Companies: 10,761     total market cap: ยฃ98.489 T
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Customers Bancorp
CUBI
#4384
Rank
ยฃ1.74 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
ยฃ51.12
Share price
-1.90%
Change (1 day)
31.76%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Customers Bancorp
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2020 Q2

Customers Bancorp - 10-Q quarterly report FY2020 Q2


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q

☒Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2020

☐Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     .
001-35542
(Commission File number)
cubi-20200630_g1.jpg
(Exact name of registrant as specified in its charter)
Customers Bancorp, Inc.

Pennsylvania 27-2290659
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
701 Reading Avenue
West Reading PA 19611
(Address of principal executive offices)
(610) 933-2000
(Registrant’s telephone number, including area code)
1015 Penn Avenue
Suite 103
Wyomissing, PA 19610
(Former name, former address and former fiscal year, if changed since last report)
 
 

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolsName of Each Exchange on which Registered
Voting Common Stock, par value $1.00 per shareCUBINew York Stock Exchange
Fixed-to-Floating Rate Non-Cumulative Perpetual
Preferred Stock, Series C, par value $1.00 per share		CUBI/PCNew York Stock Exchange
Fixed-to-Floating Rate Non-Cumulative Perpetual
Preferred Stock, Series D, par value $1.00 per share		CUBI/PDNew York Stock Exchange
Fixed-to-Floating Rate Non-Cumulative Perpetual
Preferred Stock, Series E, par value $1.00 per share		CUBI/PENew York Stock Exchange
Fixed-to-Floating Rate Non-Cumulative Perpetual
Preferred Stock, Series F, par value $1.00 per share		CUBI/PFNew York Stock Exchange
5.375% Subordinated Notes due 2034CUBBNew York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None




Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerxAccelerated filero
Non-accelerated filer
o 
Smaller Reporting Company☐
Emerging Growth Company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ☐    No  x




________________________________________ 
On July 31, 2020, 31,514,485 shares of Voting Common Stock were outstanding.

1
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
Table of Contents
Item 1.
5
Item 2.
54
Item 3.
83
Item 4.
85
Item 1.
86
Item 1A.
86
Item 2.
87
Item 3.
88
Item 4.
88
Item 5.
88
Item 6.
89
91
Ex-31.1
Ex-31.2
Ex-32.1
Ex-32.2
Ex-101

2
GLOSSARY OF ABBREVIATIONS AND ACRONYMS
The following list of abbreviations and acronyms may be used throughout this Report, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Unaudited Consolidated Financial Statements and the Notes to the Unaudited Consolidated Financial Statements.
2004 Plan2012 Amendment and Restatement of the Customers Bancorp, Inc. Amended and Restated 2004 Incentive Equity and Deferred Compensation Plan
2010 Plan2010 Stock Option Plan
2019 Plan2019 Stock Incentive Plan
ACLAllowance for credit losses
ASCAccounting Standards Codification
ALLLAllowance for loan and lease losses
AOCIAccumulated other comprehensive income
ASUAccounting Standards Update
ATMAutomated teller machine
BancorpCustomers Bancorp, Inc.
BankCustomers Bank
BBB spreadBBB rated corporate bond spreads to U.S. Treasury securities
BHCABank Holding Company Act of 1956, as amended
BMTBankMobile Technologies, Inc.
BOLIBank-owned life insurance
BRRPBonus Recognition and Retention Program
CARES Act
Coronavirus Aid, Relief and Economic Security Act
CCFCustomers Commercial Finance, LLC
CECLCurrent expected credit loss
CEOChief Executive Officer
CFOChief Financial Officer
CFPBConsumer Financial Protection Bureau
COSOCommittee of Sponsoring Organizations of the Treadway Commission
COVID-19
Coronavirus Disease 2019
CRACommunity Reinvestment Act
CPIConsumer Price Index
CUBISymbol for Customers Bancorp, Inc. common stock traded on the NYSE
CustomersCustomers Bancorp, Inc. and Customers Bank, collectively
Customers BancorpCustomers Bancorp, Inc.
DepartmentPennsylvania Department of Banking and Securities
DIFDeposit Insurance Fund
Dodd-Frank ActDodd-Frank Wall Street Reform and Consumer Protection Act of 2010
DOEUnited States Department of Education
EGRRCPAThe Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018
EPSEarnings per share
ESPPEmployee Stock Purchase Plan
EVEEconomic value of equity
FASBFinancial Accounting Standards Board
FDICFederal Deposit Insurance Corporation
FDICIAFederal Deposit Insurance Corporation Improvement Act of 1991
Federal Reserve BoardBoard of Governors of the Federal Reserve System
FERPAFamily Educational Rights and Privacy Act of 1975
FHAFederal Housing Administration
FHLBFederal Home Loan Bank
FPRDFinal Program Review Determination
FRBFederal Reserve Bank of Philadelphia
FTC ActFederal Trade Commission Act
GDPGross domestic product
GNMAGovernment National Mortgage Association
GLBAGramm-Leach-Bliley Act of 1999
HECMHome Equity Conversion Mortgage
HTMHeld to maturity
Interest-only GNMA securitiesInterest-only classes of Ginnie Mae guaranteed home equity conversation mortgage-backed securities
3
IRSInternal Revenue Service
Legacy LoansTotal 2009 and prior loans
LIBORLondon Interbank Offered Rate
LIHTCLow-Income Housing Tax Credit
LPOLimited Purpose Office
MMDAMoney market deposit accounts
NIMNet interest margin, tax equivalent
NMNot meaningful
Non-QMNon-qualified mortgage
NPANon-performing asset
NPLNon-performing loan
NPRMNotice of Proposed Rulemaking
NYSENew York Stock Exchange
OCCOffice of the Comptroller of the Currency
OCIOther comprehensive income
OFACOffice of Foreign Assets Control
OISOvernight index swap
OrderFederal Deposit Insurance Act, as amended
OREOOther real estate owned
OTTIOther-than-temporary impairment
PATRIOT ActProviding Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
PCAOBPublic Accounting Oversight Board (United States)
PCD
Purchased with Credit Deterioration
PCIPurchased Credit-Impaired
PPPPaycheck Protection Program
PPPLFFRB Paycheck Protection Program Liquidity Facility
ROURight-of-use
SABStaff Accounting Bulletin
SAGSpecial Assets Group
Sales AgreementAt Market Issuance Sales Agreement between Customers Bancorp and FBR Capital Markets & Co., Keefe, Bruyette & Woods, Inc. and Maxim Group LLC
SBASmall Business Administration
SBA loansLoans originated pursuant to the rules and regulations of the SBA
SECU.S. Securities and Exchange Commission
TDRTroubled debt restructuring
TRACTerminal Rental Adjustment Clause
U.S. GAAPAccounting principles generally accepted in the United States of America
VAUnited States Department of Veterans Affairs


