Customers Bancorp Inc

Previous wording

Management’s discussion and analysis represents an overview of the financial condition and results of operations, and highlights the significant changes in the financial condition and results of operations, as presented in the accompanying consolidated financial statements for Customers Bancorp, Inc. (the “Bancorp” or “Customers Bancorp”), a financial holding company, and its wholly owned subsidiaries, including Customers Bank (the “Bank”), collectively referred to as “Customers” herein. This information is intended to facilitate your understanding and assessment of significant changes and trends related to Customers’ financial condition and results of operations as of and for the three months ended March 31, 2024. All quarterly information in this Management’s Discussion and Analysis is unaudited. You should read this section in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Customers’ 2023 Form 10-K.

Current wording

Management’s discussion and analysis represents an overview of the financial condition and results of operations, and highlights the significant changes in the financial condition and results of operations, as presented in the accompanying consolidated financial statements for Customers Bancorp, Inc. (the “Bancorp” or “Customers Bancorp”), a financial holding company, and its wholly owned subsidiaries, including Customers Bank (the “Bank”), collectively referred to as “Customers” herein. This information is intended to facilitate your understanding and assessment of significant changes and trends related to Customers’ financial condition and results of operations as of and for the three and six months ended June 30, 2024. All quarterly information in this Management’s Discussion and Analysis is unaudited. You should read this section in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Customers’ 2023 Form 10-K.

Previous wording

Inflation remains elevated in 2024. The Federal Reserve has raised interest rates significantly throughout 2022 and into 2023 in attempts to bring the inflation to its long run target rate of two percent. The Federal Reserve has indicated that the interest rates will be lowered in 2024, however significant uncertainties exist as to the extent and timing of any future rate cuts.

Current wording

Inflation remains elevated in 2024. The Federal Reserve has raised interest rates significantly throughout 2022 and into 2023 in attempts to bring the inflation to its long run target rate of two percent. The Federal Reserve is expected to start lowering interest rates in 2024, however significant uncertainties exist as to the extent and timing of any future rate cuts.

Previous wording

Significant uncertainties as to future economic conditions continue to exist, including higher inflation and interest rate environment, elevated liquidity risk to the U.S. banking system and the exposure to the U.S. commercial real estate market, particularly to the regional banks, disruptions to global supply chain and labor markets and higher oil and commodity prices exacerbated by the military conflicts between Russia and Ukraine and in Israel. Customers has taken deliberate actions in response, including maintaining higher levels of liquidity, reserves for credit losses on loans and leases and off-balance sheet credit exposures and strong capital ratios. Customers has shifted the mix of its loan portfolio towards low credit risk commercial loans with floating or adjustable interest rates to position the Bank for higher interest rates. Customers’ exposure to higher risk commercial real estate such as the office sector is minimal, representing approximately 1% of the loan portfolio as of March 31, 2024. Customers has also shifted the mix of its available for sale debt securities portfolio towards variable rate, shorter duration debt securities. The Bank’s debt securities available for sale and held to maturity are available to be pledged as collateral to the FRB and FHLB for additional liquidity. The Bank had $5.2 billion in immediate available liquidity from the FRB and FHLB and cash on hand of $3.7 billion as of March 31, 2024. The Bank’s estimated FDIC insured deposits represented approximately 71% of our deposits (inclusive of accrued interest) as of March 31, 2024. When including collateralized and affiliate deposits as FDIC insured, this number increased to 78% of our deposits as of March 31, 2024. Customers is focused on growing its non-interest bearing and lower-cost interest-bearing deposits. Customers continues to monitor closely the impact of uncertainties affecting the macroeconomic conditions, the U.S. banking system, particularly regional banks, the military conflicts between Russia and Ukraine and in Israel, as well as any effects that may result from the federal government’s responses including future rate and regulatory actions; however, the extent to which inflation, interest rates and other macroeconomic and industry factors, the geopolitical conflicts and developments in the U.S. banking system will impact Customers’ operations and financial results during the remainder of 2024 is highly uncertain.

Current wording

Significant uncertainties as to future economic conditions continue to exist, including higher inflation and interest rate environment, elevated liquidity risk to the U.S. banking system and the exposure to the U.S. commercial real estate market, particularly to the regional banks, disruptions to global supply chain and labor markets and higher oil and commodity prices exacerbated by the military conflicts between Russia and Ukraine and in Israel. Customers has taken deliberate actions in response, including maintaining higher levels of liquidity, reserves for credit losses on loans and leases and off-balance sheet credit exposures and strong capital ratios. Customers has shifted the mix of its loan portfolio towards low credit risk commercial loans with floating or adjustable interest rates to position the Bank for higher interest rates. Customers’ exposure to higher risk commercial real estate such as the office sector is minimal, representing approximately 1% of the loan portfolio as of June 30, 2024. The Bank’s debt securities available for sale and held to maturity are available to be pledged as collateral to the FRB and FHLB for additional liquidity. The Bank had approximately $5.3 billion in immediate available liquidity from the FRB and FHLB and cash on hand of $3.0 billion as of June 30, 2024. The Bank’s estimated FDIC insured deposits represented approximately 66% of our deposits (inclusive of accrued interest) as of June 30, 2024. When including collateralized and affiliate deposits as FDIC insured, this number increased to 74% of our deposits as of June 30, 2024. Customers is focused on growing its non-interest bearing and lower-cost interest-bearing deposits. Customers continues to monitor closely the impact of uncertainties affecting the macroeconomic conditions, the U.S. banking system, particularly regional banks, the military conflicts between Russia and Ukraine and in Israel, as well as any effects that may result from the federal government’s responses including future rate and regulatory actions; however, the extent to which inflation, interest rates and other macroeconomic and industry factors, the geopolitical conflicts and developments in the U.S. banking system will impact Customers’ operations and financial results during the remainder of 2024 is highly uncertain.

