163
$
388
21,482
N/A
7,667
3,027
231
56
32,851
(1)
(2)
Includes owner occupied commercial real estate loans for 2016, 2015 and 2014.
Includes non-owner occupied commercial real estate loans for 2016, 2015 and 2014. For 2013 and 2012, 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
regularly 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, 2016 and 2015, special mention loans were $56.9 million and $24.5
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.
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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
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, 2016, 2015 and 2014 there were $16.4 million, $11.4 million, $5.0 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 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 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, 2016, 2015 and 2014, loans aggregating $6.7 million, $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, 2016, 2015 and 2014, there were no commitments to lend additional funds to debtors whose terms have been
modified in troubled debt structuring.
As of December 31, 2016, eight manufactured housing loans totaling $0.2 million, one commercial real estate non-owner
occupied loan totaling $1.8 million, and one residential real estate loan of $0.1 million that were modified in troubled debt
restructurings within the past twelve months, defaulted on payments. As of December 31, 2015, eleven manufactured housing
loans totaling $0.3 million, were modified in troubled debt restructurings within the past twelve months, defaulted on
payments. As of December 31, 2014 there were no loans modified as troubled debt restructurings within the past twelve
months, defaulted on payments.
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 no specific allowances resulting from TDR modifications during 2016. There were
three specific allowances resulting from TDR modifications during 2015, totaling $0.2 million for two 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.
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FDIC LOSS SHARING RECEIVABLE AND CLAWBACK LIABILITY
On July 11, 2016, Customers entered into an agreement to terminate all existing rights and obligations pursuant to the loss
sharing agreements with the FDIC. In connection with the termination agreement, Customers paid the FDIC $1.4 million as
final payment under these agreements. The negotiated settlement amount was based on net losses incurred on the covered
assets through September 30, 2015, adjusted for cash payments to and receipts from the FDIC as part of the December 31, 2015
and March 31, 2016 certifications. Consequently, loans and other real estate owned previously reported as covered assets
pursuant to the loss sharing agreements were no longer presented as covered assets as of June 30, 2016.
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 was 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 anticipated that
it would 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 was recorded.
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 was included in "Accrued interest payable and other liabilities" in the
accompanying consolidated balance sheet.
ACCRUED INTEREST RECEIVABLE
Accrued interest receivable increased by $3.8 million, or 18.8%, to $23.7 million at December 31, 2016 from $19.9 million at
December 31, 2015. This increase was primarily associated with the increase in total loans of $1.0 billion to $8.3 billion at
December 31, 2016 from $7.2 billion at December 31, 2015.
PREMISES AND EQUIPMENT AND OTHER ASSETS
Our premises and equipment, net of accumulated depreciation, totaled $12.3 million and $11.1 million at December 31, 2016
and 2015, respectively. Technology equipment contributed $0.9 million due to the increase of additional technology, facilities
and team members. Leasehold improvements and furniture and equipment purchases contributed $2.0 million to the increase.
Customers Bank’s restricted stock holdings at December 31, 2016 and 2015 were $68.4 million and $90.8 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, 2016 and 2015 were $70.1 million and $68.5 million, respectively, consisting primarily of
deferred taxes, prepaid expenses, cash pledged for collateral, and mark to market adjustment for interest rate swaps.
BOLI cash surrender value increased by $4.3 million, to $161.5 million at December 31, 2016 from $157.2 million at
December 31, 2015. 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 $2.9 million and $2.7
million at December 31, 2016 and 2015, respectively.
ASSETS HELD FOR SALE
Assets held for sale related to the planned disposition of BankMobile were $79.3 million and $2.1 million at December 31,
2016 and 2015, respectively. The increase of $77.2 million was primarily a result of the acquisition of the Disbursement
business in June 2016. For more information on assets designated as held for sale, refer to NOTE 3 - DISCONTINUED
OPERATIONS.
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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 $6.8 billion at
December 31, 2016, an increase of $1.2 billion, or 20.9%, from $5.7 billion at December 31, 2015. Transaction deposits
increased by $0.7 billion, or 21.1%, to $4.0 billion at December 31, 2016 from $3.3 billion at December 31, 2015, with non-
interest bearing deposits increasing by $104 million. Certificate of deposit accounts increased $0.5 billion, or 20.6%, to $2.8
billion at December 31, 2016 from $2.3 billion at December 31, 2015.
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
2016
512,664
339,398
3,163,156
2,106,905
724,857
6,846,980
$
$
December 31,
2015
$
$
408,874
127,215
2,778,747
1,624,562
723,035
5,662,433
$
$
2014
310,139
71,202
2,203,237
1,043,265
668,398
4,296,241
Non-interest bearing demand deposits totaled $0.5 billion at December 31, 2016, up from $0.4 billion at December 31, 2015.
Excluded from the above deposits were non-interest bearing demand deposits of $453.4 million and $244.8 million at
December 31, 2016 and 2015, respectively, and savings accounts of $3.4 million and $2.3 million at December 31, 2016 and
2015, respectively. These deposits were classified as liabilities held for sale on the consolidated balance sheet. No time deposits
were listed as held for sale.
Average deposit balances by type and the associated average rate paid are summarized below:
For the Years ended December 31,
2016
2015
2014
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
$
496,571
190,279
3,121,688
2,633,425
$ 6,441,963
0.00% $
379,196
123,527
0.56%
0.62% 2,448,617
1.06% 2,087,641
$ 5,038,981
0.00% $
288,565
62,840
0.56%
0.52% 1,753,691
0.99% 1,403,774
$ 3,508,870
0.00%
0.57%
0.61%
0.96%
At December 31, 2016, 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, 2016
$
$
371,923
682,368
643,589
409,025
2,106,905
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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:
2016
December 31,
2015
2014
Amount
Rate
Amount
Rate
Amount
Rate
(amounts in thousands)
FHLB advances
Federal funds purchased
$
Total short-term borrowings $
688,800
83,000
771,800
0.85% $ 1,365,300
70,000
0.74
$ 1,435,300
0.48% $ 1,298,000
—
0.56
$ 1,298,000
0.29%
—%
For additional information on the Company’s short-term debt, refer to “NOTE 12 – BORROWINGS.”
Long-term debt
The contractual maturities of fixed-rate long-term FHLB advances are as noted below.
(amounts in thousands)
2017
2018
Senior notes
December 31,
2016
2015
Amount
Rate
Amount
Rate
$
$
—
180,000
180,000
— % $
1.32
$
205,000
55,000
260,000
1.18%
1.61
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.
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LIABILITIES HELD FOR SALE
Liabilities held for sale related to the planned disposition of BankMobile were $484.8 million and $247.1 million at
December 31, 2016 and 2015, respectively. The increase of $237.7 million was primarily a result of an increase in non-interest
bearing demand deposits of $208.6 million related to the acquisition of the Disbursement business and the election of
depositors of another bank electing to move their deposit accounts to Customers Bank and a $27.9 million increase in accrued
expenses and other liabilities related to the acquisition of the Disbursement business. For more information on liabilities
designated as held for sale, refer to NOTE 3 - DISCONTINUED OPERATIONS.
SHAREHOLDERS’ EQUITY
Shareholders’ equity increased by $302.0 million to $855.9 million at December 31, 2016, from $553.9 million at
December 31, 2015. The increase in equity was primarily the result of net income from continuing operations for 2016 of $87.7
million, the issuance of 6,700,000 shares of preferred stock, and the issuance of 2,641,677 shares of common stock. The
preferred stock issuances and common stock issuances resulted in increases to shareholders' equity of $161.9 million and $64.0
million, respectively. For more information regarding the issuance of preferred and common stock, and dividends paid to
preferred shareholders, see NOTE 13 - SHAREHOLDERS' EQUITY.
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, 2016 our borrowing capacity with the Federal Home Loan Bank was $4.1 billion of
which $0.9 billion was utilized in borrowings and commitments and $1.7 billion of available capacity was used to collateralize
state and municipal deposits. As of December 31, 2015 our borrowing capacity with the Federal Home Loan Bank was $3.7
billion of which $1.6 billion was utilized in borrowings and commitments and $1.4 billion of available capacity was used to
collateralize state and municipal deposits. As of December 31, 2016 and 2015, our borrowing capacity with the Federal Reserve
Bank of Philadelphia was $158.6 million and $59.2 million, respectively.
Net cash flows used in operating activities of continuing operations were $263.0 million for the year ended December 31, 2016,
compared to net cash flows used in operating activities of continuing operations of $352.7 million for the year ended
December 31, 2015. Origination of loans held for sale in excess of the proceeds from the sales of loans contributed $358.8
million and $421.7 million to cash flows used in operating activities during 2016 and 2015, respectively.
Investing activities of continuing operations used net cash flows of $570.7 million for the year ended December 31, 2016,
compared to the net cash flows used in investing activities of $1.3 billion for the year ended December 31, 2015. The net
increase in loans was $0.8 billion for the year ended December 31, 2016 compared to a net increase of $1.3 billion for the year
ended December 31, 2015.
Financing activities provided $0.7 billion for the year ended December 31, 2016 compared to $1.5 billion for the year ended
December 31, 2015. For 2016, increases in cash from deposits provided $1.2 billion, net proceeds from common stock
issuances provided $65.1 million, and net proceeds from preferred stock issuances provided $161.9 million offset by a net
decrease in short-term FHLB borrowings which used $0.8 billion. For 2015, increases in cash from deposits provided $1.4
billion, proceeds from federal funds purchased provided $70.0 million, and net proceeds from preferred stock issuances
provided $55.6 million.
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.
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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.
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.
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Generally, to be considered adequately capitalized, or well capitalized, respectively, an institution must at least maintain the
common equity Tier 1, Tier 1 and total risk based ratios and the Tier 1 leveraged ratio in excess of the related minimum ratios
set forth in the following table.
Actual
For Capital Adequacy
Purposes
(Minimum Plus Capital
Buffer)
To Be Well Capitalized
Under
Prompt Corrective Action
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(amounts in thousands)
December 31, 2016
Common equity Tier 1 (to risk-
weighted assets)
Customers Bancorp, Inc.
$ 628,139
8.487% $ 379,306
5.125%
N/A
N/A
Customers Bank
Tier 1 capital (to risk-weighted assets)
$ 857,421
11.626% $ 377,973
5.125% $ 479,380
6.500%
Customers Bancorp, Inc.
$ 844,755
11.414% $ 490,322
6.625%
N/A
N/A
Customers Bank
Total capital (to risk-weighted assets)
$ 857,421
11.626% $ 488,599
6.625% $ 590,006
8.000%
Customers Bancorp, Inc.
$ 966,097
13.053% $ 638,343
8.625%
N/A
N/A
Customers Bank
Tier 1 capital (to average assets)
$ 1,003,609
13.608% $ 636,101
8.625% $ 737,508
10.000%
Customers Bancorp, Inc.
$ 844,755
9.067% $ 372,652
4.000%
N/A
N/A
Customers Bank
December 31, 2015
Common equity Tier 1 (to risk-
weighted assets)
Customers Bancorp, Inc.
Customers Bank
Tier 1 capital (to risk-weighted assets)
Customers Bancorp, Inc.
Customers Bank
Total capital (to risk-weighted assets)
$ 857,421
9.233% $ 371,466
4.000% $ 464,333
5.000%
$ 500,624
$ 565,217
7.610% $ 296,014
8.620% $ 294,916
N/A
4.500%
4.500% $ 425,990
N/A
6.500%
$ 556,193
$ 565,217
8.460% $ 394,685
8.620% $ 393,221
N/A
6.000%
6.000% $ 524,295
N/A
8.000%
Customers Bancorp, Inc.
$ 698,323
10.620% $ 526,247
8.000%
N/A
N/A
Customers Bank
Tier 1 capital (to average assets)
$ 710,864
10.850% $ 524,295
8.000% $ 655,369
10.000%
Customers Bancorp, Inc.
$ 556,193
7.160% $ 310,812
4.000%
N/A
N/A
Customers Bank
$ 565,217
7.300% $ 309,883
4.000% $ 387,353
5.000%
At December 31, 2016 and 2015, the Bank and Bancorp met all capital adequacy requirements to which they were subject.
Capital Ratios
Customers continued to build the amount of capital during 2016. In general, for the past few years, capital growth has been
achieved by retained earnings, increases in capital from sales of common stock and issuance of preferred stock and
subordinated debt. During 2016, the Bancorp issued non-cumulative perpetual preferred stock, which meets the definition of
Tier 1 capital per regulatory guidelines, and common stock. The net proceeds of these offerings is included in the Bancorp's
Tier 1 capital ratios presented above. For more information relating to preferred and common stock offerings in 2016, see
NOTE 13 - SHAREHOLDERS' EQUITY.
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.
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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. To date, Customers Bank's board of directors declared a cash dividend to its sole shareholder, Customers Bancorp.
Cash dividends declared by the Bank and paid to Customers 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;
$5.1 million declared on January 20, 2016 and paid on March 10, 2016;
$6.0 million declared on April 27, 2016 and paid on June 27, 2016;
$6.5 million declared on July 27, 2016 and paid on September 12, 2016;
$7.8 million declared on October 26, 2016 and paid on December 12, 2016; and
$7.8 million declared on January 25, 2017 and payable on March 10, 2017.
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, 2016 and 2015, 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
December 31,
2016
2015
$
$
244,784
1,230,596
480,446
40,223
537,380
1,302,759
436,550
42,002
Commitments to fund loans, unfunded commitments to fund mortgage warehouse loans, unfunded commitments under lines of
credit and letters of credit are agreements to extend credit to or for the benefit of a customer in the ordinary course of our
business.
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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, 2016. 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
$
$
24,528
4,500
2,831,762
110,000
84,144
1,955,826
180,000
3,119
88,250
9,262
5,310
40,223
5,336,924
$
$
3,897
300
2,047,297
—
6,738
1,532,806
—
2,379
—
5,188
—
32,353
3,630,958
$
$
7,343
600
644,955
—
13,475
108,852
180,000
740
88,250
4,074
5,310
685
1,054,284
$
$
5,225
600
139,434
—
13,475
85,443
—
—
—
—
—
7,140
251,317
$
$
8,063
3,000
76
110,000
50,456
228,725
—
—
—
—
—
45
400,365
(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 4 –
SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION”.
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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,
2017, based upon the assets, liabilities and off-balance sheet financial instruments in existence at December 31, 2016. We have
also estimated changes to that estimated net interest income based upon interest rates rising or falling immediately (“rate
shocks”). For upward rate shocks modeling a rising rate environment, current market interest rates were increased immediately
by 100, 200, and 300 basis points. For downward rate shocks modeling a falling rate environment, current market rates were
only decreased immediately by 100 basis points due to the limitations of the current low interest rate environment that renders
the Down 200 and Down 300 rate shocks impractical. The following table reflects the estimated percentage change in
estimated net interest income for the year ending December 31, 2017, resulting from changes in interest rates.
Net change in net interest income
Rate Shocks
Up 3%
Up 2%
Up 1%
Down 1%
%
Change
1.0 %
4.1 %
3.7 %
(5.2)%
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, 2016, resulting
from shocks to interest rates.
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The following table reflects the estimated EVE at risk and the ratio of EVE to EVE adjusted assets at December 31, 2016,
resulting from the referenced shocks to interest rates.
Rate Shocks
Up 3%
Up 2%
Up 1%
Down 1%
From base
(24.6)%
(14.2)%
(5.9)%
2.3 %
The net changes in economic value of equity in all scenarios are within Customers Bank’s interest rate risk policy guidelines.
The matching of assets and liabilities may also be analyzed by examining the extent to which such assets and liabilities are
interest rate sensitive and by monitoring a bank’s interest rate sensitivity “gap”. An asset or liability is said to be interest rate
sensitive within a specific time period if it will mature or reprice within that time period. The interest rate sensitivity gap is
defined as the difference between the amount of interest earning assets maturing or repricing within a specific time period and
the amount of interest bearing liabilities maturing or repricing within that time period.
The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31,
2016 that are anticipated, based upon certain assumptions, to reprice or mature in each of the future time periods shown. Except
as stated below, the amount of assets and liabilities shown that reprice or mature during a particular period were determined in
accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an
approximation of the projected repricing of assets and liabilities at December 31, 2016 on the basis of contractual maturities,
anticipated prepayments, and scheduled rate adjustments within a three-month period and subsequent selected time
intervals. The loan amounts in the table reflect principal balances expected to be repaid and/or repriced as a result of
contractual amortization and anticipated prepayments of adjustable and fixed rate loans, and as a result of contractual-rate
adjustments on adjustable-rate loans.
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Table of Contents
Balance Sheet Gap Analysis at
December 31, 2016
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)
$
227,224
$
— $
— $
— $
— $
— $
227,224
15,937
3,527,715
—
15,395
134,487
—
3,770,876
149,882
—
—
29,296
299,878
71,763
400,937
—
105,435
81,138
1,894,080
2,212,847
—
—
1,999,515
2,293,985
—
—
226,932
160,179
—
387,111
327,064
474,133
8,229,186
71,763
9,002,306
327,064
3,770,876
149,882
400,937
1,999,515
2,293,985
714,175
$
9,329,370
Other interest-bearing deposits
$
370,796
$
165,371
$
305,690
$
946,163
$
503,588
$ 1,220,342
$
3,511,950
Time deposits
Other borrowings
Subordinated debt
Total interest-bearing liabilities
Non-interest-bearing liabilities
Shareholders’ equity
483,733
591,800
—
763,392
100,000
—
803,079
80,000
—
646,483
180,000
—
1,446,329
1,028,763
1,188,769
1,772,646
35,079
—
33,682
—
63,395
—
397,939
—
135,075
—
—
638,663
97,387
—
—
—
108,783
1,329,125
429,051
868,542
2,831,762
951,800
108,783
7,404,295
1,056,533
868,542
Total liabilities and shareholders’ equity
1,481,408
1,062,445
1,252,164
2,170,585
736,050
2,626,718
$
9,329,370
Interest sensitivity gap
$ 2,289,468
$
(912,563)
$ (851,227)
$ (171,070)
$ 1,557,935
$ (1,912,543)
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
$ 1,376,905
$
525,678
$
354,608
$ 1,912,543
$
—
24.5%
14.8%
5.6%
3.8%
20.5%
0.0%
260.7%
158.4%
118.0%
116.3%
141.8%
121.6%
As shown above, we have a positive cumulative gap (cumulative interest sensitive assets are higher than cumulative interest
sensitive liabilities) within the next year, which generally indicates that an increase in rates may lead to an increase in net
interest income, and a decrease in rates may lead to a decrease 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.