4
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET — UNAUDITED
(amounts in thousands, except share and per share data)
June 30,
2020		December 31,
2019
ASSETS
Cash and due from banks$44,577  $33,095  
Interest earning deposits1,022,753  179,410  
Cash and cash equivalents1,067,330  212,505  
Investment securities, at fair value681,382  595,876  
Loans held for sale (includes $21,107 and $2,130, respectively, at fair value)
464,164  486,328  
Loans receivable, mortgage warehouse, at fair value2,793,164  2,245,758  
Loans receivable, PPP4,760,427  —  
Loans and leases receivable7,272,447  7,318,988  
Allowance for credit losses on loans and leases(159,905) (56,379) 
Total loans and leases receivable, net of allowance for credit losses on loans and leases14,666,133  9,508,367  
FHLB, Federal Reserve Bank, and other restricted stock91,023  84,214  
Accrued interest receivable49,911  38,072  
Bank premises and equipment, net8,380  9,389  
Bank-owned life insurance275,842  272,546  
Other real estate owned131  173  
Goodwill and other intangibles14,575  15,195  
Other assets584,247  298,052  
Total assets$17,903,118  $11,520,717  
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing$1,879,789  $1,343,391  
Interest bearing9,086,086  7,305,545  
Total deposits10,965,875  8,648,936  
Federal funds purchased—  538,000  
FHLB advances850,000  850,000  
Other borrowings123,833  123,630  
Subordinated debt181,255  181,115  
FRB PPP liquidity facility4,419,967  —  
Accrued interest payable and other liabilities354,341  126,241  
Total liabilities16,895,271  10,467,922  
Commitments and contingencies (NOTE 15)
Shareholders’ equity:
Preferred stock, par value $1.00 per share; liquidation preference $25.00 per share; 100,000,000 shares authorized, 9,000,000 shares issued and outstanding as of
June 30, 2020 and December 31, 2019
217,471  217,471  
Common stock, par value $1.00 per share; 200,000,000 shares authorized; 32,790,906 and 32,614,410 shares issued as of June 30, 2020 and December 31, 2019; 31,510,287 and 31,336,791 shares outstanding as of June 30, 2020 and December 31, 2019
32,791  32,617  
Additional paid in capital450,665  444,218  
Retained earnings338,665  381,519  
Accumulated other comprehensive loss, net(9,965) (1,250) 
Treasury stock, at cost (1,280,619 shares as of June 30, 2020 and December 31, 2019)
(21,780) (21,780) 
Total shareholders’ equity1,007,847  1,052,795  
Total liabilities and shareholders’ equity$17,903,118  $11,520,717  
See accompanying notes to the unaudited consolidated financial statements.
5
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS) — UNAUDITED
(amounts in thousands, except per share data)
 Three Months Ended
June 30,		Six Months Ended
June 30,
 2020201920202019
Interest income:
Loans and leases$118,447  $103,567  $234,527  $196,683  
Investment securities6,155  6,481  11,132  12,722  
Other616  1,902  4,902  3,620  
Total interest income125,218  111,950  250,561  213,025  
Interest expense:
Deposits23,238  35,980  57,591  67,204  
FHLB advances4,736  7,607  10,127  12,900  
Subordinated debt2,689  1,684  5,378  3,369  
Federal funds purchased and other borrowings2,573  2,000  4,163  5,569  
Total interest expense33,236  47,271  77,259  89,042  
Net interest income91,982  64,679  173,302  123,983  
Provision for credit losses on loans and leases20,946  5,346  52,732  10,113  
Net interest income after provision for credit losses on loans and leases71,036  59,333  120,570  113,870  
Non-interest income:
Interchange and card revenue6,478  6,760  13,287  15,565  
Deposit fees3,321  3,348  6,782  5,557  
Commercial lease income4,508  2,730  8,776  5,131  
Bank-owned life insurance1,757  1,836  3,519  3,653  
Mortgage warehouse transactional fees2,582  1,681  4,533  2,995  
Gain (loss) on sale of SBA and other loans23  —  34  —  
Mortgage banking income38  250  334  417  
Loss upon acquisition of interest-only GNMA securities—  (7,476) —  (7,476) 
Gain (loss) on sale of investment securities4,353  —  8,328  —  
Unrealized gain (loss) on investment securities1,200  (347) (178) (345) 
Other(2,024) 3,254  (1,248) 6,257  
Total non-interest income22,236  12,036  44,167  31,754  
Non-interest expense:
Salaries and employee benefits31,296  26,920  59,607  52,743  
Technology, communication and bank operations13,310  12,402  26,360  24,355  
Professional services4,552  5,718  12,223  10,291  
Occupancy3,025  3,064  6,057  5,967  
Commercial lease depreciation3,643  2,252  7,070  4,174  
FDIC assessments, non-income taxes, and regulatory fees2,368  2,157  5,235  4,145  
Provision for operating losses1,068  2,446  1,980  4,225  
Advertising and promotion582  1,360  2,222  2,169  
Merger and acquisition related expenses25  —  75  —  
Loan workout1,808  643  2,175  963  
Other real estate owned12  (14) 20  43  
Other1,817  2,634  6,941  4,491  
Total non-interest expense63,506  59,582  129,965  113,566  
Income before income tax expense29,766  11,787  34,772  32,058  
Income tax expense7,048  2,491  8,955  7,323  
Net income22,718  9,296  25,817  24,735  
Preferred stock dividends3,581  3,615  7,196  7,229  
Net income (loss) available to common shareholders$19,137  $5,681  $18,621  $17,506  
Basic earnings (loss) per common share $0.61  $0.18  $0.59  $0.56  
Diluted earnings (loss) per common share$0.61  $0.18  $0.59  $0.55  
See accompanying notes to the unaudited consolidated financial statements.
6