Previous wording

The net decrease in our estimated ACL as of March 31, 2024 as compared to our December 31, 2023 resulted primarily from lower consumer installment loan balances held for investment. The provision for credit losses on loans and leases was $16.0 million for the three months ended March 31, 2024, for an ending ACL balance of $136.6 million ($133.3 million for loans and leases and $3.3 million for unfunded lending-related commitments) as of March 31, 2024.

Current wording

The net decrease in our estimated ACL as of June 30, 2024 as compared to our December 31, 2023 resulted primarily from lower consumer installment loan balances held for investment. The provision for credit losses on loans and leases was $17.9 million and $33.8 million for the three and six months ended June 30, 2024, respectively, for an ending ACL balance of $137.3 million ($132.4 million for loans and leases and $4.9 million for unfunded lending-related commitments) as of June 30, 2024.

Previous wording

To determine the ACL as of March 31, 2024, Customers utilized Moody’s March 2024 Baseline forecast to generate its modelled expected losses and considered Moody’s other alternative economic forecast scenarios to qualitatively adjust the modelled ACL by loan portfolio in order to reflect management’s reasonable expectations of current and future economic conditions. The Baseline forecast at March 2024 assumed a slightly higher near term GDP growth rate but with weaker forecast of certain macroeconomic variables compared to the fourth quarter 2023 forecasts of macroeconomic conditions used by Customers; the Federal Reserve Board has reached its terminal range of 5.25% to 5.5%, and lowering interest rates by 0.25 percentage point per quarter beginning in June 2024; the federal government avoiding a shutdown in 2024; recent issues around a regional bank and failures of several regional banks in the first half of 2023 are not symptomatic of a broader problem in the U.S. financial system and policymakers’ aggressive response will ensure that the failures do not weaken the financial system or further undermine economic growth; the military conflict between Russia and Ukraine continuing for the foreseeable future but its fallout on energy, agriculture and other commodity markets and the global economy fading; the war in Israel not broadening to a regional conflict and disrupting global energy markets; the CPI rising 2.8% in 2024 and 2.3% in 2025; and the unemployment rate rising to 3.9% in 2024 and 4.1% in 2025. Customers continues to monitor the impact of the U.S. banking system weaknesses, military conflicts between Russia and Ukraine and in Israel, inflation, and monetary and fiscal policy measures on the U.S. economy and, if pace of the expected recovery is worse than expected, further meaningful provisions for credit losses could be required.

Current wording

To determine the ACL as of June 30, 2024, Customers utilized Moody’s June 2024 Baseline forecast to generate its modelled expected losses and considered Moody’s other alternative economic forecast scenarios to qualitatively adjust the modelled ACL by loan portfolio in order to reflect management’s reasonable expectations of current and future economic conditions. The Baseline forecast at June 2024 assumed slight improvements in forecasts of macroeconomic variables from the first quarter 2024 forecasts of macroeconomic conditions used by Customers; the Federal Reserve Board lowering interest rates by 0.25 percentage point in September and December 2024; failures of several regional banks in the first half of 2023 and recent issues around other banks are not symptomatic of a broader problem in the U.S. financial system and policymakers’ aggressive response will ensure that the failures do not weaken the financial system or further undermine economic growth; the military conflict between Russia and Ukraine continuing for the foreseeable future but its fallout on energy, agriculture and other commodity markets and the global economy fading; the war in Israel not broadening to a regional conflict and disrupting global energy markets; the CPI rising 3.2% in 2024 and 2.5% in 2025; and the unemployment rate rising to 4.0% in 2024 and 4.1% in 2025. Customers continues to monitor the impact of the U.S. banking system weaknesses, military conflicts between Russia and Ukraine and in Israel, inflation, and monetary and fiscal policy measures on the U.S. economy and, if pace of the expected recovery is worse than expected, further meaningful provisions for credit losses could be required.

Previous wording

One of the most significant judgments influencing the ACL is the macroeconomic forecasts from Moody’s. Changes in the economic forecasts could significantly affect the estimated credit losses which could potentially lead to materially different allowance levels from one reporting period to the next. Given the dynamic relationship between macroeconomic variables within Customers’ modelling framework, it is difficult to estimate the impact of a change in any one individual variable on the ACL. However, to illustrate a hypothetical sensitivity analysis, management calculated a quantitative allowance using a 100% weighting applied to an adverse scenario. This scenario includes assumptions around the risk of an extended federal government shutdown increasing, causing consumer and business confidence to decline; concerns about bank failures raising fears of further collapse in the banking industry, reducing consumer confidence and causing banks to tighten lending standards; the Federal Reserve keeping the fed funds rate at the target range through the second quarter of 2024 but easing beginning in the third quarter 2024 as the economy weakens further; military conflict between Russia and Ukraine persisting longer than expected; worries grow that the military conflict in Israel leading to a wider military conflict; rising unemployment and the U.S. economy falling into recession in the second quarter of 2024. Under this scenario, as an example, the unemployment rate is estimated at 5.8% and 7.5% in 2024 and 2025, respectively. These numbers represent a 1.9% and 3.4% higher unemployment estimate than the Baseline scenario projection of 3.9% and 4.1% for the same time periods, respectively. To demonstrate the sensitivity to key economic parameters, management calculated the difference between a 100% Baseline weighting and a 100% adverse scenario weighting for modelled results. This would result in an incremental quantitative impact to the ACL of approximately $57 million at March 31, 2024. This resulting difference is not intended to represent an expected increase in ACL levels since (i) Customers may use a weighted approach applied to multiple economic scenarios for its ACL process, (ii) the highly uncertain economic environment, (iii) the difficulty in predicting inter-relationships between macroeconomic variables used in various economic scenarios, and (iv) the sensitivity analysis does not account for any qualitative adjustments incorporated by Customers as part of its overall ACL framework.