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Table of Contents
Item 8.
Financial Statements and Supplementary Data
Financial Statements for the three years ended
December 31, 2016, 2015 and 2014
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, 2016 and 2015
Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Comprehensive Income for the years ended December 31, 2016, 2015 and 2014
Consolidated Statements of Changes In Shareholders’ Equity for the years ended December 31, 2016, 2015
and 2014
Consolidated Statements of Cash Flows for the years ended December 31, 2016, 2015 and 2014
Notes to Consolidated Financial Statements for the years ended December 31, 2016, 2015 and 2014
97
98
99
100
101
102
103
105
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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, 2016 and 2015, and the related consolidated statements of income and comprehensive income, changes in
shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. These consolidated
financial statements are the responsibility of the Bancorp’s management. Our responsibility is to express an opinion on these
consolidated 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 presentation of the financial statements and schedules. 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 at December 31, 2016 and 2015, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2016, 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, 2016, 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 March 8, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Philadelphia, Pennsylvania
March 8, 2017
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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, 2016, 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, 2016, 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, 2016 and 2015 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, 2016, and our report dated March 8, 2017 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
Philadelphia, Pennsylvania
March 8, 2017
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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 $2,117,510 and $1,757,807 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
Bank premises and equipment, net
Bank-owned life insurance
Other real estate owned
Goodwill and other intangibles
Assets held for sale
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
Liabilities held for sale
Accrued interest payable and other liabilities
Total liabilities
Commitments and contingencies (NOTES 18 and 22)
Shareholders’ equity:
Preferred stock, par value $1.00 per share; liquidation preference $25.00 per share;
100,000,000 shares authorized, 9,000,000 and 2,300,000 shares issued and outstanding
as of December 31, 2016 and 2015
Common stock, par value $1.00 per share; 200,000,000 shares authorized; 30,820,177
and 27,432,061 shares issued as of December 31, 2016 and 2015; 30,289,917 and
26,901,801 shares outstanding as of December 31, 2016 and 2015
Additional paid in capital
Retained earnings
Accumulated other comprehensive loss, net
Treasury stock, at cost (530,260 shares as of December 31, 2016 and 2015)
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to the consolidated financial statements.
$
$
$
December 31,
2016
2015
$
$
$
17,485
227,224
244,709
493,474
2,117,510
6,142,390
(37,315)
6,105,075
68,408
23,690
12,259
161,494
3,108
3,639
79,271
70,099
9,382,736
512,664
6,334,316
6,846,980
83,000
868,800
87,123
108,783
484,797
47,381
8,526,864
53,550
211,043
264,593
560,253
1,797,064
5,452,895
(35,647)
5,417,248
90,841
19,939
11,146
157,211
5,057
3,651
2,680
68,522
8,398,205
408,874
5,253,559
5,662,433
70,000
1,625,300
86,457
108,685
247,139
44,289
7,844,303
217,471
55,569
30,820
427,008
193,698
(4,892)
27,432
362,607
124,511
(7,984)
(8,233)
855,872
9,382,736
$
(8,233)
553,902
8,398,205
$
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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
Interchange and card revenue
Gain (loss) on sale of investment securities
Impairment loss on investment securities
Other
Total non-interest income
Non-interest expense:
Salaries and employee benefits
Technology, communication and bank operations
FDIC assessments, taxes, and regulatory fees
Professional services
Occupancy
Loan workout
Other real estate owned
Advertising and promotion
Other
Total non-interest expense
Income from continuing operations before income tax expense
Income tax expense
Net income from continuing operations
Loss from discontinued operations before tax expense
Income tax benefit from discontinued operations
Net loss from discontinued operations
Net income
Preferred stock dividend
Net income available to common shareholders
Basic earnings per common share from continuing operations
Basic earnings per common share
Diluted earnings per common share from continuing operations
Diluted earnings per common share
See accompanying notes to the consolidated financial statements.
100
For the Years Ended December 31,
2015
2014
2016
$
$
$
$
$
$
233,349
69,469
14,293
5,428
322,539
48,249
6,438
11,597
6,739
73,023
249,516
2,345
247,171
11,547
4,736
3,685
1,140
969
620
25
(7,262)
7,705
23,165
67,877
12,888
12,568
11,017
9,846
2,063
1,953
576
12,429
131,217
139,119
51,412
87,707
(14,524)
(5,519)
(9,005)
78,702
9,515
69,187
2.83
2.51
2.61
2.31
$
$
$
$
$
$
182,280
51,553
10,405
5,612
249,850
33,973
6,096
6,743
6,739
53,551
196,299
20,566
175,733
10,394
7,006
4,047
943
741
536
(85)
—
3,990
27,572
56,341
9,379
10,110
9,386
8,467
1,127
2,516
697
9,545
107,568
95,737
32,664
63,073
(7,242)
(2,752)
(4,490)
58,583
2,493
56,090
2.26
2.09
2.11
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
532
3,191
—
3,494
25,126
46,083
8,466
11,116
7,218
8,063
1,706
3,601
1,180
9,355
96,788
65,514
20,982
44,532
(2,126)
(808)
(1,318)
43,214
—
43,214
1.67
1.62
1.59
1.55
Table of Contents
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in thousands)
For the Years Ended December 31,
2016
2015
2014
Net income from continuing operations
Net loss from discontinued operations
Net income
$
$
87,707
(9,005)
78,702
$
63,073
(4,490)
58,583
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) on securities arising during the
period
Income tax effect
Reclassification adjustments for losses (gains) on securities included in
net income
Income tax effect
Net unrealized gains (losses) on available-for-sale securities
Unrealized losses on cash flow hedges:
Unrealized losses arising during the period
Income tax effect
Reclassification adjustment for losses included in net income
Income tax effect
Net unrealized losses on cash flow hedges
Other comprehensive income (loss), net of income tax effect
(3,335)
1,317
7,237
(2,714)
2,505
(1,093)
464
1,946
(730)
587
3,092
Comprehensive income
$
81,794
$
See accompanying notes to the consolidated financial statements.
(10,140)
3,759
85
(32)
(6,328)
(2,532)
998
—
—
(1,534)
(7,862)
50,721
$
44,532
(1,318)
43,214
17,437
(6,103)
(3,191)
1,117
9,260
(1,945)
681
—
—
(1,264)
7,996
51,210
101
Table of Contents
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the Years Ended December 31, 2016, 2015 and 2014
(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
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
2,300,000
55,569
—
—
—
—
—
—
—
—
24,224,151
$ 24,756
$
307,231
$
71,008
$
(8,118) $
(8,254) $
386,623
—
—
—
—
—
—
—
—
—
44,532
(1,318)
—
—
—
7,996
2,429,375
2,429
43,364
(45,801)
—
546
91,457
—
1
92
4,209
5
1,013
—
—
—
—
—
—
—
—
—
—
—
—
—
—
44,532
(1,318)
7,996
(8)
4,209
6
1,105
26,745,529
27,278
355,822
68,421
(122)
(8,254)
443,145
—
—
—
—
—
—
7,611
—
—
—
—
—
—
8
—
—
—
—
—
4,862
90
148,661
146
1,833
63,073
(4,490)
—
—
(2,493)
—
—
—
—
—
(7,862)
—
—
—
—
—
—
—
—
—
—
—
—
21
63,073
(4,490)
(7,862)
55,569
(2,493)
4,862
98
2,000
2,300,000
55,569
26,901,801
27,432
362,607
124,511
(7,984)
(8,233)
553,902
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
87,707
(9,005)
—
—
—
3,092
6,700,000
161,902
—
—
—
—
—
—
—
—
2,641,677
2,642
61,389
—
—
—
345,414
—
—
—
345
—
—
6,189
1,186
401,025
401
(4,363)
—
(9,515)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
87,707
(9,005)
3,092
64,031
161,902
(9,515)
6,189
1,531
(3,962)
9,000,000
$ 217,471
30,289,917
$ 30,820
$
427,008
$ 193,698
$
(4,892) $
(8,233) $
855,872
Balance, December 31,
2013
Net income from
continuing operations
Net loss from
discontinued operations
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 from
continuing operations
Net loss from
discontinued operations
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
Net income from
continuing operations
Net loss from
discontinued operations
Other comprehensive
income
Issuance of common
stock, net of offering
costs of $2,238
Issuance of preferred
stock, net of offering
costs of $5,598
Preferred stock dividends
Share-based
compensation expense
Exercise of warrants
Issuance of common
stock under share-based-
compensation
arrangements
Balance, December 31,
2016
See accompanying notes to the consolidated financial statements.
102
Table of Contents
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Cash Flows from Operating Activities of Continuing Operations
Net income from continuing operations
Adjustments to reconcile net income to net cash (used in) provided by operating activities of
continuing operations:
Provision for loan losses, net of change to FDIC receivable and clawback liability
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 Operating Activities of Continuing Operations
Cash Flows from Investing Activities of Continuing Operations
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 proceeds from (purchases of) FHLB, Federal Reserve Bank, and other restricted stock
(Payments to) 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 of Continuing Operations
Cash Flows from Financing Activities of Continuing Operations
Net increase in deposits
Net (decrease) 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 of Continuing Operations
Net (Decrease) Increase in Cash and Cash Equivalents from Continuing Operations
Discontinued Operations:
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net cash flows provided by (Used In) discontinued operations
Net (Decrease) Increase in Cash and Cash Equivalents
Cash and Cash Equivalents – Beginning
Cash and Cash Equivalents – Ending
103
For the Years Ended December 31,
2016
2015
2014
$
87,707
$
63,073
$
44,532
2,345
3,569
6,492
(2,579)
891
7,237
(3,685)
(36,130,924)
35,772,081
255
405
130
1,473
(4,736)
(9,982)
6,278
(263,043)
20,566
3,641
5,547
(10,092)
858
85
(4,479)
(29,925,763)
29,504,104
(2,430)
832
761
992
(7,006)
(12,021)
8,635
(352,697)
14,747
3,583
5,237
(6,187)
821
(3,191)
(5,344)
(18,138,339)
17,553,196
(2,409)
(273)
966
1,979
(3,702)
(15,210)
9,606
(539,988)
(5,000)
(231,703)
(164,940)
64,701
2,852
(783,290)
—
133,104
—
619
22,433
(2,049)
(5,117)
1,051
(570,696)
1,184,549
(831,500)
13,000
75,000
—
—
161,902
(9,051)
1,532
—
65,088
660,520
(173,219)
(27,419)
(28,973)
209,727
153,335
(19,884)
264,593
244,709
$
$
76,331
806
(1,341,348)
—
248,060
(15,000)
3,384
(8,839)
3,917
(1,836)
8,890
(1,257,338)
1,366,239
(17,700)
70,000
25,000
—
—
55,569
(2,314)
98
—
806
1,497,698
(112,337)
(3,951)
(888)
10,746
5,907
(106,430)
371,023
264,593
$
49,195
213,249
(1,814,317)
(309,927)
162,724
(30,465)
—
(39,578)
5,446
(1,270)
7,991
(1,921,892)
1,573,167
633,500
—
265,000
133,142
(2,000)
—
—
6
—
77
2,602,892
141,012
(2,510)
(28)
(519)
(3,057)
137,955
233,068
371,023
(continued)
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,
2016
2015
2014
$
$
71,216
$
57,251
51,313
$
38,734
703
$
3,467
$
—
25,118
—
30,365
37,580
29,843
14,042
164,681
18,826
104
Table of Contents
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); Manhattan, New York; and nationally for certain loan and deposit products. The Bank
has 14 full-service branches and provides commercial banking products, primarily loans and deposits. Customers Bank
administratively supports loan and other financial products to customers through its limited purpose offices in Boston,
Massachusetts, Providence, Rhode Island, Portsmouth, New Hampshire, Manhattan and Melville, New York and Philadelphia,
Pennsylvania. The Bank also provides liquidity to residential mortgage originators nationwide through commercial loans to
mortgage companies.
Through BankMobile, a division of Customers Bank, Customers offers state of the art high tech digital banking services to
consumers, students, and the "under banked" nationwide. The combination of the BankMobile technology software platform
with the OneAccount Student Checking and Refund Management Disbursement Services business (the "Disbursement
business") acquired from Higher One Holdings, Inc. and Higher One, Inc. (together, "Higher One") propelled BankMobile to
one of the largest mobile banking services in the United States by number of customers. Customers has announced its intent to
sell BankMobile and anticipates the sale to close in 2017. Accordingly, BankMobile has been classified as "held for sale" on
the consolidated balance sheets and BankMobile's operating results and associated cash flows have been presented as
discontinued operations in the consolidated financial statements, see NOTE 3 - DISCONTINUED OPERATIONS.
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
On June 15, 2016, Customers completed the acquisition of substantially all the assets and the assumption of certain liabilities of
the Disbursement business from Higher One. The acquisition was completed pursuant to the terms of an Asset Purchase
Agreement (the "Purchase Agreement") dated as of December 15, 2015 between Customers and Higher One. Under the terms
of the Purchase Agreement, Customers also acquired all existing relationships with vendors and educational institutions, and all
intellectual property and assumed normal business related liabilities. In conjunction with the acquisition, Customers hired
approximately 225 Higher One employees primarily located in New Haven, Connecticut that manage the Disbursement
business and serve the Disbursement business customers.
The transaction contemplates aggregate guaranteed payments to Higher One of $42 million. The aggregate purchase price
payable by Customers is $37 million in cash, with the payments to be made as follows: (i) 17 million in cash paid upon the
closing of the acquisition, (ii) $10 million in cash to be paid upon the first anniversary of the closing and (iii) $10 million in
cash to be paid upon the second anniversary of the closing. In addition, concurrently with the closing, the parties entered into a
Transition Services Agreement pursuant to which Higher One will provide certain transition services to Customers through
June 30, 2017. As consideration for these services, Customers will pay Higher One an additional $5 million in cash. Customers
also will be required to make additional payments to Higher One if, during the three years following the closing, revenues from
the Disbursement business exceed $75 million in a year. The possible payment will be equal to 35% of the amount the
Disbursement business related revenue exceeds $75 million in each year. As of December 31, 2016, Customers has not
recorded a liability for any additional contingent consideration payable under the Purchase Agreement.
As specified in the Purchase Agreement, the payments of $10 million payable to Higher One upon each of the first and second
anniversary of the transaction closing were placed into an escrow account with a third party. The escrow account with $20.0
million in aggregate restricted cash and the corresponding obligation to pay Higher One pursuant to the terms of the Purchase
Agreement have been assigned to BankMobile and are presented in "Assets held for sale" and "Liabilities held for sale" on the
December 31, 2016 consolidated balance sheets. For more information regarding Customers' plans for BankMobile and the
presentation of BankMobile within the consolidated financial statements, see NOTE 3 - DISCONTINUED OPERATIONS.
105
Table of Contents
The following table presents the fair values of the assets acquired and liabilities assumed as of the June 15, 2016 acquisition
date of the Disbursement business:
(amounts in thousands)
Fair value of assets acquired:
Developed software
Other intangible assets
Accounts receivable
Prepaid expenses
Fixed assets, net
Total assets acquired
Fair value of liabilities assumed:
Other liabilities
Deferred revenue
Total liabilities assumed
Net assets acquired
Transaction cash consideration (1)
Goodwill recognized
June 15, 2016
Preliminary
Adjusted
$
27,400 $
9,300
2,784
1,180
229
40,893
5,531
2,655
8,186
32,707 $
37,000 $
4,293 $
$
$
$
27,400
9,300
2,784
418
229
40,131
5,735
2,655
8,390
31,741
37,000
5,259
(1) Includes $10 million payable to Higher One upon each of the first and second anniversary of the transaction closing, which
has been placed into an escrow account with a third party (aggregate amount of $20 million).
The assets acquired and liabilities assumed were initially presented at their estimated fair values based on a preliminary
allocation of the purchase price. In many cases, the determination of these fair values required management to make estimates
about discount rates, future expected cash flows, market conditions and other future events that were highly subjective and
subject to change. The fair value estimates were considered preliminary and subject to change for up to one year after the
closing date of the acquisition as additional information became available. Based on a preliminary purchase price allocation,
Customers recorded $4.3 million in goodwill as a result of the acquisition. At December 31, 2016, Customers recorded
adjustments to the estimated fair values of prepaid expenses and other liabilities, which resulted in a $1.0 million increase in
goodwill. The adjusted amount of goodwill of $5.3 million reflects the excess purchase price over the estimated fair value of
the net assets acquired. The goodwill recorded is deductible for tax purposes. Customers does not anticipate any additional
adjustments to the purchase price allocation.
The fair value for the developed software was estimated based on expected revenue attributable to the software utilizing a
discounted cash flow methodology giving consideration to potential obsolescence. The developed software was being
amortized over ten years based on the estimated economic benefits received. The fair values for the other intangible assets
represent the value of existing student and university relationships and a non-compete agreement with Higher One based on
estimated retention rates and discounted cash flows. Other intangible assets were being amortized over an estimated life
ranging from four to twenty years. Because BankMobile has been classified as held for sale at December 31, 2016, these assets
are reported at the lower of cost or market on the consolidated balance sheet and are no longer being amortized. At December
31, 2016, Customers estimated the fair values of these assets to be higher than their amortized cost basis. Accordingly, a lower
of cost or fair value adjustment was not recorded in fourth quarter 2016.