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) — UNAUDITED
(amounts in thousands)
 Three Months Ended
June 30,		Six Months Ended
June 30,
 2020201920202019
Net income$22,718  $9,296  $25,817  $24,735  
Unrealized gains (losses) on available for sale debt securities:
Unrealized gains (losses) arising during the period35,315  20,755  26,217  38,572  
Income tax effect(9,182) (5,397) (6,816) (10,029) 
Reclassification adjustments for (gains) losses included in net income(4,353) —  (8,328) —  
Income tax effect1,131  —  2,165  —  
Net unrealized gains (losses) on available for sale debt securities22,911  15,358  13,238  28,543  
Unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses) arising during the period(6,369) (14,102) (34,066) (21,041) 
Income tax effect1,684  3,667  9,035  5,471  
Reclassification adjustment for (gains) losses included in net income2,718  4  4,196  (409) 
Income tax effect(734) (1) (1,118) 106  
Net unrealized gains (losses) on cash flow hedges(2,701) (10,432) (21,953) (15,873) 
Other comprehensive income (loss), net of income tax effect20,210  4,926  (8,715) 12,670  
Comprehensive income (loss)$42,928  $14,222  $17,102  $37,405  
See accompanying notes to the unaudited consolidated financial statements.
7
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY — UNAUDITED
(amounts in thousands, except shares outstanding data)
Three Months Ended June 30, 2020
Preferred StockCommon Stock
Shares of
Preferred
Stock
Outstanding		Preferred
Stock		Shares of
Common
Stock
Outstanding		Common
Stock		Additional
Paid in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Treasury
Stock		Total
Balance, March 31, 20209,000,000  $217,471  31,470,026  $32,751  $446,840  $319,529  $(30,175) $(21,780) $964,636  
Net income—  —  —  —  —  22,718  —  —  22,718  
Other comprehensive income (loss)—  —  —  —  —  —  20,210  —  20,210  
Preferred stock dividends(1)
—  —  —  —  —  (3,581) —  —  (3,581) 
Share-based compensation expense—  —  —  —  3,599  —  —  —  3,599  
Issuance of common stock under share-based compensation arrangements—  —  40,261  40  225  —  —  —  265  
Balance, June 30, 20209,000,000  $217,471  31,510,287  $32,791  $450,664  $338,665  $(9,965) $(21,780) $1,007,847  
Three Months Ended June 30, 2019
Preferred StockCommon Stock
Shares of
Preferred
Stock
Outstanding		Preferred StockShares of
Common
Stock
Outstanding		Common
Stock		Additional
Paid in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive
Income (Loss)		Treasury
Stock		Total
Balance, March 31, 20199,000,000  $217,471  31,131,247  $32,412  $436,713  $328,476  $(14,919) $(21,780) $978,373  
Net income—  —  —  —  —  9,296  —  —  9,296  
Other comprehensive income (loss)—  —  —  —  —  —  4,926  —  4,926  
Preferred stock dividends(1)
—  —  —  —  —  (3,615) —  —  (3,615) 
Share-based compensation expense—  —  —  —  2,315  —  —  —  2,315  
Issuance of common stock under share-based compensation arrangements—  —  70,776  71  39  —  —  —  110  
Balance, June 30, 20199,000,000  $217,471  31,202,023  $32,483  $439,067  $334,157  $(9,993) $(21,780) $991,405  
(1)Dividends per share of $0.4375, $0.40625, $0.403125, and $0.375 per share were declared on Series C, D, E, and F preferred stock for the three months ended June 30, 2020 and 2019, respectively.
8
Six Months Ended June 30, 2020
Preferred StockCommon Stock
Shares of Preferred Stock OutstandingPreferred StockShares of Common Stock OutstandingCommon StockAdditional Paid in CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Treasury StockTotal
Balance, December 31, 20199,000,000  $217,471  31,336,791  $32,617  $444,218  $381,519  $(1,250) $(21,780) $1,052,795  
Cumulative effect from change in accounting principle - CECL—  —  —  —  —  (61,475) —  —  (61,475) 
Net income—  —  —  —  —  25,817  —  —  25,817  
Other comprehensive income (loss)—  —  —  —  —  —  (8,715) —  (8,715) 
Preferred stock dividends(1)
—  —  —  —  —  (7,196) —  —  (7,196) 
Share-based compensation expense—  —  —  —  6,827  —  —  —  6,827  
Issuance of common stock under share-based compensation arrangements—  —  173,496  174  (380) —  —  —  (206) 
Balance, June 30, 20209,000,000  $217,471  31,510,287  $32,791  $450,665  $338,665  $(9,965) $(21,780) $1,007,847  
Six Months Ended June 30, 2019
Preferred StockCommon Stock
Shares of Preferred Stock OutstandingPreferred StockShares of Common Stock OutstandingCommon StockAdditional Paid in CapitalRetained EarningsAccumulated Other Comprehensive Income (Loss)Treasury StockTotal
Balance, December 31, 20189,000,000  $217,471  31,003,028  $32,252  $434,314  $316,651  $(22,663) $(21,209) $956,816  
Net income—  —  —  —  —  24,735  —  —  24,735  
Other comprehensive income (loss)—  —  —  —  —  —  12,670  —  12,670  
Preferred stock dividends(1)
—  —  —  —  —  (7,229) —  (7,229) 
Share-based compensation expense—  —  —  —  4,425  —  —  —  4,425  
Issuance of common stock under share-based compensation arrangements—  —  230,154  231  328  —  —  —  559  
Repurchase of common shares—  —  (31,159) —  —  —  —  (571) (571) 
Balance, June 30, 20199,000,000  $217,471  31,202,023  $32,483  $439,067  $334,157  $(9,993) $(21,780) $991,405  
(1)Dividends per share of $0.8750, $0.81250, $0.806250, and $0.750 per share were declared on Series C, D, E, and F preferred stock for the six months ended June 30, 2020 and 2019, respectively.
See accompanying notes to the unaudited consolidated financial statements.
9