Current wording

One of the most significant judgments influencing the ACL is the macroeconomic forecasts from Moody’s. Changes in the economic forecasts could significantly affect the estimated credit losses which could potentially lead to materially different allowance levels from one reporting period to the next. Given the dynamic relationship between macroeconomic variables within Customers’ modelling framework, it is difficult to estimate the impact of a change in any one individual variable on the ACL. However, to illustrate a hypothetical sensitivity analysis, management calculated a quantitative allowance using a 100% weighting applied to an adverse scenario. This scenario includes assumptions around the elevated interest rates weakening consumer spending and confidence much more than expected; concerns about bank failures raising fears of further collapse in the banking industry, reducing consumer confidence and causing banks to tighten lending standards; the Federal Reserve keeping the fed funds rate at the target range throughout the second quarter of 2024 but easing beginning in the third quarter 2024 as the economy weakens further; military conflict between Russia and Ukraine persisting longer than expected; worries grow that the military conflict in Israel leading to a wider military conflict; rising unemployment and the U.S. economy falling into recession in the third quarter of 2024. Under this scenario, as an example, the unemployment rate is estimated at 5.1% and 7.8% in 2024 and 2025, respectively. These numbers represent a 1.1% and 3.7% higher unemployment estimate than the Baseline scenario projection of 4.0% and 4.1% for the same time periods, respectively. To demonstrate the sensitivity to key economic parameters, management calculated the difference between a 100% Baseline weighting and a 100% adverse scenario weighting for modelled results. This would result in an incremental quantitative impact to the ACL of approximately $56 million at June 30, 2024. This resulting difference is not intended to represent an expected increase in ACL levels since (i) Customers may use a weighted approach applied to multiple economic scenarios for its ACL process, (ii) the highly uncertain economic environment, (iii) the difficulty in predicting inter-relationships between macroeconomic variables used in various economic scenarios, and (iv) the sensitivity analysis does not account for any qualitative adjustments incorporated by Customers as part of its overall ACL framework.

Previous wording

There is no certainty that Customers’ ACL will be appropriate over time to cover losses in our portfolio as economic and market conditions may ultimately differ from our reasonable and supportable forecast. Additionally, events adversely affecting specific customers, industries, or Customers’ markets, such as geopolitical instability, risks of rising inflation including a near-term recession, or worsening of the U.S. banking system could severely impact our current expectations. If the credit quality of Customers’ customer base materially deteriorates or the risk profile of a market, industry, or group of customers changes materially, Customers’ net income and capital could be materially adversely affected which, in turn could have a material adverse effect on Customers’ financial condition and results of operations. The extent to which the geopolitical instability, risks of rising inflation, worsening of the U.S. banking system and federal government shutdown have and will continue to negatively impact Customers’ businesses, financial condition, liquidity and results will depend on future developments, which are highly uncertain and cannot be forecasted with precision at this time.

Current wording

There is no certainty that Customers’ ACL will be appropriate over time to cover losses in our portfolio as economic and market conditions may ultimately differ from our reasonable and supportable forecast. Additionally, events adversely affecting specific customers, industries, or Customers’ markets, such as geopolitical instability, risks of rising inflation including a near-term recession, or worsening of the U.S. banking system could severely impact our current expectations. If the credit quality of Customers’ customer base materially deteriorates or the risk profile of a market, industry, or group of customers changes materially, Customers’ net income and capital could be materially adversely affected which, in turn could have a material adverse effect on Customers’ financial condition and results of operations. The extent to which the geopolitical instability, risks of rising inflation and worsening of the U.S. banking system have and will continue to negatively impact Customers’ businesses, financial condition, liquidity and results will depend on future developments, which are highly uncertain and cannot be forecasted with precision at this time.

Previous wording

The following table sets forth the condensed statements of income for the three months ended March 31, 2024 and 2023:

Current wording

The following table sets forth the condensed statements of income for the three and six months ended June 30, 2024 and 2023:

Previous wording

Customers reported net income available to common shareholders of $45.9 million for the three months ended March 31, 2024, compared to net income available to common shareholders of $50.3 million for the three months ended March 31, 2023. Factors contributing to the change in net income available to common shareholders for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 were as follows:

Current wording

Customers reported net income available to common shareholders of $54.3 million and $100.2 million for the three and six months ended June 30, 2024, respectively, compared to net income available to common shareholders of $44.0 million and $94.3 million for the three and six months ended June 30, 2023, respectively. Factors contributing to the change in net income available to common shareholders for the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023 were as follows:

Previous wording

Net interest income increased $10.5 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 due to an increase in average interest-earning assets and higher market interest rates on variable rate lower credit risk specialized lending verticals, interest-earning deposits and investments and lower average balances of borrowings, offset in part by higher funding costs on deposits from increased market interest rates. Average interest-earning assets increased by $357.5 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023. The increase in interest-earning assets was driven by an increase in interest-earning deposits, offset in part by decreases in PPP loans due to PPP loan forgiveness and guarantee payments from the SBA as the PPP program was substantially completed in early 2023, mortgage finance loans due to lower mortgage activity from rising interest rates and consumer installment loans as Customers continued its de-risking strategy. NIM increased by 14 basis points to 3.10% for the three months ended March 31, 2024 from 2.96% for the three months ended March 31, 2023. The NIM increase was primarily attributable to higher interest income on variable rate loans in specialized lending, interest-earning deposits and investments in a higher interest rate environment. The NIM increase was partially offset by the shift in the mix of interest-bearing liabilities with higher market interest rates on deposits partially offset by lower average balances of borrowings, which drove a 75 basis point increase in the cost of interest-bearing liabilities for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, and reduced recognition of net deferred loan origination fees from PPP loans due to lower PPP loan forgiveness and guarantee payments from the SBA as the PPP program was substantially completed in early 2023. Customers’ total cost of funds, including non-interest bearing deposits was 3.55% and 3.45% for the three months ended March 31, 2024 and 2023, respectively.

Current wording

Net interest income increased $2.4 million for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 primarily due to higher average balances and market interest rates on interest-earning deposits and lower interest expense from lower average balances of borrowings, offset in part by higher interest expense on deposits. Average interest-earning assets decreased by $553.4 million for the three months ended June 30, 2024, compared to the three months ended June 30, 2023. The decrease in interest-earning assets was primarily driven by decreases in commercial and industrial loans and consumer installment loans, offset in part by an increase in interest-earning deposits. NIM increased by 14 basis points to 3.29% for the three months ended June 30, 2024 from 3.15% for the three months ended June 30, 2023. The NIM increase was primarily attributable to higher interest income on variable rate loans in specialized lending and consumer installment loans in a higher interest rate environment. The NIM increase was partially offset by higher market interest rates on deposits, which drove a 44 basis point increase in the cost of interest-bearing liabilities for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Customers’ total cost of funds, including non-interest bearing deposits was 3.51% and 3.32% for the three months ended June 30, 2024 and 2023, respectively.

Previous wording

The $2.5 million decrease in the provision for credit losses for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily reflects lower consumer installment loan balances held for investment. The ACL on off-balance sheet credit exposures is presented within accrued interest payable and other liabilities in the consolidated balance sheet and the related provision is presented as part of other non-interest expense on the consolidated statement of income. The ACL on loans and leases held for investment represented 1.12% of total loans and leases receivable at March 31, 2024, compared to 0.97% of total loans and leases receivable at March 31, 2023. Net charge-offs for the three months ended March 31, 2024 were $18.0 million, or 55 basis points of average loans and leases on an annualized basis, compared to net charge-offs of $18.7 million, or 49 basis points on an annualized basis, for the three months ended March 31, 2023. The decrease in net charge-offs for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, was primarily due to lower charge-offs for consumer installment loans.

Current wording

The $5.5 million decrease in the provision for credit losses for the three months ended June 30, 2024 compared to the three months ended June 30, 2023, primarily reflects the recognition of slight improvements in macroeconomic forecasts and lower consumer installment loan balances held for investment. The ACL on off-balance sheet credit exposures is presented within accrued interest payable and other liabilities in the consolidated balance sheet and the related provision is presented as part of other non-interest expense on the consolidated statement of income. The ACL on loans and leases held for investment represented 1.08% of total loans and leases receivable at June 30, 2024, compared to 1.09% of total loans and leases receivable at June 30, 2023. Net charge-offs for the three months ended June 30, 2024 were $18.7 million, or 56 basis points of average loans and leases on an annualized basis, compared to net charge-offs of $15.6 million, or 42 basis points on an annualized basis, for the three months ended June 30, 2023. The net charge-offs of $15.6 million for three months ended June 30, 2023 excluded $6.2 million of charge-offs for certain PCD loans acquired from the FDIC applied against $8.7 million of allowance for credit losses on PCD loans recognized upon acquisition of the venture banking loan portfolio on June 15, 2023. The increase in net charge-offs for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, excluding the charge-offs for certain PCD loans acquired from the FDIC, was primarily due to higher charge-offs for commercial and industrial loans.

Previous wording

The provision for credit losses for the three months ended March 31, 2024 and 2023 also included a provision for credit losses of $1.1 million and $1.6 million on certain asset-backed securities and corporate notes, respectively, included in our investment securities available for sale. Refer to “NOTE 5 – INVESTMENT SECURITIES” to Customers’ unaudited consolidated financial statements for additional information.

Current wording

The provision for credit losses for the three months ended June 30, 2024 and 2023 also included a provision for credit losses of $0.3 million and $1.3 million on certain asset-backed securities and corporate notes, respectively, included in our investment securities available for sale. The provision for credit losses on certain asset-backed securities and corporate notes included in our investment securities available for sale was $1.4 million and $2.9 million for the six months ended June 30, 2024 and 2023, respectively. Refer to “NOTE 5 – INVESTMENT SECURITIES” to Customers’ unaudited consolidated financial statements for additional information.

Previous wording

The $19.0 million increase in non-interest expense for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 primarily resulted from increases of $10.7 million in FDIC assessments, non-income taxes and regulatory fees, $5.3 million in technology, communication and bank operations, $3.7 million in salaries and employee benefits and $1.9 million in other non-interest expense. These increases were offset in part by a decrease of $1.2 million in professional services for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Current wording

The $33.2 million increase in non-interest expense for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 primarily resulted from increases of $15.5 million in salaries and employee benefits, $11.2 million in FDIC assessments, non-income taxes and regulatory fees, $6.4 million in other non-interest expense and $5.1 million in technology, communication and bank operations. These increases were offset in part by decreases of $4.3 million in professional services and $1.9 million in loan servicing for the six months ended June 30, 2024 compared to the six months ended June 30, 2023.