In connection with the Disbursement business acquisition, Customers incurred acquisition related expenses of $1.2 million for
the year ended December 31, 2016, related predominantly to professional services. These expenses are presented in "Net loss
from discontinued operations" on the consolidated statements of income.
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Table of Contents
NOTE 3 – DISCONTINUED OPERATIONS
In the third quarter 2016, Customers announced its intent to sell BankMobile and anticipates a sale to close within one year.
Because BankMobile met the criteria to be classified as held for sale at December 31, 2016, the assets and liabilities of
BankMobile have been presented as "Assets held for sale" and "Liabilities held for sale" on the consolidated balance sheets at
December 31, 2016 and 2015. BankMobile's operating results and associated cash flows have been presented as "Discontinued
operations" within the accompanying consolidated financial statements and prior period amounts have been reclassified to
conform with the current period presentation. BankMobile will continue to be presented as "Discontinued operations" until
completion of the sale or at such time that BankMobile no longer meets the held-for-sale criteria.
The following summarized financial information related to BankMobile has been segregated from continuing operations and
reported as discontinued operations for the periods presented. The amounts presented below exclude the effect of internal
allocations made by management when assessing the performance of the BankMobile operating segment. For more
information on the BankMobile operating segment, see NOTE 25 - BUSINESS SEGMENTS.
(amounts in thousands)
Discontinued operations:
Interest income
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Loss from discontinued operations before income tax benefit
Income tax benefit
Net loss from discontinued operations
For the Years Ended December 31,
2015
2014
2016
$
$
— $
19
(19)
696
33,205
47,014
(14,524)
(5,519)
(9,005) $
— $
9
(9)
—
145
7,378
(7,242)
(2,752)
(4,490) $
—
—
—
—
—
2,126
(2,126)
(808)
(1,318)
The assets and liabilities held for sale on the consolidated balance sheets as of December 31, 2016 and 2015 were as follows:
ASSETS
LIABILITIES
(amounts in thousands)
Restricted cash (1)
Loans receivable
Bank premises and equipment, net
Goodwill and other intangibles
Other assets
Assets held for sale
Deposits:
Demand, non-interest bearing
Interest bearing
Total deposits
Accrued expenses and other liabilities (1)
Liabilities held for sale
December 31,
2016
2015
$
20,000
$
12,248
510
13,982
32,531
79,271
$
—
584
385
—
1,711
2,680
453,394
$
244,805
3,401
456,795
28,002
2,263
247,068
71
$
484,797
$
247,139
$
$
(1) Includes $10 million payable to Higher One upon each of the first and second anniversary of the transaction closing, which
has been placed into an escrow account with a third party (aggregate amount of $20 million).
At December 31, 2016, Customers anticipates that cash, securities or loans (or a combination thereof) with a market value
equal to the amount of BankMobile deposits outstanding at the time the anticipated sale closes will be included in the net assets
transferred pursuant to the terms of the contemplated purchase and sale agreement.
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Table of Contents
NOTE 4 – 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, valuation of deferred tax assets, other-than-
temporary impairment losses on securities, fair values of financial instruments, and annual goodwill and intangible asset
impairment analysis. Certain amounts reported in the 2015 and 2014 financial statements have been reclassified to conform to
the 2016 presentation.
In the third quarter 2016, Customers announced its intent to sell BankMobile and expects a sale to close within one year.
Because BankMobile met the criteria to be classified as held for sale at December 31, 2016, the assets and liabilities of
BankMobile have been presented as "Assets held for sale" and "Liabilities held for sale" on the consolidated balance sheets at
December 31, 2016 and 2015. BankMobile's operating results and associated cash flows have been presented as "Discontinued
operations" within the accompanying consolidated financial statements and prior period amounts have been reclassified to
conform with the current period presentation.
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, 2016
and 2015, these reserve balances were $149.3 million and $73.2 million, respectively.
In connection with the acquisition of the Disbursement business from Higher One, Customers placed $20 million in an escrow
account with a third party to be paid to Higher One upon each of the first and second anniversary of the transaction closing.
This cash is restricted in use and is reported in "Assets held for sale" on the consolidated balance sheets as of December 31,
2016. For more information, see NOTE 3 - DISCONTINUED OPERATIONS.
Business Combinations
Business combinations are accounted for by applying the acquisition method in accordance with Accountings Standards
Codification ("ASC") 805, Business Combinations. Under the acquisition method, identifiable assets acquired and liabilities
assumed are measured at their fair values as of the date of acquisition, and are recognized separately from goodwill. Results of
operations of the acquired entity are included in the consolidated statement of income from the date of acquisition.
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Table of Contents
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 classification determines the accounting as follows:
Available for sale: Investment 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 were no securities classified as held
to maturity as of December 31, 2016 and 2015.
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 the amortized cost basis. If neither of these
circumstances applies to a security, but Customers does not expect to recover the entire amortized cost basis, an other-than-
temporary impairment has occurred that must be separated into two categories for debt securities: (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, 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.
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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 reported at fair
value,with changes in fair value recognized in earnings in the period they occur. Upon sale, any difference between the
proceeds received and the carrying amount of the loan is 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.
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 made 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 previously 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.
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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 loan type, 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
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
On July 11, 2016, Customers entered into an agreement to terminate all existing rights and obligations pursuant to the loss
sharing agreements with the FDIC. In connection with the termination agreement, Customers paid the FDIC $1.4 million as
final payment under these agreements. The negotiated settlement amount was based on net losses incurred on the covered
assets through September 30, 2015, adjusted for cash payments to and cash receipts from the FDIC as part of the December 31,
2015 and March 31, 2016 certifications. Consequently, loans and other real estate owned previously reported as covered assets
pursuant to the loss sharing agreements are no longer reported as covered assets as of June 30, 2016.
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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, owner and non-owner occupied 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, peer and industry data, 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 as considered appropriate.
The impaired loan component of the allowance for loan losses generally relates to loans for which it is probable that the Bank
will be unable to collect all contractual principal and interest due. Customers analyzes certain loans in its portfolio for
impairment in accordance with ASC 310-10-35. Customers' impaired loans generally include loans that have been (i) placed on
non-accrual, (ii) restructured in a troubled debt restructuring, regardless of their payment status, and (iii) charged-off to their net
realizable value. 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
equity lines of credit and other consumer loans. These pools of loans are evaluated for loss exposure based upon industry, peer
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 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 generally considers include 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;
• Risk ratings;
• Changes in the values of collateral for collateral dependent loans;
• Experience, ability, and depth of lending management and staff; and
• Other external factors, such as changes in the legal, regulatory or competitive environment.
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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 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.
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.
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 contractual loan obligation based upon financial
information available and valuation of the underlying collateral. Shortfalls in the underlying collateral value for loans
determined to be collateral dependent are charged-off immediately.
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The Bank also 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 an impaired loan. 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 in certain circumstances, such
as when 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 is assigned at loan origination and indicates
management's estimate of credit quality. Risk ratings are reviewed on a periodic or “as needed” basis. Consumer and
manufactured housing loans are evaluated primarily 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 9 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES.
Impaired Loans
A loan is generally 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. Customers' impaired loans
generally include loans that have been (i) placed on non-accrual, (ii) restructured in a troubled debt restructuring, regardless of
their payment status, and (iii) charged-off to their net realizable value. 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 generally 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 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.
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Goodwill and Other Intangible Assets
Goodwill represents the excess of cost over the identifiable net assets of businesses acquired. Other intangible assets represent
purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal
rights. Intangible assets that have finite lives, such as customer and university relationship intangibles and non-compete
agreements, are amortized over their estimated useful lives and are subject to impairment testing. Goodwill and other
intangible assets recognized as part of the Disbursement business acquisition were based on a preliminary allocation of the
purchase price. In fourth quarter 2016, Customers recorded adjustments to the estimated fair values of the net assets acquired,
which resulted in a $1.0 million increase in goodwill. For more information regarding the net assets acquired and goodwill
recorded upon acquisition of the Disbursement business, see NOTE 2 - ACQUISITION ACTIVITY.
Goodwill and other intangible assets are reviewed for impairment annually as of October 31 and between annual tests when
events and circumstances indicate that impairment may have occurred. Impairment of goodwill is a condition that exists when
the carrying amount exceeds its implied fair value. A qualitative factor test can be performed to determine whether it is
necessary to perform the two-step quantitative 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.
Intangible assets subject to amortization are reviewed for impairment under ASC 360 which requires that a long-lived asset or
asset group be tested for recoverability whenever events or changes in circumstances indicate that the carrying value may not
be recoverable. The carrying value of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset.
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 evidence of impairment on the balance of goodwill and other
intangible assets. As of December 31, 2016 and 2015, goodwill and other intangible assets totaled $3.6 million and $3.7
million, respectively, from continuing operations. Goodwill and other intangible assets acquired as part of the Disbursement
business acquisition of $14.0 million have been subsequently reclassified and are presented in "Assets held for sale" on the
consolidated balance sheets at December 31, 2016.
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, 2016 and 2015 was $68.4 million and $90.8 million, respectively, which included $51.3
million and $78.9 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.
FDIC Loss Sharing Receivable and Clawback Liability
The FDIC loss sharing receivable was measured separately from the related covered assets because it was not contractually
embedded in the assets and was not transferable if the assets were 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 expected to collect from the FDIC was accreted into
interest income over the life of the FDIC loss sharing receivable.
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The FDIC loss sharing receivable was 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 were measured on the same
basis as the related covered assets. Increases in estimated cash flows on the covered assets reduced the FDIC loss sharing
receivable and decreases in estimated cash flows on the covered assets increased the FDIC loss sharing receivable. Increases to
the FDIC loss sharing receivable resulting from reduced cash flow estimates on the covered loans were recorded as a reduction
to the provision for loan losses and decreases to the FDIC loss sharing receivable were 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 were recorded net of the FDIC receivable balance as an increase to other real estate owned expense (a
component of non-interest expense).
The FDIC loss sharing receivable balance was 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 approached
expiration and the estimated losses in the covered loans had 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 was set to expire in third quarter 2017.
The final maturity of the FDIC loss sharing agreements was scheduled for 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 was 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 anticipated that it would be required
to pay the FDIC at the end of its loss sharing agreements.
On July 11, 2016, Customers entered into an agreement to terminate all existing rights and obligations pursuant to the loss
sharing agreements with the FDIC. In connection with the termination agreement, Customers paid the FDIC $1.4 million as
final payment under these agreements. The negotiated settlement amount was based on net losses incurred on the covered
assets through September 30, 2015, adjusted for cash payments to and cash receipts from the FDIC as part of the December 31,
2015 and March 31, 2016 certifications. Consequently, loans and other real estate owned previously reported as covered assets
pursuant to the loss sharing agreements were no longer reported as covered assets as of June 30, 2016.
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.
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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 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
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 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 closing market price of Customers’ common stock at the date of grant is generally 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. Customers' accounting policy election is to
recognize forfeitures as they occur.
In 2014, the shareholders of Customers 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.
Segment Information
In connection with the acquisition of the Disbursement business from Higher One and the combination of that business with the
BankMobile technology platform late in second quarter 2016, Customers' chief operating decision makers, our Chief Executive
Officer and Board of Directors, began allocating resources and assessing performance for two distinct business segments,
"Community Business Banking" and "BankMobile." The Community Business Banking segment is delivered predominately to
commercial customers in Southeastern Pennsylvania, New York, New Jersey, Massachusetts, Rhode Island and New Hampshire
through a single point of contact business model and provides liquidity to residential mortgage originators nationwide through
commercial loans to mortgage companies. The BankMobile segment provides state of the art high tech digital banking and
disbursement services to consumers, students, and the "under banked" nationwide. BankMobile, as a division of Customers
Bank, is a full service bank that is accessible to customers anywhere and anytime through the customer's smartphone or other
web-enabled device. Prior to third quarter 2016, Customers operated in one business segment, “Community Banking.”
Additional information regarding reportable segments can be found in NOTE 25 - BUSINESS SEGMENTS.
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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. In December 2016,
Customers entered into three additional pay fixed interest rate swaps totaling $175.0 million notional balance to hedge the
variable cash flows associated with the forecasted issuance of debt. Customers documented and designated these interest rate
swaps as cash flow hedges. 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.
As of December 31, 2016, Customers had four financial derivatives designated in qualifying hedge relationships with a current
notional balance of $325.0 million.
Customers has also purchased and sold credit derivatives to either hedge or participate in the performance risk associated with
some of its counterparties. These derivatives 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. At December 31, 2016, Customers had an
outstanding notional balance of credit derivatives of $44.9 million.
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 Customers’ 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.
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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.
Recently Issued Accounting Standards and Updates
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No.
2017-04, Simplifying the Test for Goodwill Impairment. To simplify the subsequent measurement of goodwill, FASB
eliminated Step 2 from the goodwill impairment test. Namely, an entity had to perform procedures to determine the fair value at
the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure
that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination.
Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by
comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the
amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed
the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any
tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if
applicable. FASB also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a
qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same
impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each
reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative
assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments in this ASU are
effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Customers does not
expect the adoption of this ASU to have a significant impact on its financial statements and results of operations.
In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business. Under current guidance, there are
three elements of a business—inputs, processes, and outputs. While an integrated set of assets and activities (collectively
referred to as a “set”) that is a business usually has outputs, outputs are not required to be present. In addition, all the inputs and
processes that a seller uses in operating a set are not required if market participants can acquire the set and continue to produce
outputs, for example, by integrating the acquired set with their own inputs and processes. The amendments in this ASU provide
a criterion to determine when a set is not a business. The criterion requires that a set not be deemed to be a business when
substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a
group of similar identifiable assets. This criterion reduces the number of transactions that need to be further evaluated. If the
criterion is not met, the amendments in this ASU (1) require that to be considered a business, a set must include, at a minimum,
an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the
evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist
entities in evaluating whether both an input and a substantive process are present. The amendments in this ASU are effective
for annual periods beginning after December 15, 2017, including interim periods within those periods. Customers does not
expect the adoption of this ASU to have a significant impact on its financial statements and results of operations.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows Restricted Cash. The amendments in this
ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and
amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as
restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the
beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this ASU are
effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Customers does not
expect the adoption to this ASU to have a significant impact on its financial statements and results of operations.
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In October 2016, the FASB issued ASU No. 2016-17, Interests Held through Related Parties That Are under Common Control.
The amendments in this ASU do not change the characteristics of a primary beneficiary under current guidance. Namely, that a
primary beneficiary of a Variable Interest Entity (VIE) has: (1) the power to direct the activities of a VIE that most significantly
impact the VIE’s economic performance and (2) the obligation to absorb losses of the VIE that could potentially be significant
to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. If a reporting entity
satisfies the first characteristic, (i.e. it is the single decision maker of a VIE), the amendments in this ASU require that reporting
entity, in determining whether it satisfies the second characteristic of a primary beneficiary, to include all of its direct variable
interests in a VIE and, on a proportionate basis, its indirect variable interests in a VIE held through related parties, including
related parties that are under common control with the reporting entity. Therefore, under the amendments, a single decision
maker is not required to consider indirect interests held through related parties that are under common control with the single
decision maker to be the equivalent of direct interests in their entirety. Instead, a single decision maker is required to include
those interests on a proportionate basis consistent with indirect interests held through other related parties.
If, after performing that assessment, a reporting entity that is the single decision maker of a VIE concludes that it does not have
the characteristics of a primary beneficiary, the amendments continue to require that reporting entity to evaluate whether it and
one or more of its related parties under common control, as a group, have the characteristics of a primary beneficiary. If the
single decision maker and its related parties that are under common control, as a group, have the characteristics of a primary
beneficiary, then the party within the related party group that is most closely associated with the VIE is the primary beneficiary.
The amendments in this ASU are effective for public business entities for fiscal years beginning after December 15, 2016,
including interim periods within those fiscal years. Customers' adoption of this ASU in first quarter 2017 did not have a
significant impact on its financial statements and results of operations.
In October 2016, the FASB issued ASU No. 2016-16—Income Taxes, Intra-Entity Transfers of Assets Other Than Inventory.
This ASU requires that an entity recognize the income tax consequences of an intra-entity transfer of an asset other than
inventory when the transfer occurs. Consequently, the amendments in this ASU eliminate the exception for an intra-entity
transfer of an asset other than inventory. Two common examples of assets included in the scope of this ASU are intellectual
property and property, plant, and equipment. Intra-entity transfers of inventory will continue to follow existing US GAAP. The
amendments in this ASU do not include new disclosure requirements; however, existing disclosure requirements might be
applicable when accounting for the current and deferred income taxes for an intra-entity transfer of an asset other than
inventory. For public business entities, the amendments in this ASU are effective for annual reporting periods beginning after
December 15, 2017, including interim reporting periods within those annual reporting periods. Early adoption is permitted for
all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been
issued or made available for issuance. Customers is currently evaluating the impact of this ASU on its financial condition,
results of operations and consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and
Cash Payments. This ASU is aimed at reducing the existing diversity in practice with regards to the following specific items in
the Statement of Cash Flows:
1. Cash payments for debt prepayment or extinguishment costs will be classified in financing activities.
2. Upon settlement of zero-coupon bonds and bonds with insignificant cash coupons, the portion of the payment
attributable to imputed interest will be classified as an operating activity, while the portion of the payment
attributable to principal will be classified as a financing activity.
3. Cash paid by an acquirer that isn’t soon after a business combination for the settlement of a contingent
consideration liability will be separated between financing activities and operating activities. Cash payments
up to the amount of the contingent consideration liability recognized at the acquisition date will be classified
in financing activities; any excess will be classified in operating activities. Cash paid soon after the business
combination will be classified in investing activities.