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(amounts in thousands)
 Six Months Ended
June 30,
 20202019
Cash Flows from Operating Activities
Net income $25,817  $24,735  
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for credit losses on loan and lease losses52,732  10,113  
Depreciation and amortization15,009  8,884  
Share-based compensation expense7,278  4,900  
Deferred taxes(28,104) (681) 
Net amortization (accretion) of investment securities premiums and discounts(364) 421  
Unrealized (gain) loss on investment securities178  345  
(Gain) loss on sale of investment securities(8,328) —  
Loss upon acquisition of interest-only GNMA securities—  7,476  
(Gain) loss on sale of SBA and other loans(426) (304) 
Fair value adjustment on loans held for sale1,450  —  
Origination of loans held for sale(22,730) (22,152) 
Proceeds from the sale of loans held for sale21,745  19,591  
Amortization (accretion) of fair value discounts and premiums(1,137) 232  
Net (gain) loss on sales of other real estate owned(4) —  
Valuation and other adjustments to other real estate owned—  31  
Earnings on investment in bank-owned life insurance(3,519) (3,653) 
(Increase) decrease in accrued interest receivable and other assets(108,325) (63,311) 
Increase (decrease) in accrued interest payable and other liabilities88,305  16,502  
Net Cash Provided By Operating Activities 39,577  3,129  
Cash Flows from Investing Activities
Proceeds from maturities, calls and principal repayments of investment securities 78,485  11,616  
Proceeds from sales of investment securities available for sale109,207  —  
Purchases of investment securities available for sale(280,410) —  
Origination of mortgage warehouse loans(23,573,962) (12,246,471) 
Proceeds from repayments of mortgage warehouse loans23,033,058  11,624,062  
Net (increase) decrease in loans and leases, excluding mortgage warehouse loans(4,515,097) (22,665) 
Purchase of loans(211,096) (555,587) 
Net proceeds from sale of (purchases of) FHLB, Federal Reserve Bank, and other restricted stock(6,809) (12,262) 
Purchases of bank premises and equipment(214) (345) 
Proceeds from sales of other real estate owned77  —  
Purchases of leased assets under lessor operating leases(9,011) (11,672) 
Net Cash Used In Investing Activities(5,375,772) (1,213,324) 
Cash Flows from Financing Activities
Net increase in deposits2,316,939  1,043,541  
Net increase (decrease) in short-term borrowed funds from the FHLB—  (335,970) 
Net increase (decrease) in federal funds purchased(538,000) 219,000  
Proceeds from borrowed funds from PPP liquidity facility4,419,967  —  
Proceeds from long-term borrowed funds from the FHLB—  350,000  
Repayments of other borrowings—  (25,000) 
Preferred stock dividends paid(7,229) (7,229) 
Purchase of treasury stock—  (571) 
Payments of employee taxes withheld from share-based awards(1,067) (1,210) 
Proceeds from issuance of common stock410  1,294  
Net Cash Provided By Financing Activities6,191,020  1,243,855  
Net Increase (Decrease) in Cash and Cash Equivalents854,825  33,660  
Cash and Cash Equivalents – Beginning212,505  62,135  
Cash and Cash Equivalents – Ending$1,067,330  $95,795  
(continued)
Six Months Ended
June 30,
20202019
Non-cash Operating and Investing Activities:
Transfer of loans to other real estate owned$31  $291  
Transfer of loans held for investment to held for sale19,050  —  
Unsettled sales of investment securities33,615  —  
Acquisition of interest-only GNMA securities securing a mortgage warehouse loan—  17,157  
Acquisition of residential reverse mortgage loans securing a mortgage warehouse loan—  1,325  
See accompanying notes to the unaudited consolidated financial statements.
10
CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
NOTE 1 — DESCRIPTION OF THE BUSINESS
Customers Bancorp, Inc. (“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.
Customers Bancorp and its wholly owned subsidiaries, the Bank, and non-bank subsidiaries, serve residents and businesses in Southeastern Pennsylvania (Bucks, Berks, Chester, Philadelphia and Delaware Counties); Rye Brook, New York (Westchester County); Hamilton, New Jersey (Mercer County); Boston, Massachusetts; Providence, Rhode Island; Portsmouth, New Hampshire (Rockingham County); Manhattan and Melville, New York; Washington, D.C.; Chicago, Illinois; and nationally for certain loan and deposit products. The Bank has 13 full-service branches and provides commercial banking products, primarily loans and deposits. In addition, Customers Bank also administratively supports loan and other financial products, including equipment finance leases, to customers through its limited-purpose offices in Boston, Massachusetts; Providence, Rhode Island; Portsmouth, New Hampshire; Manhattan and Melville, New York; Philadelphia, Pennsylvania; Washington, D.C.; and Chicago, Illinois. The Bank also serves specialty niche businesses nationwide, including its commercial loans to mortgage banking businesses, commercial equipment financing, specialty lending and consumer loans through relationships with fintech companies. In addition, BankMobile, a division of Customers Bank, offers state-of-the-art high-tech digital banking services to consumers, students and the "under banked" nationwide, along with "Banking as a Service" offerings with white label partners.
The 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 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation
The interim unaudited consolidated financial statements have been prepared in conformity with U.S. GAAP and pursuant to the rules and regulations of the SEC. These interim unaudited consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present a fair statement of the financial position and the results of operations and cash flows of Customers Bancorp and subsidiaries for the interim periods presented. Certain information and footnote disclosures normally included in the annual consolidated financial statements have been omitted from these interim unaudited consolidated financial statements as permitted by SEC rules and regulations. The December 31, 2019 consolidated balance sheet presented in this report has been derived from Customers Bancorp’s audited 2019 consolidated financial statements. Management believes that the disclosures are adequate to present fairly the consolidated financial statements as of the dates and for the periods presented. These interim unaudited consolidated financial statements should be read in conjunction with the 2019 consolidated financial statements of Customers Bancorp and subsidiaries included in Customers' Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 2, 2020 (the "2019 Form 10-K"). The 2019 Form 10-K describes Customers Bancorp’s significant accounting policies, which include its policies on Principles of Consolidation; Cash and Cash Equivalents and Statements of Cash Flows; Restrictions on Cash and Amounts due from Banks; Business Combinations; Investment Securities; Loan Accounting Framework; Loans Held for Sale and Loans at Fair Value; Loans Receivable - Mortgage Warehouse, at Fair Value; Loans and Leases Receivable; Purchased Loans; ALLL; Goodwill and Other Intangible Assets; FHLB, Federal Reserve Bank, and Other Restricted Stock; OREO; BOLI; Bank Premises and Equipment; Lessor Operating Leases; Treasury Stock; Income Taxes; Share-Based Compensation; Transfer of Financial Assets; Segment Information; Derivative Instruments and Hedging; Comprehensive Income (Loss); EPS; Loss Contingencies; and Collaborative Arrangements. There have been no material changes to Customers Bancorp's significant accounting policies noted above for the three and six months ended June 30, 2020, except for the adoption of ASU 2016-13 Financial Instruments - Credit Losses ("ASC 326"): Measurement of Credit Losses on Financial Instruments, which is discussed below in Adoption of New Accounting Standard, and replaces our prior ALLL policy.