Previous wording

Included in the $10.7 million increase in FDIC assessments, non-income taxes and regulatory fees was $4.2 million in FDIC premiums related to periods prior to 2024 and $0.5 million related to an industry-wide FDIC special assessment associated with the bank failures of March 2023. Included in the $5.3 million increase in technology, communication and bank operations was $7.1 million of deposit servicing-related fees related to periods prior to 2024, partially offset by reductions in deposit servicing-related fees and other technology, communication and banking operations expenses for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

Current wording

Included in the $11.2 million increase in FDIC assessments, non-income taxes and regulatory fees for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was $4.2 million in FDIC premiums related to periods prior to 2024 and $0.7 million related to an increase in industry-wide FDIC special assessment associated with the bank failures of March 2023. Included in the $5.1 million increase in technology, communication and bank operations for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 was $7.1 million of deposit servicing-related fees related to periods prior to 2024.

Previous wording

Customers’ effective tax rate was 23.94% for the three months ended March 31, 2024 compared to 21.33% for the three months ended March 31, 2023. The increase in the effective tax rate primarily resulted from a decrease in estimated income tax credits for the year ending December 31, 2024.

Current wording

Customers’ effective tax rate was 24.68% for the three months ended June 30, 2024 compared to 30.39% for the three months ended June 30, 2023. The decrease in the effective tax rate primarily resulted from tax expense on surrendered bank-owned life insurance policies of $4.1 million for the three months ended June 30, 2023.

Previous wording

Preferred stock dividends were $3.8 million and $3.5 million for the three months ended March 31, 2024 and 2023, respectively. There were no changes to the amount of preferred stock outstanding during the three months ended March 31, 2024 and 2023.

Current wording

Preferred stock dividends were $3.8 million and $3.6 million for the three months ended June 30, 2024 and 2023, respectively. Preferred stock dividends were $7.6 million and $7.0 million for the six months ended June 30, 2024 and 2023, respectively. There were no changes to the amount of preferred stock outstanding during the three and six months ended June 30, 2024 and 2023.

Previous wording

Net interest income (the difference between the interest earned on loans and leases, 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, related interest spread, net interest margin and the dollar amount of changes in interest income and interest expense for the major categories of interest-earning assets and interest-bearing liabilities for the three months ended March 31, 2024 and 2023. 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.

Current wording

Net interest income (the difference between the interest earned on loans and leases, 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, related interest spread, net interest margin and the dollar amount of changes in interest income and interest expense for the major categories of interest-earning assets and interest-bearing liabilities for the three and six months ended June 30, 2024 and 2023. 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.

Previous wording

(5)Total costs of deposits (including interest bearing and non-interest-bearing) were 3.45% and 3.32% for the three months ended March 31, 2024 and 2023, respectively.

Current wording

(5)Total costs of deposits (including interest bearing and non-interest-bearing) were 3.40% and 3.11% for the three months ended June 30, 2024 and 2023, respectively.

Previous wording

Net interest income increased $10.5 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 primarily due to an increase in average interest-earning assets and higher market interest rates on variable rate lower credit risk specialized lending verticals, interest-earning deposits and investments and lower average balances of borrowings, offset in part by higher funding costs on deposits from increased market interest rates. Average interest-earning assets increased by $357.5 million, primarily related to an increase in interest-earning deposits, offset in part by decreases in PPP loans due to PPP loan forgiveness and guarantee payments from the SBA as the PPP program was substantially completed in early 2023, mortgage finance loans due to lower mortgage activity from higher interest rates and consumer installment loans as Customers continued its de-risking strategy. Total consumer installment loans decreased for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, as consumer installment loans held for investment decreased primarily for risk management purposes and the build out of our held for sale strategy in 2024 in which we accumulate loans with the intent to sell in the future.

Current wording

Net interest income increased $2.4 million for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 primarily due to higher average balances and market interest rates on interest-earning deposits and lower interest expense from lower average balances of borrowings, offset in part by higher interest expense on deposits. Average interest-earning assets decreased by $553.4 million, primarily related to decreases in commercial and industrial loans and consumer installment loans, offset in part by an increase in interest-earning deposits. Total consumer installment loans decreased for the three months ended June 30, 2024 compared to the three months ended June 30, 2023, as consumer installment loans held for investment decreased primarily for risk management purposes and the build out of our held for sale strategy in 2024 in which we accumulate loans with the intent to sell in the future.

Previous wording

The NIM increased by 14 basis points to 3.10% for the three months ended March 31, 2024 from 2.96% for the three months ended March 31, 2023 resulting primarily from a shift in the mix of interest-earning assets in a higher interest rate environment, offset in part by a shift in the mix of interest-bearing liabilities in a higher interest rate environment and reduced recognition of net deferred loan origination fees from PPP loans driven by lower loan forgiveness and guarantee payments from the SBA, which accelerated the recognition of net deferred loan origination fees, as the PPP program was substantially completed in early 2023. The shift in the mix of interest-earning assets in a higher interest rate environment, mostly due to higher interest rates on variable rate loans in specialized lending, interest-earning deposits and investments drove an increase in the yield on interest-earning assets and contributed to the NIM increase for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The NIM increase was offset in part by a shift in the mix of interest-bearing liabilities with higher market interest rates on deposits partially offset by lower average balances of borrowings, which drove a 75 basis point increase in the cost of interest-bearing liabilities, and reduced recognition of net deferred loan origination fees from PPP loans driven by lower loan forgiveness and guarantee payments from the SBA for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. Customers’ total cost of funds, including non-interest bearing deposits was 3.55% and 3.45% for the three months ended March 31, 2024 and 2023, respectively.