4. Cash proceeds received from the settlement of insurance claims will be classified on the basis of the related
insurance coverage (that is, the nature of the loss). Cash proceeds from lump-sum settlements will be
classified based on the nature of each loss included in the settlement.
5. Cash proceeds received from the settlement of bank-owned life insurance (BOLI) policies will be classified
as cash inflows from investing activities. Cash payments for premiums on BOLI may be classified as cash
outflows for investing, operating, or a combination of both.
6. A transferor’s beneficial interest obtained in a securitization of financial assets will be disclosed as a non-cash
activity, and cash received from beneficial interests will be classified in investing activities.
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7. Distributions received from equity method investees will be classified using either a cumulative earnings
approach or a look-through approach as an accounting policy election.
The ASU contains additional guidance clarifying when an entity should separate cash receipts and cash payments and classify
them into more than one class of cash flows (including when reasonable judgment is required to estimate and allocate cash
flows) versus when an entity should classify the aggregate amount into one class of cash flows on the basis of predominance.
For public business entities, the amendments are effective for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. Customers is currently evaluating the impact of this ASU and does not expect this ASU to
have a material impact on the presentation of its statement of cash flows.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on
Financial Instruments. This ASU requires an entity to utilize a new impairment model known as the current expected credit
loss ("CECL") model to estimate lifetime expected credit loss and record an allowance that, when deducted from the amortized
cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is
expected to result in earlier recognition of credit losses. The ASU also requires new disclosures for financial assets measured at
amortized cost, loans, and available for sale debt securities. For public business entities, the amendments in this ASU are
effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Customers is
currently evaluating the impact of this ASU, initiating implementation efforts across the company, and planning for loss
modeling requirements consistent with lifetime expected loss estimates. The adoption of this ASU could have a material impact
on Customers' financial condition, results of operations and consolidated financial statements. The extent of the impact upon
adoption will likely depend on the characteristics of Customers loan portfolio and economic conditions at that date.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-
Based Payment Accounting. The FASB issued this ASU as part of its initiative to reduce complexity in accounting standards.
The areas for simplification in this ASU involve several aspects of the accounting for employee share-based payment
transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on
the statement of cash flows. Some areas for simplification apply only to non-public entities. For public business entities, the
amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual
periods. In addition, the amendments in this ASU eliminate the guidance in Topic 718 that was indefinitely deferred shortly
after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. In fourth quarter 2016, Customers elected
to early-adopt this ASU and has retroactively applied the guidance effective as of January 1, 2016. As a result of the early
adoption, Customers recognized excess tax benefits as a reduction of income tax expense of $4.1 million for the year ended
December 31, 2016, which would have been recognized as an increase in additional paid in capital prior to the adoption. The
adoption of the ASU resulted in an increase in weighted average diluted shares of 559,209 for the year ended December 31,
2016 as excess tax benefits are no longer included in assumed proceeds when determining diluted shares outstanding under the
treasury method. Customers adopted the amendments to presentation requirements for the statement of cash flows on a
prospective basis and the impact of adopting these amendments was not material.
The following tables provide a summary of the quarterly impact of the adoption of ASU 2016-09 on current and previously
reported financial statements and results of operations:
(amounts in thousands, except share and
per share amounts)
Statement of income
Quarter ended
September 30, 2016
Quarter ended
June 30, 2016
Quarter ended
March 31, 2016
As
Previously
Reported
As Reported
Under New
Guidance
As
Previously
Reported
As Reported
Under New
Guidance
As
Previously
Reported
As Reported
Under New
Guidance
Provision for income taxes
$
14,576
$
14,558
$
13,016
$
12,964
$
9,537
$
9,051
Net income
21,189
21,207
19,430
19,483
17,699
18,184
Net income available to common
shareholders
Basic earnings per share
Diluted earnings per share
Weighted-average number of common
shares - diluted
18,637
18,655
17,368
17,421
16,413
16,898
$
$
0.68
0.64
$
$
0.68
0.63
$
$
0.64
0.60
$
$
0.64
0.59
$
$
0.61
0.57
$
$
0.63
0.58
29,149,734
29,697,207
28,971,040
29,504,329
28,783,101
29,271,255
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In March 2016, the FASB issued ASU No. 2016-07, Investments - Equity Method and Joint Ventures. To simplify the
accounting for equity method investments, the amendments in the ASU eliminate the requirement in Topic 323, Investments -
Equity Method and Joint Venture, that an entity retroactively adopt the equity method of accounting if an investment qualifies
for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendments require
that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the
investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified
for equity method accounting. The ASU is effective for all entities for fiscal years beginning after December 15, 2016, and
interim periods within those fiscal years. The adoption of this ASU in first quarter 2017did not have a significant impact on
Customers' financial condition or results of operations.
In March 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging: Contingent Put and Call Options in Debt
Instruments. Topic 815, Derivatives and Hedging, requires that embedded derivatives be separated from the host contract and
accounted for separately as derivatives if certain criteria are met, including the “clearly and closely related” criterion. The
amendments in this ASU clarify the requirements for assessing whether contingent call (put) options that can accelerate the
payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment
under the amendments is required to assess the embedded call (put) options solely in accordance with the four-step decision
sequence. Namely, this decision sequence requires that an entity consider whether:
1.
the payoff is adjusted based on changes in an index;
2.
3.
4.
the payoff is indexed to an underlying other than interest rates or credit risk;
the debt involves a substantial premium or discount; and
the call (put) option is contingently exercisable.
The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are
determined to have a debt host) with embedded call (put) options. For public business entities, the amendments are effective
for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years.
The adoption of this ASU in first quarter 2017 did not have a significant impact on Customers' financial condition or results of
operations.
In March 2016, the FASB issued ASU No. 2016-05, Derivatives and Hedging: Effect of Derivative Contract Novations on
Existing Hedge Accounting Relationships. The term novation refers to replacing one counterparty to a derivative instrument
with a new counterparty. That change occurs for a variety of reasons, including financial institution mergers, intercompany
transactions, an entity exiting a particular derivatives business or relationship, an entity managing against internal credit limits,
or in response to laws or regulatory requirements. The amendments in this ASU clarify that a change in the counterparty to a
derivative instrument that has been designated as the hedging instrument under Topic 815, does not, in and of itself, require
dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. For public
business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15,
2016, and interim periods within those fiscal years. The adoption of this ASU in first quarter 2017 did not have a significant
impact on Customers' financial condition or results of operations.
In March 2016, the FASB issued ASU No. 2016-04, Liabilities - Extinguishments of Liabilities: Recognition of Breakage for
Certain Prepaid Stored-Value Products. When an entity sells a prepaid stored-value product (such as gift cards,
telecommunication cards, and traveler’s checks), it recognizes a financial liability for its obligation to provide the product
holder with the ability to purchase goods or services at a third-party merchant. When a prepaid stored-value product goes
unused wholly or partially for an indefinite time period, the amount that remains on the product is referred to as breakage.
There currently is diversity in the methodology used to recognize breakage. Subtopic 405-20, Extinguishment of Liabilities,
includes derecognition guidance for both financial liabilities and nonfinancial liabilities, and Topic 606, Revenue from
Contracts with Customers, includes authoritative breakage guidance but excludes financial liabilities. The amendments in this
ASU provide a narrow scope exception to the guidance in Subtopic 405-20 to require that breakage be accounted for consistent
with the breakage guidance in Topic 606. For public business entities, the amendments are effective for financial statements
issued for fiscal years beginning after December 15, 2017, and 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.
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In February 2016, the FASB issued 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 lessee. 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 this ASU on its
financial condition and results of operations and expects to recognize right-of-use assets and lease liabilities for substantially all
of its operating lease commitments disclosed in NOTE 10 - BANK PREMISES AND EQUIPMENT based on the present value
of unpaid lease payments as of the date of adoption.
In January 2016, the FASB issued 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 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 FASB issued ASU No. 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. The amendments in this ASU were effective for financial statements issued for annual periods
beginning after December 15, 2016, and interim periods within those annual periods. The adoption of this ASU in first quarter
2017 did not have a significant impact on Customers' financial condition or results of operations.
In September 2015, the FASB issued ASU No. 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 was 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 in first quarter 2016 did not have
a significant 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 the 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 was effective for interim
and annual periods beginning after December 15, 2015. The adoption of these ASUs on January 1, 2016 resulted in a
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reclassification adjustment, which reduced "Other borrowings" by $1.8 million and "Subordinated debt" by $1.3 million, with a
corresponding decrease in "Other assets" of $3.1 million as of December 31, 2015.
In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis. The guidance in this ASU
affects reporting entities that must determine whether they should consolidate certain legal entities. This ASU modifies the
evaluation of whether limited partnerships or similar legal entities are variable interest entities (VIEs) or voting interest entities,
eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis
of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships.
The guidance in this ASU was effective for annual and interim periods beginning after December 15, 2015. The adoption of this
ASU in first quarter 2016 did not have an impact on Customers' financial condition or results of operations.
In January 2015, the FASB issued ASU No. 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 in first quarter 2016 did not have an impact on Customers'
financial condition or results of operations.
In November 2014, the FASB issued ASU No. 2014-16, Derivatives and Hedging: 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 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 in first quarter 2016 did not have an impact on Customers'
financial condition or results of operations.
In August 2014, the FASB issued ASU No. 2014-13, Consolidation: 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 was effective in first quarter 2016.
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 No. 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 was effective in first quarter 2016. 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 No. 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 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
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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 No. 2015-14, Revenue from Contracts with Customers: 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.
In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent
Considerations (Reporting Revenue Gross versus Net). While the ASU does not change the core provisions of Topic 606, it
clarifies the implementation guidance on principal versus agent considerations. Namely, the ASU clarifies and offers guidance
to help determine when the reporting entity is providing goods or services to a customer itself (i.e., the entity is a principal), or
merely arranging for that good or service to be provided by the other party (i.e., the reporting entity is an agent). If the entity is
a principal, it recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the
specified good or service transferred to the customer. When the reporting entity is an agent, it recognizes revenue in the amount
of any fee or commission to which it expects to be entitled in exchange for arranging for the specified good or service to be
provided by the other party. An entity is a principal if it controls the specified good or service before that good or service is
transferred to a customer. The guidance includes indicators to assist in determining whether the control criteria are met. If a
contract with a customer includes more than one specified good or service, an entity could be a principal for some specified
goods or services and an agent for others.
In April 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance
Obligations and Licensing. This ASU clarifies guidance related to identifying performance obligations and licensing
implementation guidance contained in the new revenue recognition standard. The ASU includes targeted improvements based
on input the FASB received from the Transition Resource Group for Revenue Recognition and other stakeholders. The ASU
seeks to proactively address areas in which diversity in practice potentially could arise, as well as to reduce the cost and
complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis. The amendments in
this ASU affect the guidance in ASU 2014-09, Revenue from Contracts with Customers, which will be effective for fiscal years
beginning after December 31, 2017 for public entities.
In May 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and
Practical Expedients. This ASU clarifies certain aspects of Topic 606 guidance as follows:
• The objective of the collectibility assessment is to determine whether the contract is valid and represents a substantive
transaction on the basis of whether a customer has the ability and intention to pay the promised consideration in
exchange for the goods or services transferred.
• An entity can recognize revenue in the amount of consideration received when it has transferred control of the goods
or services, has no additional obligation to transfer goods or services, and the consideration received is nonrefundable.
• A reporting entity is permitted to make the accounting policy election to exclude amounts collected from customers for
all sales taxes from the transaction price.
• The measurement date is specified as being the contract inception, and variable consideration guidance applies only to
variability resulting from reasons other than the form of the consideration.
• As a practical expedient, a reporting entity is permitted to reflect the aggregate effect of all modifications that occur
before the beginning of the earliest period presented in accordance with Topic 606 when identifying the satisfied and
unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the
satisfied and unsatisfied performance obligations.
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• The ASU clarifies that a completed contract for purposes of transition is a contract for which all (or substantially all)
of the revenue was recognized under legacy GAAP before the date of initial application. Accounting for elements of a
contract that do not affect revenue under legacy GAAP are irrelevant to the assessment of whether a contract is
complete. In addition, the amendments in this ASU permit an entity to apply the modified retrospective transition
method either to all contracts or only to contracts that are not completed contracts.
The amendments in this ASU clarify that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting
period is not required to disclose the effect of the accounting change for the period of adoption. However, an entity is still
required to disclose the effect of the changes on any prior periods retrospectively adjusted.
The guidance in the revenue recognition ASUs listed above is effective for annual reporting periods beginning after
December 15, 2017, including interim reporting periods within that reporting period. Customers is currently evaluating the
impact of the various revenue recognition ASUs. The guidance does not apply to revenue associated with financial instruments,
including loans and securities. Customers is currently evaluating its non-interest revenue sources and does not anticipate the
adoption of these ASUs to have a material impact on its financial condition or results of operations.
NOTE 5 – 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 from continuing operations available to common shareholders (1)
Net loss from discontinued operations
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 common share from continuing operations
Basic loss per common share from discontinued operations
Basic earnings per common share
Diluted earnings per common share from continuing operations
Diluted loss per share from discontinued operations
Diluted earnings per common share
(1) Net income from continuing operations, net of preferred stock dividends
For the Years Ended
December 31,
2016
2015
2014
78,192
(9,005)
69,187
$
$
60,580
(4,490)
56,090
$
$
44,532
(1,318)
43,214
27,596,020
26,844,545
26,719,626
2,221,517
1,516,297
196,113
324,097
968,671
250,707
30,013,650
28,684,939
27,939,004
2.83
$
(0.33) $
$
2.51
2.61
$
(0.30) $
$
2.31
2.26
$
(0.17) $
$
2.09
2.11
$
(0.16) $
$
1.96
1.67
(0.05)
1.62
1.59
(0.05)
1.55
$
$
$
$
$
$
$
$
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
126
For the Years Ended
December 31,
2016
2015
2014
894,720
52,242
946,962
606,095
52,242
658,337
135,861
118,745
254,606
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NOTE 6 - 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, 2016 and 2015.
(amounts in thousands)
Balance, December 31, 2014
Current period:
Other comprehensive loss before
reclassifications
Amounts reclassified from accumulated other
comprehensive income to net income (2)
Net current-period other comprehensive loss
Balance, December 31, 2015
Current period:
Other comprehensive loss before
reclassifications
Amounts reclassified from accumulated other
comprehensive income to net income (2)
Net current-period other comprehensive income
Balance, December 31, 2016
Available-for-sale Securities
Unrealized
Gains
(Losses) (2)
1,142
$
Foreign
Currency
Items
Total
Unrealized
Gains
(Losses)
$
— $
1,142
Unrealized
Loss on Cash
Flow Hedge
$
(1,264) $
Total
(122)
(5,797)
(584)
(6,381)
(1,534)
(7,915)
53
(5,744)
(4,602)
—
(584)
(584)
53
(6,328)
(5,186)
—
(1,534)
(2,798)
53
(7,862)
(7,984)
(1,872)
(146)
(2,018)
(629)
(2,647)
3,793
1,921
(2,681) $
730
584
— $
4,523
2,505
(2,681) $
$
1,216
587
(2,211) $
5,739
3,092
(4,892)
(1) All amounts are presented net of tax. Amounts in parentheses indicate reductions to accumulated other comprehensive
income.
(2) Reclassification amounts for available-for-sale securities are reported as gain or loss on sale of investment securities or
impairment loss on investment securities on the consolidated statements of income. During the year ended December 31, 2016,
Customers reclassified $3.8 million of unrealized losses and $25 thousand of unrealized gains as impairment loss on investment
securities and gain (loss) on sale of investment securities, respectively, on the consolidated statements of income.
Reclassification amounts for cash flow hedges are reported as interest expense on FHLB advances on the consolidated
statements of income.
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NOTE 7 – INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities as of December 31, 2016 and 2015 are summarized as
follows:
(amounts in thousands)
Available for Sale:
Agency-guaranteed residential mortgage-backed
securities
Agency-guaranteed commercial real estate mortgage-
backed securities
Corporate notes (1)
Equity securities (2)
Total
Amortized
Cost
December 31, 2016
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
233,002
$
918
$
(2,657) $
231,263
204,689
44,932
15,246
—
401
—
$
497,869
$
1,319
$
(2,872)
(185)
—
(5,714) $
201,817
45,148
15,246
493,474
(1)
(2)
Includes subordinated debt issued by other bank holding companies.
Includes equity securities issued by a foreign entity.
(amounts in thousands)
Available for Sale:
Agency-guaranteed residential mortgage-backed
securities
Agency-guaranteed commercial real estate mortgage-
backed securities
Corporate notes (1)
Equity securities (2)
Total
Amortized
Cost
December 31, 2015
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
299,392
$
1,453
$
(2,741) $
298,104
206,719
39,925
22,514
—
320
—
$
568,550
$
1,773
$
(3,849)
(178)
(3,302)
(10,070) $
202,870
40,067
19,212
560,253
(1)
(2)
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 (losses)
For the Years Ended December 31,
2016
2015
2014
$
$
$
2,852
26
(1)
25
$
$
$
806
$
213,249
— $
(85)
(85) $
3,191
—
3,191
These gains and losses were determined using the specific identification method and were included in non-interest income.