New Accounting Standards

Presented below are recently issued accounting standards that Customers has adopted as well as those that the FASB has issued but are not yet effective.
11
Accounting Standards Adopted in 2020

Allowance for Credit Losses

On January 1, 2020, Customers adopted ASC 326, which replaced the incurred loss methodology with an expected loss methodology that is referred to as the CECL methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and net investments in leases recognized by Customers as a lessor in accordance with ASC 842. CECL also applies to off-balance sheet credit exposures not accounted for as insurance, such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments. ASC 326 also made changes to the accounting for AFS debt securities, which now requires credit losses to be presented as an allowance, rather than as a write-down on AFS debt securities that management does not intend to sell or believes that it is more likely than not they will not be required to sell.

Customers adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost, net investments in leases, and off-balance sheet credit exposures. Results for reporting periods beginning after December 31, 2019 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP. Customers recorded a net decrease to retained earnings of $61.5 million, net of deferred taxes of $21.5 million, as of January 1, 2020 for the cumulative effect of adopting ASC 326. Customers adopted ASC 326 using the prospective transition approach for PCD financial assets that were previously classified as PCI and accounted for under ASC 310-30. In accordance with the standard, Customers did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $0.2 million of the allowance for credit losses on PCD loans and leases. The remaining noncredit discount of $0.3 million, based on the adjusted amortized cost basis, will be accreted into interest income at the effective interest rate as of January 1, 2020.