Current wording

The NIM increased by 14 basis points to 3.29% for the three months ended June 30, 2024 from 3.15% for the three months ended June 30, 2023 resulting primarily from a shift in the mix of interest-earning assets and interest-bearing liabilities in a higher interest rate environment. The shift in the mix of interest-earning assets in a higher interest rate environment, mostly due to higher interest rates on variable rate loans in specialized lending and consumer installment loans drove an increase in the yield on interest-earning assets and contributed to the NIM increase for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The NIM increase was partially offset by higher market interest rates on deposits, which drove a 44 basis point increase in the cost of interest-bearing liabilities for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. Customers’ total cost of funds, including non-interest bearing deposits was 3.51% and 3.32% for the three months ended June 30, 2024 and 2023, respectively.

Previous wording

The provision for credit losses is a charge to earnings to maintain the ACL at a level consistent with management’s assessment of expected lifetime losses in the loan and lease portfolio at the balance sheet date. Customers recorded a provision for credit losses on loans and leases during the three months ended March 31, 2024, which resulted primarily from increased uncertainty and slightly weaker macroeconomic forecasts, partially offset by lower consumer installment loan balances held for investment. Customers recorded a provision for credit losses of $16.0 million for loans and leases and $0.4 million for lending-related commitments, respectively, for the three months ended March 31, 2024. Customers recorded a provision for credit losses of $18.0 million for loans and leases, which resulted primarily from the recognition of weaker macroeconomic forecasts, and a provision for credit losses of $0.3 million for lending-related commitments, respectively, for the three months ended March 31, 2023. Net charge-offs for the three months ended March 31, 2024 were $18.0 million, or 55 basis points of average loans and leases on an annualized basis, compared to net charge-offs of $18.7 million, or 49 basis points of average loans and leases on an annualized basis, for the three months ended March 31, 2023. The decrease in net charge-offs for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, was primarily due to lower charge-offs for consumer installment loans.

Current wording

The provision for credit losses is a charge to earnings to maintain the ACL at a level consistent with management’s assessment of expected lifetime losses in the loan and lease portfolio at the balance sheet date. Customers recorded a provision for credit losses on loans and leases during the three months ended June 30, 2024, which resulted primarily from the recognition of slight improvements in macroeconomic forecasts and lower consumer installment loan balances held for investment. Customers recorded a provision for credit losses of $17.9 million for loans and leases and $1.6 million for lending-related commitments, respectively, for the three months ended June 30, 2024. Customers recorded a provision for credit losses of $22.4 million for loans and leases, which resulted primarily from increased uncertainty and slightly weaker macroeconomic forecasts, partially offset by lower consumer installment loan balances held for investment, and a benefit to provision for credit losses of $0.3 million for lending-related commitments, respectively, for the three months ended June 30, 2023. Net charge-offs for the three months ended June 30, 2024 were $18.7 million, or 56 basis points of average loans and leases on an annualized basis, compared to net charge-offs of $15.6 million, or 42 basis points of average loans and leases on an annualized basis, for the three months ended June 30, 2023. The net charge-offs of $15.6 million for three months ended June 30, 2023 excluded $6.2 million of charge-offs for certain PCD loans acquired from the FDIC applied against $8.7 million of allowance for credit losses on PCD loans recognized upon acquisition of the venture banking loan portfolio on June 15, 2023. The increase in net charge-offs for the three months ended June 30, 2024, compared to the three months ended June 30, 2023, excluding the charge-offs for certain PCD loans acquired from the FDIC, was primarily due to higher charge-offs for commercial and industrial loans.

Previous wording

The provision for credit losses for the three months ended March 31, 2024 and 2023 also included a provision for credit losses of $1.1 million and $1.6 million on certain asset-backed securities and corporate notes, respectively, included in our investment securities available for sale. Refer to “NOTE 5 – INVESTMENT SECURITIES” to Customers’ unaudited consolidated financial statements for additional information.

Current wording

The provision for credit losses for the three months ended June 30, 2024 and 2023 also included a provision for credit losses of $0.3 million and $1.3 million on certain asset-backed securities and corporate notes, respectively, included in our investment securities available for sale. The provision for credit losses on certain asset-backed securities and corporate notes included in our investment securities available for sale was $1.4 million and $2.9 million for the six months ended June 30, 2024 and 2023, respectively. Refer to “NOTE 5 – INVESTMENT SECURITIES” to Customers’ unaudited consolidated financial statements for additional information.

Previous wording

The table below presents the components of non-interest income for the three months ended March 31, 2024 and 2023.

Current wording

The table below presents the components of non-interest income for the three and six months ended June 30, 2024 and 2023.

Previous wording

Commercial lease income represents income earned on commercial operating leases originated by Customers’ commercial equipment financing group in which Customers is the lessor. The $0.4 million increase in commercial lease income for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 primarily resulted from the growth of Customers’ equipment finance business.

Current wording

Commercial lease income represents income earned on commercial operating leases originated by Customers’ commercial equipment financing group in which Customers is the lessor. The $1.4 million increase in commercial lease income for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 primarily resulted from the growth of Customers’ equipment finance business.