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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:
(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
Agency-guaranteed residential mortgage-backed securities
Agency-guaranteed commercial mortgage-backed securities
Total debt securities
December 31, 2016
Available for Sale
Amortized
Cost
Fair
Value
$
— $
—
37,932
7,000
233,002
204,689
$
482,623
$
—
—
38,237
6,911
231,263
201,817
478,228
Gross unrealized losses and fair value of Customers' investment securities 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, 2016
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(amounts in thousands)
Available for Sale:
Agency-guaranteed residential mortgage-
backed securities
Agency-guaranteed commercial mortgage-
backed securities
Corporate notes (1)
Total
$
87,433
$
(1,330) $
30,592
$
(1,327) $ 118,025
$
(2,657)
201,817
9,747
$ 298,997
$
(2,872)
(185)
(4,387) $
—
—
30,592
$
—
201,817
—
9,747
(1,327) $ 329,589
$
(2,872)
(185)
(5,714)
(1)
Includes subordinated debt issued by other bank holding companies.
(amounts in thousands)
Available for Sale:
Agency-guaranteed residential mortgage-
backed securities
Agency-guaranteed commercial mortgage-
backed securities
Corporate notes (1)
Equity securities (2)
Total
Less than 12 months
December 31, 2015
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$ 102,832
$
(535) $
57,357
$
(2,206) $ 160,189
$
(2,741)
202,870
9,748
19,206
$ 334,656
$
(3,849)
(178)
(3,301)
(7,863) $
—
—
6
57,363
$
—
202,870
9,748
—
(1)
19,212
(2,207) $ 392,019
(3,849)
(178)
(3,302)
(10,070)
$
(1)
(2)
Includes subordinated debt issued by other bank holding companies.
Consists primarily of equity securities issued by a foreign entity.
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At December 31, 2016, there were twenty-nine available-for-sale investment securities in the less-than-twelve-month category
and seven 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. Customers does not intend to sell
these securities and it is not more likely than not that Customers will be required to sell the securities before recovery of the
amortized cost basis.
At December 31, 2016, management evaluated its equity holdings issued by a foreign entity for other-than-temporary
impairment. Because management no longer has the intent to hold these securities until a recovery in fair value, Customers
recorded an other-than-temporarily impairment loss of $7.3 million in fourth quarter 2016 for the full amount of the decline in
fair value below the cost basis. The fair value of the equity securities at December 31, 2016 of $15.2 million became the new
cost basis of the securities.
At December 31, 2016 and 2015, Customers Bank had pledged investment securities aggregating $231.3 million and $299.8
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 8 – LOANS HELD FOR SALE
The composition of loans held for sale as of December 31, 2016 and 2015 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,
2016
2015
$
2,116,815
$
1,754,950
—
39,257
2,116,815
1,794,207
695
2,857
$
2,117,510
$
1,797,064
Commercial loans held for sale consists primarily of mortgage warehouse loans. These mortgage warehouse lending
transactions are subject to master repurchase agreements and are designated as held for sale and reported at fair value based on
an election made to account for these loans at fair value. Pursuant to the master repurchase agreements, Customers funds the
pipelines for these mortgage lenders by sending cash payments directly to the closing agents for funded loans (i.e., the purchase
event) and receives proceeds directly from third party investors when the loans are sold into the secondary market (i.e., the sale
event). The fair values of the mortgage warehouse loans are estimated as the amount of cash initially advanced to fund the
underlying mortgage, plus accrued interest and fees, as specified in the respective agreements. The interest rates on these loans
are variable and the lending transactions are short-term, with an average life of 22 days from purchase to sale. The primary goal
of these lending transactions is to provide liquidity to mortgage companies.
Effective December 31, 2016, Customers transferred $25.1 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, 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.
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NOTE 9 – LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
At December 31, 2016, BankMobile met the criteria to be classified as held for sale. As a result, Customers reclassified BankMobile-
related loans from "Loans receivable" to "Assets held for sale" on the consolidated balance sheets at December 31, 2016 and 2015. For
more information on BankMobile, see NOTE 3 - DISCONTINUED OPERATIONS.
The following table presents loans receivable as of December 31, 2016 and 2015.
(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,
2016
2015
$
3,214,999
$
2,909,439
1,370,853
1,193,715
64,789
1,111,400
956,255
87,240
5,844,356
5,064,334
193,502
101,730
2,726
297,958
271,613
113,490
3,124
388,227
6,142,314
76
(37,315)
6,105,075
$
5,452,561
334
(35,647)
5,417,248
$
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The following tables summarize loans receivable by loan type and performance status as of December 31, 2016 and 2015:
(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, 2016
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)
$
12,573
$
— $
12,573
$
— $ 3,200,322
$
2,104
$ 3,214,999
350
137
—
—
4,417
3,761
12
21,250
$
$
—
—
—
—
—
2,813
—
2,813
$
350
137
—
—
4,417
6,574
12
24,063
8,443
967,391
1,037
977,221
2,039
379,227
12,229
393,632
2,057
1,185,331
6,327
1,193,715
—
2,959
2,236
64,789
178,559
89,850
—
7,567
3,070
64,789
193,502
101,730
58
17,792
2,420
$ 6,067,889
$
236
32,570
2,726
$ 6,142,314
$
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, 2015
(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
$
— $
— $
— $
— $ 2,905,789
$
3,650
$ 2,909,439
39
268
1,997
—
2,986
3,752
107
—
—
—
—
—
2,805
—
39
268
1,997
—
2,986
6,557
107
1,973
799,595
1,552
803,159
2,700
292,312
12,961
308,241
1,307
—
2,202
2,449
140
940,895
87,006
257,984
101,132
2,643
12,056
234
8,441
3,352
234
956,255
87,240
271,613
113,490
3,124
$
9,149
$
2,805
$
11,954
$
10,771
$ 5,387,356
$
42,480
$ 5,452,561
(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.
As of December 31, 2016 and 2015, the Bank had $0.5 million and $1.2 million, respectively, of residential real estate held in other real
estate owned. As of December 31, 2016 and 2015, the Bank initiated foreclosure proceedings on $0.4 million and $0.6 million,
respectively, in loans secured by residential real estate.
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Allowance for loan losses
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, 2016 and 2015 and the loans and allowance for loan
losses by loan type based on impairment evaluation method were 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
for periods prior to the termination of the FDIC loss sharing arrangements.
Twelve months ended
December 31, 2016
(amounts in thousands)
Allowance for loan
losses:
Ending Balance,
December 31, 2015
Charge-offs
Charge-offs for
BankMobile loans (1)
Recoveries
Provision for loan
losses
Provision for
BankMobile loans (1)
Ending Balance,
December 31, 2016
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
Commercial
and
Industrial
Commercial
Real Estate
Owner
Occupied
Commercial
Real Estate
Non-Owner
Occupied
Multi-family
Construction
Residential
Real Estate
Manufactured
Housing
Other
Consumer
Total
$
12,016
$
8,864
$
1,348
$
8,420
$
1,074
$
3,298
$
494
$
133
$
35,647
(2,920)
(27)
(140)
—
—
—
—
381
(414)
4,725
—
—
—
—
1,854
—
130
(516)
(2,088)
—
—
(493)
—
367
170
—
—
—
—
(208)
—
(129)
(3,709)
(696)
11
103
696
(696)
2,743
2,634
696
—
—
862
—
$
11,602
$
11,050
$
2,183
$
7,894
$
840
$
3,342
$
286
$
118
$
37,315
$
— $
8,516
$
2,050
$
2,151
$
— $
6,972
$
9,665
$
57
$
29,411
3,212,895
967,668
379,353
1,185,237
64,789
178,963
88,995
2,433
6,080,333
2,104
1,037
12,229
6,327
—
7,567
3,070
236
32,570
$ 3,214,999
$
977,221
$
393,632
$ 1,193,715
$
64,789
$
193,502
$
101,730
$
2,726
$ 6,142,314
$
— $
1,024
$
287
$
14
$
— $
35
$
— $
— $
1,360
11,602
9,686
1,896
—
340
—
4,626
3,254
772
68
2,414
893
$
11,602
$
11,050
$
2,183
$
7,894
$
840
$
3,342
$
88
198
286
60
58
31,144
4,811
$
118
$
37,315
'(1) Includes activities for BankMobile-related loans, primarily overdrawn consumer deposit accounts.
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Table of Contents
Twelve months ended
December 31, 2015
(amounts in thousands)
Allowance for loan
losses:
Ending Balance,
December 31, 2014
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
Commercial
and
Industrial
Commercial
Real Estate
Owner
Occupied
Commercial
Real Estate
Non-Owner
Occupied
Multi-family
Construction
Residential
Real Estate
Manufactured
Housing
Other
Consumer
Total
$
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)
—
(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
2,750
5,365,473
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
$
3,124
$ 5,452,561
$
— $
1,990
$
1
$
148
$
— $
84
$
— $
50
$
2,273
12,016
6,650
1,347
—
224
—
3,858
4,414
1,074
—
2,141
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
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,
2016 and 2015, funds available for reimbursement, if necessary, were $1.0 million and $1.2 million, respectively. Each quarter, these
funds are evaluated to determine if they would be sufficient to absorb probable losses within the manufactured housing portfolio.
134
Table of Contents
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, 2016 and 2015 and the average recorded investment and
interest income recognized for the years ended December 31, 2016 and 2015. Purchased-credit-impaired loans are considered to be
performing and are not included in the tables below.
(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:
Multi-family
Commercial and industrial
Commercial real estate - owner occupied
Commercial real estate - non-owner occupied
Other consumer
Residential real estate
Total
December 31, 2016
Twelve months ended
December 31, 2016
Recorded
Investment
Net of
Charge Offs
Unpaid
Principal
Balance
Related
Allowance
Average
Recorded
Investment
Interest
Income
Recognized
$
— $
— $
— $
964
$
2,396
1,210
2,002
—
57
6,682
9,665
—
6,120
840
149
—
290
3,430
1,210
2,114
—
57
6,749
9,665
—
6,120
840
204
—
303
—
—
—
—
—
—
—
—
1,024
287
14
—
35
15,424
7,963
5,265
—
47
4,567
8,961
232
7,028
173
380
29
395
53
804
426
155
—
—
120
465
—
436
—
—
—
—
$
29,411
$
30,692
$
1,360
$
51,428
$
2,459
135
Table of Contents
(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
Other consumer
Residential real estate
Total
Troubled Debt Restructurings
December 31, 2015
Twelve months 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
At December 31, 2016, 2015 and 2014, there were $16.4 million, $11.4 million, and $5.0 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
borrower satisfies a minimum six-month performance requirement; however, the TDR will remain classified as impaired. Generally, the
Bank requires sustained performance for nine months before returning a TDR to accrual status.
Modifications 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,
2016, 2015 and 2014. There were no modifications that involved forgiveness of debt.
(dollars in thousands)
Extensions of maturity
Interest-rate reductions
Total
For the Years Ended December 31,
2016
2015
2014
Number
of Loans
Recorded
Investment
Number
of Loans
Recorded
Investment
Number
of Loans
Recorded
Investment
3
61
64
$
$
1,995
4,621
6,616
1
161
162
$
$
183
7,274
7,457
11
10
21
$
$
460
620
1,080
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Table of Contents
The following table provides, by loan type, the number of loans modified in troubled debt restructurings and the related recorded
investment for the years ended December 31, 2016, 2015 and 2014.
(dollars in thousands)
Commercial and industrial
Commercial real estate non-owner occupied
Manufactured housing
Residential real estate
Total loans
For the Years Ended December 31,
2016
2015
2014
Number
of Loans
Recorded
Investment
Number
of Loans
Recorded
Investment
Number
of Loans
Recorded
Investment
1
1
58
4
64
$
$
76
1,844
2,286
2,410
6,616
$
3
1
156
2
162
$
791
211
6,251
204
7,457
— $
—
10
11
21
$
$
—
—
620
460
1,080
As of December 31, 2016, 2015, 2014, there were no commitments to lend additional funds to debtors whose terms have been modified
in TDRs.
As of December 31, 2016, eight manufactured housing loans totaling $0.2 million, one commercial real estate non-owner occupied loan
of $1.8 million, and one residential real estate loan of $0.1 million that were modified in troubled debt restructurings within the past
twelve months, defaulted on payments. As of December 31, 2015, eleven manufactured housing loans totaling $0.3 million that were
modified in troubled debt restructurings within the past twelve months, defaulted on payments. As of December 31, 2014, there were no
loans modified in troubled debt restructurings within the past twelve months, that defaulted on payments.
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 loan
losses. There were no specific allowances resulting from TDR modifications during 2016. There were three specific allowances
resulting from TDR modifications during 2015, totaling $0.2 million for two 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.
Purchase Credit Impaired Loans
The changes in accretable yield related to purchased-credit-impaired loans for the years ended December 31, 2016, 2015 and 2014
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
For the Years Ended December 31,
2016
2015
2014
$
$
$
12,947
(3,760)
1,015
10,202
$
17,606
(2,299)
(2,360)
12,947
$
$
22,557
(3,201)
(1,750)
17,606
Allowance for Loan Losses and the FDIC Loss Sharing Receivable and Clawback Liability
Losses incurred on covered loans were eligible for partial reimbursement by the FDIC. Subsequent to the purchase date, the expected
cash flows on the covered loans were subject to evaluation. Decreases in the present value of expected cash flows on the covered loans
were recognized by increasing the allowance for loan losses with a related charge to the provision for loan losses. At the same time, the
FDIC indemnification asset was increased reflecting an estimated future collection from the FDIC, which was recorded as a reduction to
the provision for loan losses. If the expected cash flows on the covered loans increased such that a previously recorded impairment could
be reversed, the Bank recorded a reduction in the allowance for loan losses (with a related credit to the provision for loan losses)
accompanied by a reduction in the FDIC receivable balance (with a related charge to the provision for loan losses). Increases in expected
cash flows on covered loans and decreases in expected cash flows of the FDIC loss sharing receivable, when there were no previously
recorded impairments, were considered together and recognized over the remaining life of the loans as interest income. Decreases in the
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Table of Contents
valuations of other real estate owned covered by the loss sharing agreements were recorded net of the estimated FDIC receivable as an
increase to other real estate owned expense (a component of non-interest expense).
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 was 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 anticipated that it would be required to pay
the FDIC at the end of its loss sharing agreements.
The Bank presented the FDIC Loss Sharing Receivable, net of the estimated Clawback liability on the consolidated balance sheets. In
the event the estimated Clawback liability exceeded the FDIC Loss Sharing Receivable balance, the net liability amount was presented
in "Accrued interest payable and other liabilities" on the consolidated balance sheets.
On July 11, 2016, Customers entered into an agreement to terminate all existing rights and obligations pursuant to the loss sharing
agreements with the FDIC. In connection with the termination agreement, Customers paid the FDIC $1.4 million as final payment under
these agreements. The negotiated settlement amount was based on net losses incurred on the covered assets through September 30,
2015, adjusted for cash payments to and cash receipts from the FDIC as part of the December 31, 2015 and March 31, 2016
certifications. Consequently, loans and other real estate owned previously reported as covered assets pursuant to the loss sharing
agreements were no longer presented as covered assets as of June 30, 2016.
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, 2016, 2015 and 2014.
(amounts in thousands)
Ending balance as of December 31,
Provision for loan losses (1)
Provision for BankMobile loans (presented as discontinued operations)
Charge-offs
Charge-offs for BankMobile loans
Recoveries
Ending balance as of December 31,
Allowance for Loan Losses
For The Years Ended December 31,
2016
2015
2014
$
35,647
$
30,932
$
2,634
696
(3,709)
(696)
2,743
16,694
—
(13,412)
—
1,433
$
37,315
$
35,647
$
23,998
10,058
—
(4,947)
—
1,823
30,932
(amounts in thousands)
Ending balance as of December 31,
Increased (decreased) estimated cash flows (2)
Increased estimated cash flows from covered OREO (a)
Other activity, net (b)
Cash payments to (receipts from) the FDIC
Ending balance as of December 31,
(1) Provision for loan losses
(2) Effect attributable to FDIC loss share arrangements
$
$
$
Net amount reported as provision for loan losses (from continuing operations) $
FDIC Loss Sharing Receivable
For The Years Ended December 31,
2016
2015
2014
(2,083) $
289
—
(255)
2,049
— $
2,634
(289)
2,345
$
$
$
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
(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 qualified for reimbursement under loss share
arrangements.
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Table of Contents
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
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 of the exposure 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 borrowers have 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; operate in industries with little
industry risk; 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, but 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.
139
Table of Contents
“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
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, 2016 and 2015 for the loans receivable portfolio.
December 31, 2016
Commercial
and
Industrial
Commercial
Real Estate
Owner
Occupied
Commercial
Real Estate
Non-Owner
Occupied
Construction
Residential
Real Estate
Manufactured
Housing
Other
Consumer
Total
$
$
943,356
19,552
14,313
—
—
375,919
12,065
5,648
—
—
$ 1,175,850
10,824
7,041
—
—
$
$
50,291
14,498
—
—
—
$ 189,919
—
3,583
—
—
— $
—
—
92,920
8,810
— $ 5,933,625
56,939
—
47,294
—
95,576
2,656
8,880
70
Multi-family
$3,198,290
—
16,709
—
—
$3,214,999
$
977,221
$
393,632
$ 1,193,715
$
64,789
$ 193,502
$
101,730
$
2,726
$ 6,142,314
(amounts in thousands)
Pass/Satisfactory
Special Mention
Substandard
Performing (1)
Non-performing (2)
Total
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Table of Contents
December 31, 2015
Commercial
and
Industrial
Commercial
Real Estate
Owner
Occupied
Commercial
Real Estate
Non-Owner
Occupied
Multi-family
Construction
Residential
Real Estate
Manufactured
Housing
Other
Consumer
Total
(amounts in thousands)
Pass/Satisfactory
Special Mention
Substandard
Performing (1)
Non-performing (2)
Total
$2,907,362
661
1,416
—
—
$2,909,439
$
$
784,892
14,052
4,215
—
—
803,159
$
$
295,762
7,840
4,639
—
—
308,241
$
$
950,886
1,671
3,698
—
—
956,255
$
$
87,240
—
—
—
—
87,240
$ 268,210
282
3,121
—
—
$ 271,613
$
$
— $
—
—
104,484
9,006
113,490
$
— $ 5,294,352
24,506
—
17,089
—
107,361
2,877
247
9,253
$ 5,452,561
3,124
(1)
(2)
Includes consumer and other installment loans not subject to risk ratings.