12
The following table illustrates the impact of adopting ASC 326:

(amounts in thousands)
Pre-ASC 326 AdoptionImpact of ASC 326 AdoptionAs Reported Under
ASC 326
Assets
Loans receivable, mortgage warehouse, at fair value$2,245,758  $—  $2,245,758  
Loans and leases receivable
Multi-family1,907,331  7  1,907,338  
Commercial and industrial1,891,152  3  1,891,155  
Commercial real estate owner occupied551,948  100  552,048  
Commercial real estate non-owner occupied1,222,772  41  1,222,813  
Construction117,617  —  117,617  
Total commercial loans and leases receivable5,690,820  151  5,690,971  
Residential real estate382,634  32  382,666  
Manufactured housing71,359  37  71,396  
Other consumer1,174,175  12  1,174,187  
Total consumer loans receivable1,628,168  81  1,628,249  
Loans and leases receivable7,318,988  232  7,319,220  
Allowance for credit losses on loans and leases(56,379) (79,829) (136,208) 
Total loans and leases receivable, net of allowance for credit losses on loans and leases9,508,367  (79,596) 9,428,771  
Liabilities
Allowance for credit losses on lending-related commitments49  3,388  3,437  
Net deferred tax (asset) liability11,740  (21,510) (9,770) 
Equity
Retained earnings$381,519  $(61,475) $320,044  


Allowance for Credit Losses on Loans and Leases

The allowance for credit losses on loans and leases is a valuation account that is deducted from the loan or lease’s amortized cost basis to present the net amount expected to be collected on the loans and leases. Loans and leases deemed to be uncollectible are charged against the allowance for credit losses on loans and leases, and subsequent recoveries, if any, are credited to the allowance for credit losses on loans and leases. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Changes to the allowance for credit losses on loans and leases are recorded through the provision for credit losses on loans and leases. The allowance for credit losses on loans and leases is maintained at a level considered appropriate to absorb expected credit losses over the expected life of the portfolio as of the reporting date.

The allowance for credit losses on loans and leases is measured on a collective (pool) basis when similar risk characteristics exist. Customers' loan portfolio segments include commercial and consumer. Each of these two loan portfolio segments is comprised of multiple loan classes. Loan classes are characterized by similarities in loan type, collateral type, risk attributes and the manner in which credit risk is assessed and monitored. The commercial segment is composed of multi-family, commercial and industrial, commercial real estate owner occupied, commercial real estate non-owner occupied and construction loan classes. The consumer segment is composed of residential real estate, manufactured housing and other consumer. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. For individually assessed loans, see related details in the Individually Assessed Loans section below.

The allowance for credit losses on collectively assessed loans and leases is measured over the expected life of the loan or lease using lifetime loss rate models which consider historical loan performance, loan or borrower attributes and forecasts of future economic
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conditions in addition to information about past events and current conditions. Significant loan/borrower attributes utilized in the models include origination date, maturity date, collateral property type, internal risk rating, delinquency status, borrower state and FICO score at origination. Customers uses external sources in the creation of its forecasts, including current economic conditions and forecasts for macroeconomic variables over its reasonable and supportable forecast period (e.g., GDP growth rate, unemployment rate, BBB spread, commercial real estate and home price index). After the reasonable and supportable forecast period, which ranges from two to five years, the models revert the forecasted macroeconomic variables to their historical long-term trends, without specific predictions for the economy, over the expected life of the pool. The lifetime loss rate models also incorporate prepayment assumptions into estimated lifetime loss rates. Customers runs the CECL impairment models on a quarterly basis and qualitatively adjusts model results for risk factors that are not considered within the models but which are relevant in assessing the expected credit losses within the loan and lease pools. Management generally considers the following qualitative factors:

•Volume and severity of past-due loans, non-accrual loans and classified loans;
•Lending policies and procedures, including underwriting standards and historically based loss/collection, charge-off and recovery practices;
•Nature and volume of the portfolio;
•Existence and effect of any credit concentrations and changes in the level of such concentrations;
•Risk ratings;
•The value of the underlying collateral for loans that are not collateral dependent;
•Changes in the quality of the loan review system;
•Experience, ability and depth of lending management and staff;
•Other external factors, such as changes in legal, regulatory or competitive environment; and
•Model and data limitations.

Customers has elected to not estimate an allowance for credit losses on accrued interest receivable, as it already has a policy in place to reverse or write-off accrued interest, through interest income, in a timely manner. Accrued interest receivable is presented as a separate financial statement line item in the consolidated balance sheet.

Purchased Credit Deteriorated (“PCD”) Loans and Leases

PCD assets are acquired individual loans and leases (or acquired groups of loans and leases with similar risk characteristics) that, as of the date of acquisition, have experienced a more-than-insignificant deterioration in credit quality since origination, as determined by an acquirer’s assessment. PCD loans and leases are recorded at their purchase price plus the allowance for credit losses expected at the time of acquisition, or “gross up” of the amortized cost basis. The January 1, 2020 transition adjustment discussed above was established for these loans and leases without affecting the income statement or retained earnings. Changes in the current estimate of the allowance for credit losses after acquisition from the estimated allowance previously recorded are reported in the income statement as provision for credit losses expense or reversal of provision for credit losses in subsequent periods as they arise. Purchased loans or leases that do not qualify as PCD assets are accounted for similar to originated assets, whereby an allowance for credit losses is recognized with a corresponding increase to the income statement provision for credit losses. Evidence that purchased loans and leases, measured at amortized cost, have more-than-insignificant deterioration in credit quality since origination and, therefore meet the PCD definition, may include loans and leases that are past-due, in non-accrual status, poor borrower credit score, recent loan-to-value percentages and other standard indicators (i.e., TDR, charge-offs and bankruptcy).

Allowance for Credit Losses on Lending-Related Commitments

Customers estimates expected credit losses over the contractual period in which it is exposed to credit risk on contractual obligations to extend credit, unless the obligation is unconditionally cancellable by Customers. The allowance for credit losses on lending-related commitments is recorded in accrued interest payable and other liabilities in the consolidated balance sheet and is recorded as a provision for credit losses within other non-interest expense in the consolidated income statement. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives. Customers estimates the expected credit losses for undrawn commitments using a usage given default calculation. The lifetime loss rates for off-balance sheet credit exposures are calculated in the same manner as on-balance sheet credit exposures, using the same models and economic forecasts, adjusted for the estimated likelihood that funding will occur.