Previous wording

The $1.3 million increase in loan fees for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 primarily resulted from increases in fees earned on unused lines of credit, servicing related revenue and other fees from commercial borrowers.

Current wording

The $1.0 million increase in loan fees for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 primarily resulted from increases in fees earned on unused lines of credit and other fees from commercial and consumer borrowers.

Previous wording

Bank-owned life insurance income represents income earned on life insurance policies owned by Customers including an increase in cash surrender value of the policies and any benefits paid by insurance carriers under the policies. The $0.6 million increase in bank-owned life insurance income for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 primarily resulted from an increase in death benefits paid by insurance carriers under the policies.

Current wording

Bank-owned life insurance income represents income earned on life insurance policies owned by Customers including an increase in cash surrender value of the policies and any benefits paid by insurance carriers under the policies. The $3.0 million decrease in bank-owned life insurance income for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 primarily resulted from a decrease in death benefits paid by insurance carriers under the policies.

Previous wording

The table below presents the components of non-interest expense for the three months ended March 31, 2024 and 2023.

Current wording

The table below presents the components of non-interest expense for the three and six months ended June 30, 2024 and 2023.

Previous wording

The $3.7 million increase in salaries and employee benefits for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 primarily resulted from an increase in average full-time equivalent team members, annual merit increases, incentives and stock awards, partially offset by a decrease in severance.

Current wording

The $11.8 million increase in salaries and employee benefits for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 primarily resulted from an increase in average full-time equivalent team members including the addition of 10 new banking teams, annual merit increases, incentives and severance.

Previous wording

The $5.3 million increase in technology, communication and bank operations expense for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 primarily resulted from an increase in deposit servicing-related expenses resulting from higher servicing fees, which included $7.1 million for periods prior to 2024, and $2.6 million increase in fees for software as a service.

Current wording

The $0.2 million decrease in technology, communication and bank operations expense for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 primarily resulted from a decrease in deposit servicing-related expenses resulting from lower servicing fees, partially offset by an increase of $4.2 million in fees for software, software as a service and processing fees.

Previous wording

Customers incurred expenses of $10.7 million and $7.6 million to BM Technologies under the deposit servicing agreement included within the technology, communication and bank operations expense during the three months ended March 31, 2024 and 2023, respectively. The deposit servicing fees of $10.7 million incurred to BM Technologies for the three months ended March 31, 2024 included $7.1 million for periods prior to 2024.

Current wording

Customers incurred expenses of $3.4 million and $7.3 million to BM Technologies under the deposit servicing agreement included within the technology, communication and bank operations expense during the three months ended June 30, 2024 and 2023, respectively. Customers incurred expenses of $14.1 million and $14.9 million to BM Technologies under the deposit servicing agreement included within the technology, communication and bank operations expense during the six months ended June 30, 2024 and 2023, respectively. The deposit servicing fees of $14.1 million incurred to BM Technologies for the six months ended June 30, 2024 included $7.1 million for periods prior to 2024.

Previous wording

The $1.2 million decrease in professional services for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 primarily resulted from decreases in legal fees related to loan transactions and consulting fees.

Current wording

The $3.1 million decrease in professional services for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 primarily resulted from decreases in legal and consulting fees.

Previous wording

The $10.7 million increase in FDIC assessments, non-income taxes and regulatory fees for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 primarily resulted from an increase in FDIC assessment rates, FDIC premiums of $4.2 million relating to periods prior to 2024 and an increase in the estimated FDIC special assessments of $0.5 million. In November 2023, FDIC issued a final rule to implement a special assessment of 3.36 basis points on the uninsured deposits in excess of $5 billion as of December 31, 2022 to recover the losses arising from the closures of Silicon Valley Bank and Signature Bank in early March 2023. Customers recorded an additional special assessment of $0.5 million based on the updated estimate of the losses from the FDIC for the three months ended March 31, 2024. The special assessment will be paid over eight quarterly periods beginning in the first quarter 2024. Customers had approximately $6.4 billion in uninsured deposits as of December 31, 2022. The total special assessment amount to be paid by Customers may vary based on collections ultimately received by the FDIC to recover its losses.

Current wording

The $11.2 million increase in FDIC assessments, non-income taxes and regulatory fees for the six months ended June 30, 2024 compared to the six months ended June 30, 2023 primarily resulted from an increase in FDIC assessment rates, FDIC premiums of $4.2 million relating to periods prior to 2024 and an increase in the estimated FDIC special assessments of $0.7 million. In November 2023, FDIC issued a final rule to implement a special assessment of 3.36 basis points on the uninsured deposits in excess of $5 billion as of December 31, 2022 to recover the losses arising from the closures of Silicon Valley Bank and Signature Bank in early March 2023. Customers recorded an additional special assessment of $0.7 million based on the updated estimate of the losses from the FDIC for the six months ended June 30, 2024. The special assessment will be paid over eight quarterly periods beginning in the first quarter 2024. Customers had approximately $6.4 billion in uninsured deposits as of December 31, 2022. The total special assessment amount to be paid by Customers may vary based on collections ultimately received by the FDIC to recover its losses.

Previous wording

The $1.9 million increase in other non-interest expense for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 primarily resulted from an increase in fees paid to a fintech company related to consumer installment loans originated and held for sale as a part of the Bank’s held for sale strategy.