Includes loans that are past due and still accruing interest and loans on non-accrual status.
NOTE 10 – BANK PREMISES AND EQUIPMENT
The components of bank premises and equipment as of December 31, 2016 and 2015 were as follows:
(amounts in thousands)
Leasehold improvements
Furniture, fixtures and equipment
IT equipment
Automobiles
Accumulated depreciation
Total
Expected Useful Life
2016
2015
December 31,
3 to 25 years
$
13,665
$
12,506
5 to 10 years
3 to 5 years
3 to 5 years
6,036
6,502
506
26,709
(14,450)
$
12,259
$
5,245
5,558
206
23,515
(12,369)
11,146
Premises and equipment for BankMobile totaled approximately $0.5 million and $0.4 million, net of accumulated depreciation
of $221 thousand and $58 thousand, at December 31, 2016 and 2015, respectively. These amounts are presented within "Assets
held for sale" on the consolidated balance sheets.
Future minimum rental commitments pursuant to non-cancelable leases as of December 31, 2016 were as follows:
(amounts in thousands)
2017
2018
2019
2020
2021
Thereafter
Total minimum payments
December 31, 2016
$
$
3,897
3,988
3,355
2,835
2,390
8,063
24,528
Rent expense from continuing operations was approximately $4.5 million, $3.7 million and $3.3 million for the years ended
December 31, 2016, 2015 and 2014, respectively. Rent expense included in discontinued operations was $0.2 million and $0.1
million for the years ended December 31, 2016 and 2015, respectively. There was no rent expense included in discontinued
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operations for the year ended December 31, 2014. 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.
NOTE 11 – DEPOSITS
At December 31, 2016, BankMobile met the criteria to be classified as "held for sale". As a result, Customers reclassified
BankMobile-related deposits from "Total deposits" to "Liabilities held for sale" on the consolidated balance sheets at
December 31, 2016 and 2015. For more information on BankMobile, see NOTE 3 - DISCONTINUED OPERATIONS.
The components of deposits from continuing operations at December 31, 2016 and 2015 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
December 31,
2016
2015
$
$
512,664
339,398
3,163,156
2,106,905
724,857
6,846,980
$
$
408,874
127,215
2,778,747
1,624,562
723,035
5,662,433
The scheduled maturities for time deposits from continuing operations at December 31, 2016 were as follows:
(amounts in thousands)
2017
2018
2019
2020
2021
Thereafter
Total time deposits
December 31, 2016
$
$
2,047,297
446,220
198,735
47,729
91,705
76
2,831,762
The aggregate amounts of demand deposit overdrafts from continuing operations that were reclassified as loans were not
material at December 31, 2016 and 2015. Time deposits greater than $250,000 from continuing operations totaled $1.2 billion
and $920.5 million at December 31, 2016 and 2015, respectively.
Included in the savings balances above were $972.2 million and $815.7 million of brokered money market deposits at
December 31, 2016 and 2015, respectively. Also included in time, other balances above were $721.9 million and $612.8
million of brokered time deposits, respectively, at December 31, 2016 and 2015.
BankMobile non-interest bearing demand deposits were $453.4 million and $244.8 million at December 31, 2016 and 2015,
respectively, and savings account balances were $3.4 million and $2.3 million at December 31, 2016 and 2015, respectively.
Total BankMobile demand deposit overdrafts reclassified as assets held for sale were $12.2 million and $0.6 million at
December 31, 2016 and 2015, respectively. Overdraft balances for BankMobile at December 31, 2016 related primarily to one
commercial customer and were collected the next business day.
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NOTE 12 – BORROWINGS
Short-term debt
Short-term debt at December 31, 2016 and 2015 was as follows:
(amounts in thousands)
FHLB advances
Federal funds purchased
Total short-term debt
December 31,
2016
2015
Amount
Rate
Amount
Rate
$
$
688,800
83,000
771,800
0.85% $
0.74
$
1,365,300
70,000
1,435,300
0.48%
0.56
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
2016
December 31,
2015
2014
$ 1,697,800
965,293
$ 1,365,300
844,835
$ 1,383,000
898,396
0.95%
0.60%
0.46%
137,000
84,514
85,000
41,397
35,000
13,312
0.58%
0.35%
0.31%
At December 31, 2016 and 2015, the Bank had aggregate availability under federal funds lines totaling $237.0 million and
$175.0 million, respectively.
Long-term debt
FHLB advances
The contractual maturities of long-term advances from the FHLB were as follows:
(amounts in thousands)
2017
2018
December 31,
2016
2015
Amount
Rate
Amount
Rate
$
$
—
180,000
180,000
—% $
1.32
$
205,000
55,000
260,000
1.18%
1.61
Of the $180.0 million of long-term advances that mature in 2018, $170.0 million are fixed rate.
The Bank had a total maximum borrowing capacity with the Federal Home Loan Bank of $4.1 billion and with the Federal
Reserve Bank of Philadelphia of $158.6 million at December 31, 2016. The Bank had a total 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. Amounts can be borrowed as short-term or long-term. As of December 31, 2016, advances under these arrangements
were secured by certain assets, which included a blanket lien on securities of $200.2 million and qualifying loans of Customers
Bank of $3.9 billion.
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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. The
subordinated notes qualify as Tier 2 capital for regulatory capital purposes.
NOTE 13 – SHAREHOLDERS’ EQUITY
Common Stock
During 2016, Customers Bancorp issued shares of its common stock pursuant to the following public offerings:
On November 9, 2016, Customers Bancorp issued 2,415,000 shares of common stock at a price to the public of $25.00 per
share as part of an underwritten public offering. Customers received net proceeds of $58.3 million from the offering, after
deducting offering costs.
On August 11, 2016, Customers Bancorp entered into an At Market Issuance Sales Agreement ("the Sales Agreement") with
FBR Capital Markets & Co., Keefe, Bruyette & Woods, Inc. and Maxim Group LLC. Customers Bancorp has authorized the
sale, at its discretion, of shares of its common stock, in an aggregate offering amount up to $50 million under the Sales
Agreement. Customers issued 219,386 shares in connection with this Sales Agreement during 2016 receiving net proceeds of
$5.5 million, net of offering costs.
The net proceeds from the common stock offerings will be used for general corporate purposes, which may include working
capital and the funding of organic growth at Customers Bank.
In May 2014, Customers 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, Customers 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 2016, 2015 or 2014.
At December 31, 2016 and 2015, there were warrants outstanding to purchase 184,706 shares and 627,673 shares, respectively,
of Customers Bancorp’s common stock. The purchase prices at December 31, 2016 and 2015 ranged from $9.55 per share to
$73.01 per share.
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Preferred Stock
Customers Bancorp currently has four series of preferred stock outstanding.
Preferred stock issued during 2016 included the following:
On September 16, 2016, Customers Bancorp issued 3,400,000 shares of Fixed-to-Floating Rate Non-Cumulative Perpetual
Preferred Stock, Series F, (the “Series F Preferred Stock”) par value $1.00 per share, at a price of $25.00 per share in a public
offering. Dividends on the Series F Preferred Stock will accrue and be payable quarterly in arrears, at a fixed rate per annum
equal to 6.00% from the original issue date to, but excluding, December 15, 2021, and thereafter at a floating rate per annum
equal to three-month LIBOR on the related dividend determination date plus a spread of 4.762% per annum. Customers
received net proceeds of $82.2 million from the offering, after deducting offering costs.
On April 28, 2016, Customers Bancorp issued 2,300,000 shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred
Stock, Series E, (the “Series E Preferred Stock”) par value $1.00 per share, at a price of $25.00 per share in a public offering.
Dividends on the Series E Preferred Stock will accrue and be payable quarterly in arrears, at a fixed rate per annum equal to
6.45% from the original issue date to, but excluding, June 15, 2021, and thereafter at a floating rate per annum equal to three-
month LIBOR on the related dividend determination date plus a spread of 5.14% per annum. Customers received net proceeds
of $55.6 million from the offering, after deducting offering costs.
On January 29, 2016, Customers Bancorp issued 1,000,000 shares of Fixed-to-Floating Rate Non-Cumulative Perpetual
Preferred Stock, Series D, (the "Series D Preferred Stock") par value $1.00 per share, at a price of $25.00 per share in a public
offering. 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. Customers received net
proceeds of $24.1 million from the offering, after deducting offering costs.
Preferred stock issued during 2015 included the following:
On May 18, 2015, Customers Bancorp issued 2,300,000 shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred
Stock, Series C, (the "Series C Preferred Stock") par value $1.00 per share, at a price of $25.00 per share in a public offering.
Dividends on the Series C Preferred Stock will accrue and be payable quarterly in arrears, 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. Customers received net proceeds
of $55.6 million from the offering, after deducting offering costs.
The net proceeds from the preferred stock offerings will be used for general corporate purposes, which may include working
capital and the funding of organic growth at Customers Bank.
Dividends on the Series C, Series D, Series E, and Series F Preferred Stock are not 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, Series D, Series E, and
Series F Preferred Stock in respect of a dividend period, then no dividend shall be deemed to have accrued for such dividend
period, be payable on the applicable dividend payment date, or be cumulative, and Customers Bancorp will have no obligation
to pay any dividend for that dividend period, whether or not the board of directors or a duly authorized committee of the board
declares a dividend on the Series C, Series D, Series E, and Series F Preferred Stock for any future dividend period.
The Series C, Series D, Series E, and Series F Preferred Stock have no stated maturity, are not subject to any mandatory
redemption, sinking fund or other similar provisions and will remain outstanding unless redeemed at Customers Bancorp's
option. Customers Bancorp may redeem the Series C, Series D, Series E and Series F Preferred Stock at its option, at a
redemption price equal to $25.00 per share, plus any declared and unpaid dividends (without regard to any undeclared
dividends), (i) in whole or in part, from time to time, on any dividend payment date on or after June 15, 2020 for the Series C
Preferred Stock, March 15, 2021 for the Series D Preferred Stock, June 15, 2021 for the Series E Preferred Stock, and
December 15, 2021 for the Series F Preferred Stock and or (ii) in whole but not in part, within 90 days following the
occurrence of a regulatory capital treatment event. Any redemption of the Series C, Series D, Series E, and Series F Preferred
Stock is subject to prior approval of the Board of Governors of the Federal Reserve System. The Series C, Series D, Series E,
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and Series F Preferred Stock qualify as Tier 1 capital under regulatory capital guidelines. Except in limited circumstances, the
Series C, Series D, Series E, and Series F Preferred Stock do not have any voting rights.
Preferred stock dividends paid during 2016 included the following:
On December 15, 2016, Customers made the following dividend payments to preferred shareholders of record as of November
30, 2016:
•
•
•
•
a cash dividend on its Series C Preferred Stock of $0.4375 per share.
a cash dividend on its Series D Preferred Stock of $0.40625 per share.
a cash dividend on its Series E Preferred Stock of $0.403125 per share.
a cash dividend on its Series F Preferred Stock of $0.370833 per share.
On September 15, 2016, Customers made the following dividend payments to preferred shareholders of record as of August 31,
2016:
•
•
•
a cash dividend on its Series C Preferred Stock of $0.4375 per share.
a cash dividend on its Series D Preferred Stock of $0.40625 per share.
a cash dividend on its Series E Preferred Stock of $0.403125 per share.
On June 15, 2016, Customers made the following dividend payments to preferred shareholders of record as of May 31, 2016:
•
•
•
a cash dividend on its Series C Preferred Stock of $0.4375 per share.
a cash dividend on its Series D Preferred Stock of $0.40625 per share.
a cash dividend on its Series E Preferred Stock of $0.210521 per share.
On March 15, 2016, Customers made the following dividend payments to preferred shareholders of record as of February 29,
2016:
•
•
a cash dividend on its Series C Preferred Stock of $0.4375 per share.
a cash dividend on its Series D Preferred Stock of $0.2076 per share.
Preferred stock dividends paid during 2015 included the following:
On December 15, 2015, Customers made the following dividend payment to preferred shareholders of record on November 30,
2015:
•
a cash dividend on its Series C Preferred Stock of $0.4375 per share.
On September 15, 2015, Customers made the following dividend payment to preferred shareholders of record on August 31,
2015:
•
a cash dividend on its Series C Preferred Stock of $0.56875 per share.
NOTE 14 – 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, 2016, 2015, and 2014 were $1.6 million,
$1.1 million, and $1.0 million, respectively, including contributions for BankMobile team members. Employer contributions
for BankMobile team members for the year ended December 31, 2016 were $0.2 million. Employer contributions for
BankMobile team members prior to 2016 were not material.
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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, 2016 was $3.9 million and was included in other liabilities.
NOTE 15 – 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, 2016, the aggregate number
of shares of common stock available for grant under these plans was 1,360,280 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 senior 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 first quarter 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 by the
amount of cash bonuses paid to the participants in the plan. At December 31, 2016, restricted stock units outstanding under this
plan totaled 340,165.
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 2016, 2015, and 2014 was $6.2 million, $4.9 million, and $4.2 million, respectively, including share-
based compensation expense for BankMobile team members. Share based compensation related to BankMobile team members
for 2016 and 2015 was $0.6 million and $0.1 million, respectively. Share based compensation related to BankMobile team
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members 2014 was not material. At December 31, 2016, there was $13.1 million of unrecognized compensation cost related to
all non-vested share-based compensation awards. This cost is expected to be recognized through December 2021.
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. Because
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 2016 and 2015 was $103 thousand and $80 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 based on the expected
life of the option. 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 vesting
requirement, generally three or five years.
During 2016, options to purchase an aggregate of 297,725 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 majority of the options issued are subject to a five-year cliff vesting
and expire after ten years. In addition to the five-year service requirement, 277,725 of the options issued must meet one of the
following conditions 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 at least a 7% compound annual increase in core earnings per share 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 for the periods presented.
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
2016
2015
2014
1.84%
—%
23.39%
7.00
1.90%
—%
21.18%
7.00
$
7.61
$
6.42
$
2.16%
—%
18.00%
7.00
4.52
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The following summarizes stock option activity for the year ended December 31, 2016:
(dollars in thousands, except weighted-average exercise price)
Outstanding, December 31, 2015
Granted
Exercised
Forfeited
Outstanding, December 31, 2016
Exercisable at December 31, 2016
Number
of Shares
Weighted-
average
Exercise
Price
3,731,761
$
297,725
(46,171)
(23,275)
3,960,040
1,094,078
$
$
14.33
25.92
10.31
13.90
15.25
10.03
Weighted-
average
Remaining
Contractual
Term
in Years
Aggregate
Intrinsic
Value
658
6.10
3.77
$
$
81,439
28,221
Cash received from the exercise of options during the year ended December 31, 2016 was $0.5 million with a related tax
benefit of $0.2 million.
A summary of the status of Customers' non-vested options at December 31, 2016 and changes during the year ended
December 31, 2016 was as follows:
Non-vested at December 31, 2015
Granted
Vested
Forfeited
Non-vested at December 31, 2016
Restricted Stock Units
$
Options
3,026,766
297,725
(435,254)
(23,275)
2,865,962
Weighted-
average
exercise price
15.53
25.92
14.97
13.90
17.24
The fair value of restricted stock units granted under the 2004 Plan is generally determined based on the closing 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 was that the recipient remained an employee or director through
December 31, 2016. The second requirement was 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 fourth quarter 2013. Pursuant to the
terms of this award, 375,402 of restricted stock units vested on December 31, 2016.
There were 247,285 restricted stock units granted during the year ended December 31, 2016. Of the aggregate restricted stock
units granted, 86,654 were granted under the Bonus Recognition and Retention Program and are subject to five-year cliff
vesting. The remaining 160,631 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, 2016 and changes during the year ended
December 31, 2016:
Outstanding and unvested at December 31, 2015
Granted
Vested
Forfeited
Outstanding and unvested at December 31, 2016
Restricted
Stock Units
Weighted-
average grant-
date fair value
873,264
247,285
(473,066)
(1,978)
645,505
$
$
14.24
23.85
12.15
22.84
19.43
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, 2016, Customers issued 29,079 shares of Voting Common Stock with a fair
value of $0.8 million to the directors as compensation for their services. The fair values were generally determined based on the
closing price of the common stock the day before the shares were issued.
NOTE 16 – INCOME TAXES
The components of income tax expense were as follows:
(amounts in thousands)
Current
Deferred
Income tax expense from continuing operations
Income tax benefit from discontinued operations
Total
For the Years Ended December 31,
2016
2015
2014
$
$
53,991
(2,579)
51,412
(5,519)
45,893
$
$
42,756
(10,092)
32,664
(2,752)
29,912
$
$
27,169
(6,187)
20,982
(808)
20,174
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,
2016
2015
2014
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
Equity-based compensation benefit
Unrecorded basis difference in
foreign subsidiary
Other
Effective income tax rate
$
$
48,691
35.00% $
33,508
35.00% $
22,930
4,983
3.58
1,651
1.72
1,418
(237)
(1,716)
(3,715)
2,830
576
51,412
(0.17)
(1.23)
(2.67)
(277)
(2,422)
—
(0.29)
(2.53)
—
2.03
0.42
36.96% $
—
204
32,664
—
0.22
34.12% $
(249)
(1,296)
—
—
(1,821)
20,982
150
35.00%
2.16
(0.38)
(1.98)
—
—
(2.77)
32.03%
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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 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, 2016 and 2015, 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. We have not recorded a deferred tax asset on our unrecorded basis
difference in our foreign subsidiary because we currently do not expect it to reverse in the foreseeable future. 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, 2016 and 2015.