Individually Assessed Loans and Leases

ASC 326 provides that a loan or lease is measured individually if it does not share similar risk characteristics with other financial assets. For Customers, loans and leases which are identified to be individually assessed under CECL typically would have been evaluated
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individually as impaired loans using accounting guidance in effect in periods prior to the adoption of CECL and include troubled debt restructurings (TDRs) and collateral dependent loans.

TDRs

A loan for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties is considered to be a TDR. The allowance for credit loss on a TDR is measured using the same method as all other loans held for investment, except in cases when the value of a concession cannot be measured using a method other than the discounted cash flow (“DCF”) method. When the value of a concession is measured using the DCF method, the allowance for credit loss is determined by discounting the expected future cash flows at the original effective interest rate of the loan.

The CARES Act and certain regulatory agencies recently issued guidance stating certain loan modifications to borrowers experiencing financial distress as a result of the economic impacts created by COVID-19 may not be required to be treated as TDRs under U.S GAAP. For COVID-19 related loan modifications which met the loan modification criteria under either the CARES Act or the criteria specified by the regulatory agencies, Customers elected to suspend TDR accounting for such loan modifications.

Collateral Dependent Loans

Customers considers a loan to be collateral dependent when foreclosure of the underlying collateral is probable. Customers has also elected to apply the practical expedient to measure expected credit losses of a collateral dependent asset using the fair value of the collateral, less any estimated costs to sell, when foreclosure is not probable but repayment of the loan is expected to be provided substantially through the operation or sale of the collateral, and the borrower is experiencing financial difficulty.

Allowance for Credit Losses on Available for Sale Securities

For AFS debt securities in an unrealized loss position, Customers first assesses whether it intends to sell, or it is more likely than not that it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For AFS debt securities that do not meet the aforementioned criteria, Customers evaluates whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses on AFS securities is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses on AFS securities is recognized in other comprehensive income.

Changes in the allowance for credit losses on AFS securities are recorded as provision, or reversal of provision for credit losses on AFS securities in other non-interest income within the consolidated income statement. Losses are charged against the allowance for credit losses on AFS securities when management believes the uncollectibility of an AFS security is confirmed or when either of the criteria regarding intent or requirement to sell is met. Accrued interest receivable on AFS debt securities totaled $3.2 million at June 30, 2020 and is excluded from the estimate of credit losses.


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Other Accounting Standards Adopted in 2020
StandardSummary of guidanceEffects on Financial Statements
ASU 2019-04,
Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments

Issued April 2019
• Clarifies the scope of the credit losses standard and addresses issues related to accrued interest receivable balances, recoveries, variable interest rates, and prepayments.
• Addresses partial-term fair value hedges, fair value hedge basis adjustments and certain transition requirements.
• Addresses recognizing and measuring financial instruments, specifically the requirement for remeasurement under ASC 820 when using the measurement alternative, certain disclosure requirements and which equity securities have to be remeasured at historical exchange rates.
• Topic 326 Amendments - Effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption permitted. Topic 815 Amendments - Effective for first annual period beginning after the issuance date of this ASU (i.e., fiscal year 2020). Entities that have already adopted the amendments in ASU 2017-12 may elect either to retrospectively apply all the amendments or to prospectively apply all amendments as of the date of adoption. Topic 825 Amendments - Effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.
• Customers adopted on January 1, 2020.
• The adoption of this guidance relating to Topics 815 and 825 did not have a material impact on Customers' financial condition, results of operations and consolidated financial statements. Please refer to ASU 2016-13 for further discussion on Customers' adoption of ASU 2016-13 (Topic 326).

ASU 2018-18,
Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic 606

Issued November 2018

• Clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. In those situations, all the guidance in Topic 606 should be applied, including recognition, measurement, presentation, and disclosure requirements.
• Adds unit-of-account guidance in Topic 808 to align with the guidance in Topic 606 when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within scope of Topic 606.
• Requires that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under Topic 606 is precluded if the collaborative arrangement participant is not a customer.
• Effective for fiscal year beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption permitted.
• Customers adopted on January 1, 2020.
• The adoption of this guidance did not have a material impact on Customers' financial condition, results of operations and consolidated financial statements.

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Other Accounting Standards Adopted in 2020 (continued)

StandardSummary of guidanceEffects on Financial Statements
ASU 2018-15,
Internal-Use Software (Subtopic 350-40): Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

Issued August 2018
• Clarifies that service contracts with hosting arrangements must follow internal-use software guidance Subtopic 350-40 when determining which implementation costs to capitalize as an asset related to the service contract and which costs to expense.
• Also clarifies that capitalized implementation costs of a hosting arrangement that is a service contract are to be amortized over the term of the hosting arrangement, which includes the noncancelable period of the arrangement plus options to extend the arrangement if reasonably certain to exercise.
• Clarifies that existing impairment guidance in Subtopic 350-40 must be applied to the capitalized implementation costs as if they were long-lived assets.
• Applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.
• Effective for fiscal year beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption permitted.		• Customers adopted on January 1, 2020.
• The adoption of this guidance did not have a material impact on Customers' financial condition, results of operations and consolidated financial statements.

Accounting Standards Issued But Not Yet Adopted
StandardSummary of guidanceEffects on Financial Statements
ASU 2020-04,
Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting

Issued March 2020
• Provides optional guidance for a limited period of time to ease the potential burden in accounting for (or derecognizing the effects of) reference rate reform on financial reporting. Specifically, the amendments provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. These relate only to those contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.
• Effective as of March 12, 2020 and can be adopted anytime during the period of January 1, 2020 through December 31, 2022.
• Customers intends to adopt this guidance during adoption period and is currently evaluating the expected impact of this ASU on its financial condition, results of operations and consolidated financial statements.