Current wording

The $4.6 million increase in other non-interest expense for the three months ended June 30, 2024 compared to the three months ended June 30, 2023 primarily resulted from increases in fees paid to a fintech company related to consumer installment loans originated and held for sale as a part of the Bank’s held for sale strategy and the provision for credit losses on unfunded lending-related commitments.

Previous wording

The table below presents income tax expense and the effective tax rate for the three months ended March 31, 2024 and 2023.

Current wording

The table below presents income tax expense and the effective tax rate for the three and six months ended June 30, 2024 and 2023.

Previous wording

The $1.1 million increase in income tax expense for the three months ended March 31, 2024, when compared to the same period in the prior year, primarily resulted from a decrease in estimated income tax credits for the year ending December 31, 2024. The increase in the effective tax rate for the three months ended March 31, 2024, when compared to the same period in the prior year, primarily resulted from a decrease in estimated income tax credits for the year ending December 31, 2024.

Current wording

The $0.6 million decrease in income tax expense for the six months ended June 30, 2024, when compared to the same period in the prior year, primarily resulted from tax expense on surrendered bank-owned life insurance policies of $4.1 million for the six months ended June 30, 2023, partially offset by higher pre-tax income and a decrease in estimated income tax credits. The decrease in the effective tax rate for the six months ended June 30, 2024, when compared to the same period in the prior year, primarily resulted from tax expense on surrendered bank-owned life insurance policies for the six months ended June 30, 2023, partially offset by a decrease in estimated income tax credits for the year ending December 31, 2024.

Previous wording

Preferred stock dividends were $3.8 million and $3.5 million for the three months ended March 31, 2024 and 2023, respectively. There were no changes to the amount of preferred stock outstanding during the three months ended March 31, 2024 and 2023.

Current wording

Preferred stock dividends were $3.8 million and $3.6 million for the three months ended June 30, 2024 and 2023, respectively. Preferred stock dividends were $7.6 million and $7.0 million for the six months ended June 30, 2024 and 2023, respectively. There were no changes to the amount of preferred stock outstanding during the three and six months ended June 30, 2024 and 2023.

Previous wording

Customers’ total assets were $21.3 billion at March 31, 2024. This represented an increase of $31.1 million from total assets of $21.3 billion at December 31, 2023. The increase in total assets was primarily driven by increases of $199.2 million in investment securities, at fair value, $64.7 million in loans receivable, mortgage finance, at fair value and $17.3 million in loans held for sale, partially offset by decreases of $145.2 million in cash and cash equivalents, $71.1 million in investment securities held to maturity and $27.2 million in loans and leases receivable.

Current wording

Customers’ total assets were $20.9 billion at June 30, 2024. This represented a decrease of $373.3 million from total assets of $21.3 billion at December 31, 2023. The decrease in total assets was primarily driven by decreases of $797.8 million in cash and cash equivalents and $140.4 million in investment securities held to maturity, partially offset by increases of $290.3 million in loans and leases receivable, $106.0 million in investment securities, at fair value, $104.8 million in loans receivable, mortgage finance, at fair value and $35.4 million in loans held for sale.

Previous wording

Total liabilities were $19.7 billion at March 31, 2024. This represented a decrease of $22.1 million from $19.7 billion at December 31, 2023. The decrease in total liabilities primarily resulted from a decrease of $55.3 million in accrued interest payable and other liabilities, partially offset by an increase of $41.1 million in total deposits.

Current wording

Total liabilities were $19.2 billion at June 30, 2024. This represented a decrease of $481.8 million from $19.7 billion at December 31, 2023. The decrease in total liabilities primarily resulted from decreases of $242.1 million in total deposits, $184.9 million in FHLB advances and $55.0 million in accrued interest payable and other liabilities.

Previous wording

Cash and cash equivalents include cash and due from banks and interest-earning deposits. Cash and due from banks consists mainly of vault cash and cash items in the process of collection. Cash and due from banks were $52.0 million and $45.2 million at March 31, 2024 and December 31, 2023, respectively. Cash and due from banks balances vary from day to day, primarily due to variations in customers’ deposit activities with the Bank.

Current wording

Cash and cash equivalents include cash and due from banks and interest-earning deposits. Cash and due from banks consists mainly of vault cash and cash items in the process of collection. Cash and due from banks were $45.0 million and $45.2 million at June 30, 2024 and December 31, 2023, respectively. Cash and due from banks balances vary from day to day, primarily due to variations in customers’ deposit activities with the Bank.

Previous wording

Interest-earning deposits consist of cash deposited at other banks, primarily the FRB. Interest-earning deposits were $3.6 billion and $3.8 billion at March 31, 2024 and December 31, 2023, respectively. The balance of interest-earning deposits varies from day to day, depending on several factors, such as fluctuations in customers’ deposits with Customers, payment of checks drawn on customers’ accounts and strategic investment and risk management decisions made to optimize Customers’ net interest income, while effectively managing interest-rate risk and liquidity. The decrease in interest-earning deposits from December 31, 2023 primarily resulted from deploying excess cash into loans and investment securities.

Current wording

Interest-earning deposits consist of cash deposited at other banks, primarily the FRB. Interest-earning deposits were $3.0 billion and $3.8 billion at June 30, 2024 and December 31, 2023, respectively. The balance of interest-earning deposits varies from day to day, depending on several factors, such as fluctuations in customers’ deposits with Customers, payment of checks drawn on customers’ accounts and strategic investment and risk management decisions made to optimize Customers’ net interest income, while effectively managing interest-rate risk and liquidity. The decrease in interest-earning deposits from December 31, 2023 primarily resulted from deploying excess cash into loans and investment securities.