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, 2016 and 2015:
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(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 deferred loan fees
Bank premises and equipment
Other
Total deferred tax liabilities
Net deferred tax asset
December 31,
2016
2015
$
14,540
$
1,714
1,233
589
2,137
1,523
5,548
—
1,413
3,041
1,972
13,248
3,112
728
840
2,290
1,337
5,196
428
1,679
2,497
1,374
33,710
32,729
(1,039)
(1,090)
(713)
(1,379)
(4,221)
29,489
$
—
(2,688)
(875)
(592)
(4,155)
28,574
$
Customers had approximately $6.1 million of federal net operating loss carryovers at December 31, 2016, that expire in 2025
through 2031.
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,
2013.
NOTE 17 – 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,
2016
2015
2014
$
$
220
$
1,160
(1,142)
238
$
9
$
2,218
(2,007)
220
$
7,273
5
(7,269)
9
As of December 31, 2016 and 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.
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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, 2016. None of these
transactions involved amounts in excess of 5% of the Customers' gross revenues during 2016 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,
2016. 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, 2016 and 2015, the Bank had approximately $6.4 million and $14.0 million, respectively, in deposits from
related parties, including directors and certain executive officers.
During 2015 and 2014, Customers paid $27,300 and $46,900 to Jaxxon Promotions, Inc., a company in which a Bancorp
director owns 25% interest. No payments were made to Jaxxon Promotions, Inc. in 2016.
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NOTE 18 – 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:
(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,
2016
2015
$
244,784
$
537,380
1,230,596
480,446
40,223
5,310
1,302,759
436,550
42,002
6,360
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. Because 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, 2016 and 2015 for guarantees under standby
letters of credit issued was not material.
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NOTE 19 – 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 common equity Tier 1, Tier 1, total capital to risk-weighted assets, and
Tier 1 capital to average assets (as defined in the regulations). At December 31, 2016 and 2015, the Bank and the Bancorp met
all capital adequacy requirements to which they were subject.
The Dodd-Frank Act required the Federal Reserve Bank 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 weighted 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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Generally, to be considered adequately capitalized, or well capitalized, respectively, an institution must at least maintain the
common equity Tier 1, Tier 1 and total risk based ratios and the Tier 1 leveraged ratio in excess of the related minimum ratios
set forth in the following table.
(amounts in thousands)
December 31, 2016
Common equity Tier 1 (to risk-
weighted assets)
Customers Bancorp, Inc.
Customers Bank
Tier 1 capital (to risk-weighted assets)
Customers Bancorp, Inc.
Customers Bank
Total capital (to risk-weighted assets)
Customers Bancorp, Inc.
$
$
$
$
$
Actual
For Capital Adequacy
Purposes
(Minimum Plus Capital
Buffer)
To Be Well Capitalized
Under
Prompt Corrective Action
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
628,139
857,421
8.487% $
11.626% $
379,306
377,973
5.125%
5.125% $
N/A
479,380
N/A
6.500%
844,755
857,421
11.414% $
11.626% $
490,322
488,599
6.625%
6.625% $
N/A
590,006
N/A
8.000%
966,097
13.053% $
638,343
8.625%
N/A
N/A
Customers Bank
Tier 1 capital (to average assets)
Customers Bancorp, Inc.
Customers Bank
December 31, 2015
Common equity Tier 1 (to risk-
weighted assets)
Customers Bancorp, Inc.
Customers Bank
Tier 1 capital (to risk-weighted assets)
Customers Bancorp, Inc.
Customers Bank
Total capital (to risk-weighted assets)
Customers Bancorp, Inc.
Customers Bank
Tier 1 capital (to average assets)
Customers Bancorp, Inc.
Customers Bank
$ 1,003,609
13.608% $
636,101
8.625% $
737,508
10.000%
$
$
$
$
$
$
$
$
$
$
844,755
857,421
9.067% $
372,652
4.000%
N/A
N/A
9.233% $
371,466
4.000% $
464,333
5.000%
500,624
565,217
7.610% $
8.620% $
296,014
294,916
4.500%
4.500% $
N/A
425,990
N/A
6.500%
556,193
565,217
8.460% $
8.620% $
394,685
393,221
6.000%
6.000% $
N/A
524,295
N/A
8.000%
698,323
710,864
556,193
565,217
10.620% $
526,247
8.000%
N/A
N/A
10.850% $
524,295
8.000% $
655,369
10.000%
7.160% $
310,812
4.000%
N/A
N/A
7.300% $
309,883
4.000% $
387,353
5.000%
The new risk-based capital rules adopted effective January 1, 2015 required 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.
Effective January 1, 2016, the capital level required to avoid limitation on elective distributions applicable to the Bancorp and
the Bank were as follows:
(i) a common equity Tier 1 risk-based capital ratio of 5.125%;
(ii) a Tier 1 risk-based capital ratio of 6.625%; and
(iii) a Total risk-based capital ratio of 8.625%.
Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on
discretionary bonuses to executive officers.
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NOTE 20 – 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 Accounting Standards Codification ("ASC") Topic 825, Financial Instruments,
requires disclosure of the estimated fair value of an entity’s assets and liabilities considered to be financial instruments. For
Customers, as for most financial institutions, the majority of its assets and liabilities are considered to be financial instruments.
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
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, 2016 and 2015:
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.
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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 classified as 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
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 22 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, non-binding indicative
bids from brokers, or estimates made by management considering current market rates and terms. 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 310, Receivables, in which the Bank has measured impairment
generally based on the fair value of the loan’s collateral or discounted cash flow analysis. Fair value is generally determined
based upon independent third-party appraisals of the properties that collateralize the loans, 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 other real estate owned ("OREO") is determined using appraisals, which may be discounted based on
management’s review and changes in market conditions or sales agreements with third parties. All appraisals must be
performed in accordance with the Uniform Standards of Professional Appraisal Practice. Appraisals are certified to the Bank
and performed by appraisers on the Bank’s approved list of appraisers. Evaluations are completed by a person independent of
management. The content of the appraisal depends on the complexity of the property. Appraisals are completed on a “retail
value” and an “as is value”. These assets are included as Level 3 fair values, based upon the lowest level of input that is
significant to the fair value measurements.
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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
classified 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
classified 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 classified as a Level 1 fair
values measurement. 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 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 generally uses commitments on hand from third
party investors to estimate an exit price, and adjusts for the probability of the commitment being exercised based on 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.
Derivative assets and liabilities are presented in "Other assets" and "Accrued interest payable and other liabilities" on the
consolidated balance sheet.
Assets and Liabilities held for sale:
Assets and liabilities held for sale are recorded at the lower of cost basis or market value. Assets classified as held for sale at
December 31, 2016 were $79.3 million. Included in assets held for sale were financial instruments including restricted cash of
$20 million (Level 1) and loans receivable of $12.2 million (Level 3). The remaining assets designated as held for sale consist
of goodwill, intangibles and other assets not designated as financial instruments. Liabilities classified as held for sale consisted
primarily of $457.0 million of transaction deposit accounts (Level 1). The remaining liabilities classified as held for sale
consist of accrued liabilities not considered financial instruments under ASC 825 - Financial Instruments.
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Off-balance-sheet financial instruments:
The 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
calculations are only provided for a limited portion of Customers’ assets and liabilities. Due to a wide range of valuation
techniques and the degree of subjectivity used in making these estimates, comparisons between Customers’ disclosures and
those of other companies may not be meaningful.
The estimated fair values of Customers’ financial instruments were as follows at December 31, 2016 and 2015.
Fair Value Measurements at December 31, 2016
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
(amounts in thousands)
Assets:
Cash and cash equivalents
$ 244,709
$
244,709
$
244,709
$
— $
Investment securities, available for sale
493,474
493,474
15,246
Loans held for sale
Loans receivable, net of allowance for loan
losses
FHLB, Federal Reserve Bank and other
restricted stock
Derivatives
Assets held for sale
Liabilities:
Deposits
Deposits held for sale
Federal funds purchased
FHLB advances
Other borrowings
Subordinated debt
Derivatives
2,117,510
2,117,510
6,105,075
6,149,773
68,408
10,864
32,248
68,408
10,864
32,248
—
—
—
—
20,000
478,228
2,117,510
—
—
—
—
6,149,773
68,408
10,819
—
—
45
12,248
$ 6,846,980
$ 6,846,868
$ 4,015,218
$ 2,831,650
$
456,795
83,000
868,800
87,123
108,783
14,172
456,795
83,000
869,049
91,761
111,375
14,172
456,795
83,000
688,800
66,261
—
—
—
—
180,249
25,500
111,375
14,172
—
—
—
—
—
—
—
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(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
Assets held for sale
Liabilities:
Deposits
Deposits held for sale
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
560,253
1,797,064
$
264,593
560,253
1,797,458
$
264,593
19,212
—
$
— $
541,041
1,757,807
—
—
39,651
5,417,248
5,353,326
90,841
9,295
584
90,841
9,295
584
—
—
—
—
90,841
9,250
—
—
5,353,326
$ 5,662,433
247,068
70,000
1,625,300
86,457
108,685
$ 5,664,685
247,068
70,000
1,625,468
93,804
110,825
$ 3,314,836
247,068
70,000
1,365,300
68,867
—
$ 2,349,849
—
—
260,168
24,937
110,825
$
13,932
13,932
—
13,932
—
45
584
—
—
—
—
—
—
—
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, 2016 and 2015 were as follows:
December 31, 2016
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:
Agency-guaranteed residential mortgage-
backed securities
Agency-guaranteed commercial 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 $1,360
Other real estate owned
Total assets - nonrecurring fair value measurements
$
$
$
$
$
161
— $
231,263
$
— $
231,263
—
—
15,246
—
—
15,246
$
201,817
45,148
—
10,819
2,117,510
2,606,557
— $
14,172
$
$
201,817
—
45,148
—
15,246
—
45
10,864
— 2,117,510
$ 2,621,848
45
— $
14,172
— $
—
— $
— $
—
— $
6,527
2,731
9,258
$
$
6,527
2,731
9,258
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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:
Agency-guaranteed residential mortgage-
backed securities
Agency-guaranteed commercial 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
(1)
(2)
Included in Other Assets
Included in Other Liabilities
$
$
$
$
$
— $
298,104
$
— $
298,104
—
—
19,212
—
—
19,212
$
202,870
40,067
—
9,250
1,757,807
2,308,098
— $
13,932
$
$
202,870
—
40,067
—
19,212
—
45
9,295
— 1,757,807
$ 2,327,355
45
— $
13,932
— $
—
— $
— $
—
— $
4,346
358
4,704
$
$
4,346
358
4,704
The changes in Level 3 assets and liabilities measured at fair value on a recurring basis at December 31, 2016 and 2015 were as
follows:
(amounts in thousands)
Balance at January 1,
Issuances
Settlements
Balance at December 31,
For the Years Ended December 31,
2016
2015
Residential Mortgage Loan Commitments
$
$
45
400
(400)
45
$
$
43
273
(271)
45
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, 2016 and 2015.
162
0 %
(8)%
90 %
(8)%
(8)%
94 %
Table of Contents
The following table summarizes financial assets and financial liabilities measured at fair value as of December 31, 2016 and
2015 for which Customers utilized Level 3 inputs to measure fair value:
December 31, 2016
(dollars in thousands)
Impaired loans
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) (4)
$
1,431 Collateral appraisal (1)
Liquidation expenses (2)
(8)%
5,096
Discounted cash flow
Projected cash flows (3)
4 times EBIDTA
2,731 Collateral appraisal (1)
Liquidation expenses (2)
Discount rate (3)
45
Adjusted market bid
Pull-through rate
December 31, 2015
(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) (4)
4,346 Collateral appraisal (1)
358 Collateral appraisal (1)
Liquidation expenses (2)
Liquidation expenses (2)
45
Adjusted market bid
Pull-through rate
(1)
(2)
(3)
(4)
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 based on a percentage of the value determined by appraisal.
Projected cash flows of the business derived using EBITDA multiple based on management's best estimate.
Presented as a percentage of the value determined by appraisal for impaired loans and other real estate owned.
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NOTE 21 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Risk Management Objectives of Using Derivatives
Customers is exposed to certain risks arising from both its business operations and economic conditions. Customers manages
economic risks, including interest rate, liquidity, and credit risk, primarily by managing the amount, sources, and durations of
its assets and liabilities. Specifically, Customers enters into derivative financial instruments to manage exposures that arise
from business activities that result in the receipt or payment of future known and uncertain cash amounts, the values of which
are determined by interest rates. Customers’ derivative financial instruments are used to manage differences in the amount,
timing, and duration of Customers’ known or expected cash receipts and its known or expected cash payments principally
related to certain borrowings. 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 2016 and 2015, such derivatives were used to hedge the variable cash flows
associated with the forecasted issuances of debt. The ineffective portion of the change in fair value of the derivatives is to be
recognized directly in earnings. During 2016 and 2015, Customers did not record any hedge ineffectiveness.
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 $2.5 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, 2016, Customers had four outstanding interest rate derivatives with notional amounts totaling $325.0 million
that were designated as cash flow hedges of interest rate risk. At December 31, 2015, 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
hedges expire between October 2018 and 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, 2016, Customers had 76 interest rate swaps with an
aggregate notional amount of $716.6 million related to this program. At December 31, 2015, Customers had 62 interest rate
swaps with an aggregate notional amount of $461.0 million related to this program.
Customers enters into residential mortgage loan commitments in connection with its consumer mortgage banking activities to
fund mortgage loans at specified rates and times in the future. These commitments are short-term in nature and generally expire
in 30 to 60 days. The residential mortgage loan commitments that relate to the origination of mortgage loans that will be held
for sale are considered derivative instruments under applicable accounting guidance and are reported at fair value, with changes
in fair value recorded directly in earnings. At December 31, 2016 and 2015, Customers had an outstanding notional balance of
residential mortgage loan commitments of $3.6 million and $2.8 million, respectively.
164
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Customers has also purchased and sold credit derivatives to either hedge or participate in the performance risk associated with
some of its counterparties. These derivatives are not designated as hedging instruments and are reported at fair value, with
changes in fair value reported directly in earnings. At December 31, 2016 and 2015, Customers had an outstanding notional
balance of credit derivatives of $44.9 million and $19.3 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 their presentation on the
consolidated balance sheets at December 31, 2016 and 2015.
December 31, 2016
Derivative Assets
Derivative Liabilities
Balance Sheet
Balance Sheet
Location
Fair Value
Location
Fair Value
(amounts in thousands)
Derivatives designated as cash flow hedges:
Interest rate swaps
Other assets
Total
Derivatives not designated as hedging instruments:
Interest rate swaps
Credit contracts
Residential mortgage loan commitments
Total
Other assets
Other assets
Other assets
$
$
$
— Other liabilities
—
10,683
Other liabilities
136
45
Other liabilities
Other liabilities
$
10,864
$
$
$
$
3,624
3,624
10,537
11
—
10,548
(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
Location
Fair Value
Balance Sheet
Location
Fair Value
Other assets
Other assets
Other assets
Other assets
$
$
$
$
— Other liabilities
—
9,088
162
45
9,295
Other liabilities
Other liabilities
Other liabilities
$
$
$
$
4,477
4,477
9,455
—
—
9,455
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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, 2016, 2015, and 2014.
For the Year Ended December 31, 2016
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
$
$
2,955
163
—
3,118
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
For the Year Ended December 31, 2016
Location of Gain
Amount of Gain (Loss)
Amount of Income
(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
$
587
Interest expense
$
(1,946)
166
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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)
Derivative in cash flow hedging relationship:
Interest rate swaps
$
(1,534)
Interest expense
$
—
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, 2016, 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 $10.0 million.
In addition, Customers has collateral posting thresholds with certain of these counterparties and at December 31, 2016, had
posted $4.5 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.
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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.
(amounts in thousands)
Description
Interest rate swap derivatives
with institutional
counterparties
Offsetting of Financial Assets and Derivative Assets at
December 31, 2016
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
$
4,723
$
— $
4,723
$
— $
— $ 4,723
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
(amounts in thousands)
Description
Interest rate swap derivatives
with institutional
counterparties
$
— $
— $
— $
— $
— $ —
168
Table of Contents
(amounts in thousands)
Description
Interest rate swap derivatives
with institutional
counterparties
Offsetting of Financial Liabilities and Derivative Liabilities at
December 31, 2016
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
$
9,825
$
— $
9,825
$
— $
4,472
$ 5,353
Offsetting of Financial Liabilities and Derivative Liabilities at
December 31, 2015
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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NOTE 22 — LOSS CONTINGENCY
At December 31, 2015, Customers had a net receivable of $0.6 million recorded in "Other assets" related to a suspected fraud
discovered in the Bank’s held-for-sale loan portfolio during 2013. Since 2013, Customers has aggressively pursued restitution
against the involved parties and ultimately reached a settlement agreement with one of the parties in third quarter 2016.
Customers continues to seek restitution against the remaining involved party. At December 31, 2016, Customers had no
receivable amount recorded on its consolidated balance sheet related to this matter.
NOTE 23 – CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
The following tables present the condensed financial statements for Customers Bancorp, Inc. (parent company only) for the
periods presented.
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,
2016
2015
$
$
$
$
$
$
54,441
—
883,793
10,784
949,018
87,123
6,023
93,146
855,872
54,567
5
583,875
4,190
642,637
88,250
485
88,735
553,902
642,637
Total Liabilities and Shareholders’ Equity
$
949,018
$
170
Table of Contents
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 provided by (used in)
operating activities:
Equity in undistributed earnings of subsidiaries, net of dividends
received from Bank
Loss on sale of available for sale investment securities
(Increase) decrease in other assets
Increase (decrease) in other liabilities
Net Cash Provided By (Used in) Operating Activities
Cash Flows from Investing Activities:
Proceeds from sales 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
Net Cash Provided by Financing Activities
Net Increase (Decrease) in Cash and Cash Equivalents
Cash and Cash Equivalents – Beginning
Cash and Cash Equivalents – Ending
$
171
For the Years Ended December 31,
2016
2015
2014
$
25,400
$
18,545
$
25,400
18,545
90
90
5,854
4,570
10,424
14,976
3,961
18,937
59,765
78,702
9,515
69,187
5,854
4,604
10,458
8,087
3,516
11,603
46,980
58,583
2,493
56,090
$
81,794
$
50,721
$
5,251
5,611
10,862
(10,772)
3,797
(6,975)
50,189
43,214
—
43,214
51,210
For the Years Ended December 31,
2016
2015
2014
$
78,702
$
58,583
$
43,214
(59,765)
1
(7,721)
54
11,271
4
(230,872)
(230,868)
65,088
161,902
—
1,532
—
(9,051)
219,471
(126)
54,567
54,441
$
(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
Table of Contents
NOTE 24 – SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table presents selected quarterly data for the years ended December 31, 2016 and 2015. 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 from continuing operations before income taxes
Provision for income taxes
Net income from continuing operations
Loss from discontinued operations before income taxes
Income tax benefit from discontinued operations
Net loss from discontinued operations
Net income
Preferred stock dividend
Net income available to common shareholders
Earnings per common share:
Basic earnings per common share from continuing
operations
Basic earnings per common share
Diluted earnings per common share from continuing
operations
Diluted earnings per common share
$
$
$
$
$
December 31
September 30
June 30
March 31
2016
$
83,609
$
84,212
$
81,320
$
19,475
64,134
(261)
921
30,509
34,807
11,470
23,337
(5,659)
(2,150)
(3,509)
19,828
3,615
19,622
64,590
(161)
11,121
36,750
39,122
15,834
23,288
(3,357)
(1,276)
(2,081)
21,207
2,552
18,159
63,161
786
5,853
32,085
36,143
14,369
21,774
(3,696)
(1,405)
(2,291)
19,483
2,062
16,213
$
18,655
$
17,421
$
0.68
0.56
0.62
0.51
$
$
$
$
0.76
0.68
0.70
0.63
$
$
$
$
0.73
0.64
0.67
0.59
$
$
$
$
73,398
15,767
57,631
1,980
5,267
31,871
29,047
9,739
19,308
(1,812)
(688)
(1,124)
18,184
1,286
16,898
0.67
0.63
0.62
0.58
In fourth quarter 2016, Customers elected to early-adopt ASU 2016-09, Compensation - Stock Compensation: Improvements to
Employee Share-Based Payment, and has retroactively applied the guidance effective as of January 1, 2016. As a result of the
adoption, Customers recognized excess tax benefits recognized as a a reduction of income tax expense of $4.1 million for the
year ended December 31, 2016. The adoption of the ASU also resulted in an increase in weighted average diluted shares of
559,209 for the year ended December 31, 2016 as excess tax benefits are no longer included in assumed proceeds when
determining diluted shares outstanding under the treasury method. Form more information regarding the impact of adoption,
see NOTE 4 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION. The quarterly data above has
been adjusted to reflect the retrospective adoption of this ASU.
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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 from continuing operations before income taxes
Provision for income taxes
Net income from continuing operations
Loss from discontinued operations before income taxes
Income tax benefit from discontinued operations
Net loss from discontinued operations
Net income
Preferred stock dividend
Net income available to common shareholders
Earnings per common share:
Basic earnings per common share from continuing
operations
Basic earnings per common share
Diluted earnings per common share from continuing
operations
Diluted earnings per common share
$
$
$
$
$
December 31
September 30
June 30
March 31
2015
$
67,713
$
63,736
$
59,683
$
14,241
53,472
6,173
9,300
29,587
27,012
8,103
18,909
(1,811)
(688)
(1,123)
17,786
1,006
13,799
49,937
2,094
6,159
28,354
25,648
9,155
16,493
(1,944)
(740)
(1,204)
15,289
980
13,123
46,560
9,335
6,387
23,582
20,030
7,187
12,843
(2,074)
(787)
(1,287)
11,556
507
58,718
12,388
46,330
2,964
5,726
26,045
23,047
8,219
14,828
(1,413)
(537)
(876)
13,952
—
16,780
$
14,309
$
11,049
$
13,952
0.67
0.62
0.62
0.58
$
$
$
$
0.58
0.53
0.54
0.50
$
$
$
$
0.46
0.41
0.43
0.39
$
$
$
$
0.55
0.52
0.52
0.49
173
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NOTE 25 – BUSINESS SEGMENTS
Customers has historically operated under one business segment, "Community Banking." However, beginning in third quarter
2016, Customers revised its segment financial reporting to reflect the manner in which its chief operating decision makers (our
Chief Executive Officer and Board of Directors) have begun allocating resources and assessing performance subsequent to
Customers' acquisition of the Disbursement business from Higher One and the combination of that business with the
BankMobile technology platform late in second quarter 2016.
Management has determined that Customers' operations consist of two reportable segments - Community Business Banking
and BankMobile. Each segment generates revenues, manages risk, and offers distinct products and services to targeted
customers through different delivery channels. The strategy, marketing, and analysis of these segments vary considerably.
The Community Business Banking segment is delivered predominately to commercial customers in Southeastern Pennsylvania,
New York, New Jersey, Massachusetts, Rhode Island and New Hampshire through a single point of contact business model and
provides liquidity to residential mortgage originators nationwide through commercial loans to mortgage companies. Lending
and deposit gathering activities are focused primarily on privately held businesses, high net worth families, selected
commercial real estate lending, and commercial mortgage companies. Revenues are generated primarily through net interest
income (the difference between interest earned on loans, investments, and other interest earning assets and interest paid on
deposits and other borrowed funds) and other non-interest income, such as mortgage warehouse transactional fees and bank
owned life insurance.
The BankMobile segment provides state of the art high tech digital banking and disbursement services to consumers, students,
and the "under banked" nationwide. BankMobile, as a division of Customers Bank, is a full service bank that is accessible to
customers anywhere and anytime through the customer's smartphone or other web-enabled device. Revenues are currently
being generated primarily through interchange and card revenue, deposit and wire transfer fees and university fees. The
majority of revenue and expenses for BankMobile are a result of the Disbursement business acquisition.
The following tables present the operating results for Customers' reportable business segments for the years ended December
31, 2016, 2015 and 2014. Customers has presented the financial information and disclosures for prior periods to reflect the
segment disclosures as if they had been in effect for the periods presented. The segment financial results include directly
attributable revenues and expenses. Corporate overhead costs are assigned to the Community Business Banking segment as
those expenses are expected to continue following the planned disposition of BankMobile. Similarly, the preferred stock
dividends have been allocated in their entirety to the Community Business Banking segment. The tax benefit assigned to
BankMobile was based on an estimated effective tax rate of 38%.
In the third quarter 2016, Customers announced its intent to sell BankMobile and anticipates a sale to close within one year.
Because BankMobile met the criteria to be classified as held for sale at December 31, 2016, the assets and liabilities of
BankMobile have been presented as "Assets held for sale" and "Liabilities held for sale" on the consolidated balance sheets at
December 31, 2016 and 2015. BankMobile's operating results and associated cash flows have been presented as "Discontinued
operations" within the accompanying consolidated financial statements and prior period amounts have been reclassified to
conform with the current period presentation. For more information on BankMobile discontinued operations, see NOTE 3 -
DISCONTINUED OPERATIONS.
The BankMobile segment results presented below differ from the amounts reported as "Discontinued operations" on the
consolidated financial statements primarily because of the internal funds transfer pricing methodology used by management to
allocate interest income to BankMobile for the value provided to the Community Business Banking segment for the use of low/
no cost deposits.
174
Table of Contents
(amounts in thousands)
Interest income (1)
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Preferred stock dividends
Net income (loss) available to common shareholders $
Goodwill and other intangibles
Total assets
Total deposits
(amounts in thousands)
Interest income (1)
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Preferred stock dividends
Net income (loss) available to common
shareholders
Goodwill and other intangibles
Total assets
Total deposits
$
$
$
$
$
$
$
$
For the Year Ended December 31, 2016
Community
Business Banking
BankMobile
Consolidated
$
315,643
$
6,896 (1) $
73,004
242,639
2,246
23,165
131,217
132,341
48,836
83,505
9,515
73,990
3,639
9,303,465
6,846,980
$
$
$
$
38
6,858
795
33,205
47,014
(7,746)
(2,943)
(4,803)
—
(4,803)
13,982
79,271
456,795
$
$
$
$
322,539
73,042
249,497
3,041
56,370
178,231
124,595
45,893
78,702
9,515
69,187
17,621
9,382,736
7,303,775
For the Year Ended December 31, 2015
Community
Business Banking
BankMobile
Consolidated
243,404
$
6,446 (1) $
53,536
189,868
20,562
27,573
107,569
89,310
30,221
59,089
2,493
56,596
3,651
8,395,525
5,662,433
24
6,422
4
144
7,377
(815)
(309)
(506)
—
$
$
$
$
(506)
$
— $
2,680
247,068
$
$
249,850
53,560
196,290
20,566
27,717
114,946
88,495
29,912
58,583
2,493
56,090
3,651
8,398,205
5,909,501
(1) - Amounts reported include funds transfer pricing of $6.9 million and $6.4 million, respectively, for the years ended December 31, 2016,
and 2015 credited to BankMobile for the value provided to the Community Business Banking segment for the use of low/no cost deposits.
175
Table of Contents
(amounts in thousands)
Interest income (1)
Interest expense
Net interest income
Provision for loan losses
Non-interest income
Non-interest expense
Income before income taxes
Income tax expense
Net income
Preferred stock dividends
Net income available to common shareholders
Goodwill and other intangibles
Total assets
Total deposits
$
$
$
$
For the Year Ended December 31, 2014
Community
Business Banking
BankMobile
Consolidated
$
186,089
$
4,338 (1) $
38,485
147,604
14,747
25,126
96,788
61,195
19,340
41,855
—
41,855
3,664
6,819,354
4,296,242
19
4,319
—
—
2,126
2,193
834
1,359
—
$
$
$
$
1,359
$
— $
2,146
236,296
$
$
190,427
38,504
151,923
14,747
25,126
98,914
63,388
20,174
43,214
—
43,214
3,664
6,821,500
4,532,538
(1) - Amounts reported include funds transfer pricing of $4.3 million for the year ended December 31, 2014 credited to BankMobile for the
value provided to the Community Business Banking segment for the use of low/no cost deposits.
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NOTE 26 - SUBSEQUENT EVENTS
On March 7, 2017, Customers entered into a Purchase and Assumption Agreement (the “Purchase Agreement”) with Flagship
Community Bank (“Flagship”). Subject to the terms and conditions of the Purchase Agreement, Customers will sell to
Flagship the assets, and Flagship will assume from Customers the liabilities, of the BankMobile division of Customers Bank.
The purchase price to be paid by Flagship to Customers is $175 million, which is subject to adjustment as provided in the
Purchase Agreement. Customers expects that its net proceeds on the closing of the transaction will be approximately $173
million, and expects to realize a pre-tax net benefit from this transaction of approximately $100 million, considering the
expected purchase price adjustments, fees, expenses, and the payment of transaction-based compensation of approximately
$24.5 million to certain Customers’ employees, pursuant to the terms previously disclosed by Customers in its Current Report
on Form 8-K filed December 30, 2016.
The transaction has been approved by the respective board of directors of Customers Bancorp, Customers Bank and Flagship.
Certain matters related to the transaction must be approved by the shareholders of Flagship, which will be considered and voted
on at a special meeting of Flagship’s shareholders to be held not later than May 31, 2017.
Completion of the transaction is subject to certain closing conditions, including (i) receipt of required regulatory approvals, (ii)
Flagship obtaining financing in an amount not less than $260 million, (iii) approval by Flagship shareholders of certain matters
related to the transaction and (iv) certain other customary conditions.
The Purchase Agreement includes customary representations, warranties and covenants of the parties and contains certain
termination rights for both Customers and Flagship. The executed Purchase Agreement was included as Exhibit 2.1 to the
Current Report on Form 8-K filed on March 8, 2017.
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MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS AND REPORT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
Management of 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 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 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, 2016. The effectiveness of our internal control over financial
reporting as of December 31, 2016 has been audited by BDO USA, LLP, an independent registered public accounting firm, as
stated in their report which is included herein.
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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, 2016, 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, 2016. 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 2016, 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
None.
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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 2017 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 2017 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 2017 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 2017 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 2017 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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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
3.6
3.7
4.1
4.2
4.3
4.4
4.5
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., incorporated by reference to Exhibit 2.3 to the Customers Bancorp
Form 10-K filed with the SEC on February 26, 2016
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
Statement with Respect to Shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series E,
incorporated by reference to Exhibit 3.1 to the Customers Bancorp Form 8-K filed with the SEC on April 28, 2016.
Statement with Respect to Shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series F,
incorporated by reference to Exhibit 3.1 to the Customers Bancorp Form 8-K filed with the SEC on September 16,
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 Form 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 Form 8-K filed with the SEC on July 31, 2013
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Exhibit
No.
4.6
4.7
4.8
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
6.375% Global Note in aggregate principal amount of $55,000,000, incorporated by reference to Exhibit 4.3 to the
Customers Bancorp Form 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 Form 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 Form 8-K filed with the SEC on August 29, 2013
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 Form 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, incorporated by reference to Exhibit 10.14 to the Customers Bancorp Form 10-K filed with the SEC on
February 26, 2016
10.15+
Employment Agreement, dated as of August 5, 2013, by and between Customers Bancorp, Inc. and Robert
Wahlman, incorporated by reference to Exhibit 10.15 to the Customers Bancorp Form 10-K filed with the SEC on
February 26, 2016
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Exhibit
No.
10.16+
Employment Agreement, dated as of March 1, 2014, by and between Customers Bancorp, Inc. and Steven Issa,
incorporated by reference to Exhibit 10.16 to the Customers Bancorp Form 10-K filed with the SEC on February
26, 2016
Description
10.17+ Amendment to Employment Agreement, dated as of February 26, 2016, by and between Customers Bancorp, Inc.
and Steven Issa, incorporated by reference to Exhibit 10.17 to the Customers Bancorp Form 10-K filed with the
SEC on February 26, 2016
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
21.1
23.1
31.1
31.2
32.1
32.2
101
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
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
Termination of At Market Issuance Sales Agreement dated as of January 20, 2016, incorporated by reference to
Exhibit 10.20 to the Customers Bancorp Form 10-K filed with the SEC on February 26, 2016
Transition Services Agreement dated as of June 15, 2016 by and among Customers Bancorp, Customers Bank,
Higher One, Inc. and Higher One Holdings, Inc., incorporated by reference to Exhibit 10.1 to the Customers
Bancorp’s Form 8-K filed with the SEC on June 16, 2016
At Market Issuance Sales Agreement dated as of August 11, 2016, by and among Customers Bancorp, FBR Capital
Markets & Co., Keefe, Bruyette & Woods, Inc. and Maxim Group LLC., incorporated by reference to Exhibit 10.1
to the Customers Bancorp Form 8-K filed with the SEC on August 11, 2016
Order to Cease and Desist and Order of Assessment of Civil Money Penalty Issued Upon Consent Dated December
6, 2016, incorporated by reference to Exhibit 10.2 to the Customers Bancorp Form 8-K filed with the SEC on
December 7, 2016
Amended and Restated Employment Agreement, dated as of December 30, 2016, by and between Customers
Bancorp, Inc. and Richard Ehst, incorporated by reference to Exhibit 10.2 to the Customers Bancorp Form 8-K
filed with the SEC on December 30, 2016
Amended and Restated Employment Agreement, dated as of December 30, 2016, by and between Customers
Bancorp, Inc. and Jay S. Sidhu. incorporated by reference to Exhibit 10.1 to the Customers Bancorp Form 8-K filed
with the SEC on December 30, 2016
Letter Agreement, dated as of December 30, 2016, by and between Customers Bancorp, Inc. and Jay S. Sidhu.
incorporated by reference to Exhibit 10.3 to the Customers Bancorp Form 8-K filed with the SEC on December 30,
2016
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, 2016 and 2015, (b) Statements of Income
for the years ended December 31, 2016, 2015 and 2014, (c) Statements of Comprehensive Income for the years
ended December 31, 2016, 2015 and 2014, (d) Statements of Cash Flows for the years ended December 31, 2016,
2015 and 2014, (e) Statements of Changes in Shareholders’ Equity for the years ended December 31, 2016, 2015
and 2014 and (f) Notes to Financial Statements for the years ended December 31, 2016, 2015 and 2014.
+
Management Contract or compensatory plan or arrangement
183
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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.
March 8, 2017
March 8, 2017
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.
184
Table of Contents
Signature:
/s/ Jay S. Sidhu
Jay S. Sidhu
/s/ Robert E. Wahlman
Robert E. Wahlman
/s/ Carla A. Leibold
Carla A. Leibold
Chairman, Chief Executive Officer and Director (principal executive officer) March 8, 2017
Title(s):
Date:
Executive Vice President and Chief Financial Officer (principal financial
officer)
March 8, 2017
Senior Vice President - Chief Accounting Officer and Controller (principal
accounting officer)
March 8, 2017
/s/ Daniel K. Rothermel Director
Daniel K. Rothermel
/s/ Bhanu Choudhrie
Director
Bhanu Choudhrie
/s/ Andrea R. Allon
Director
Andrea R. Allon
/s/ T. Lawrence Way
Director
T. Lawrence Way
/s/ Rick B. Burkey
Director
Rick B. Burkey
/s/ Steven J. Zuckerman Director
Steven J. Zuckerman
March 8, 2017
March 8, 2017
March 8, 2017
March 8, 2017
March 8, 2017
March 8, 2017
185