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Accounting and Reporting Considerations related to COVID-19

On March 27, 2020, the CARES Act was signed into law and contained substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic and stimulate the economy. The CARES Act includes the PPP designed to aid small-and medium-sized businesses through federally guaranteed loans distributed through banks. Customers is a participant in the PPP. Section 4013 of the CARES act also gives entities temporary relief from the accounting and disclosure requirements for TDRs under ASC 310-40 in certain situations.

Accounting for PPP Loans

In April 2020, Customers began to originate loans to qualified small businesses under the PPP administered by the SBA. The PPP loans are fully guaranteed by the SBA and may be eligible for forgiveness by the SBA to the extent that the proceeds are used for payroll and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00% and terms of two or five years, if not forgiven, in whole or in part. Payments are deferred for the first six months of the loan. The loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1% to 5% based on the size of the loan. Customers classified the PPP loans as held for investment and these loans are carried at amortized cost and interest income is recognized using the interest method. The origination fees, net of direct origination costs, are deferred and recognized as an adjustment to the yield of the related loans over their contractual life using the interest method. As PPP is newly created, Customers does not have historical prepayment data to accurately estimate principal prepayments and therefore has elected to not estimate prepayments as a policy election. No allowance for credit losses has been recognized for PPP loans as these loans are 100% guaranteed by the SBA. See Note 7 - Loans and Leases Receivable and Allowance for Credit Losses on Loans and Leases for additional information.

Loan Modifications

As mentioned above, Section 4013 of the CARES Act gives entities temporary relief from the accounting and disclosure requirements for TDRs. In addition, on April 7, 2020, certain regulatory banking agencies issued an interagency statement that offers practical expedients for evaluating whether loan modifications in response to the COVID-19 pandemic are TDRs. To qualify for TDR accounting and disclosure relief under the CARES Act, the applicable loan must not have been more than 30 days past due as of December 31, 2019, and the modification must be executed during the period beginning on March 1, 2020, and ending on the earlier of December 31, 2020, or the date that is 60 days after the termination date of the national emergency declared by the president on March 13, 2020, under the National Emergencies Act related to the outbreak of COVID-19. The CARES Act applies to modifications made as a result of COVID-19 including: forbearance agreements, interest rate modifications, repayment plans, and other arrangements to defer or delay payment of principal or interest. The interagency statement does not require the modification to be completed within a certain time period if it is related to COVID-19 and can be provided to borrowers either individually or as part of a loan modification program. Moreover, the interagency statement applies to short-term modifications (e.g. not more than six months deferral) including payment deferrals, fee waivers, extensions of repayment terms, or other insignificant payment delays as a result of COVID-19.

Customers applied Section 4013 of the CARES Act and the interagency statement in connection with applicable modifications. For modifications that qualify under either the CARES Act or the interagency statement, TDR accounting and reporting is suspended. These modifications generally involve principal and/or interest payment deferrals for a period of 90 days at a time and can be extended to six months if requested by the borrower as long as the reason is still related to COVID-19. These modified loans would not also be reported as past due or nonaccrual during the deferral period. See Note 7 - Loans and Leases Receivable and Allowance for Credit Losses on Loans and Leases for additional information.




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NOTE 3 — EARNINGS (LOSS) PER SHARE
The following are the components and results of Customers' earnings (loss) per common share calculations for the periods presented.
 Three Months Ended
June 30,		Six Months Ended
June 30,
(amounts in thousands, except share and per share data)2020201920202019
Net income available to common shareholders$19,137  $5,681  $18,621  $17,506  
Weighted-average number of common shares outstanding – basic31,477,591  31,154,292  31,434,371  31,101,037  
Share-based compensation plans148,180  471,449  191,298  446,985  
Weighted-average number of common shares – diluted31,625,771  31,625,741  31,625,669  31,548,022  
Basic earnings (loss) per common share$0.61  $0.18  $0.59  $0.56  
Diluted earnings (loss) per common share$0.61  $0.18  $0.59  $0.55  

The following are securities that could potentially dilute basic earnings per common share in future periods that were not included in the computation of diluted earnings per common share because either the performance conditions for certain of the share-based compensation awards have not been met or to do so would have been anti-dilutive for the periods presented.
 Three Months Ended
June 30,		Six Months Ended
June 30,
 2020201920202019
Share-based compensation awards3,813,959  2,246,181  3,674,506  2,301,663  

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NOTE 4 — CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT
The following tables present the changes in accumulated other comprehensive income (loss) by component for the three and six months ended June 30, 2020 and 2019. All amounts are presented net of tax. Amounts in parentheses indicate reductions to AOCI.
 Three Months Ended June 30, 2020
(amounts in thousands)
Unrealized Gains (Losses) on Available for Sale Securities (1)
Unrealized Gains (Losses) on Cash Flow Hedges (2)
Total
Balance - March 31, 2020$4,614  $(34,789) $(30,175) 
Unrealized gains (losses) arising during period, before tax35,315  (6,369) 28,946  
Income tax effect(9,182) 1,684  (7,498) 
Other comprehensive income (loss) before reclassifications26,133  (4,685) 21,448  
Reclassification adjustments for (gains) losses included in net income, before tax(4,353) 2,718  (1,635) 
Income tax effect1,131  (734) 397  
Amounts reclassified from accumulated other comprehensive income (loss) to net income
(3,222) 1,984  (1,238) 
Net current-period other comprehensive income (loss)22,911  (2,701) 20,210  
Balance - June 30, 2020$27,525  $(37,490) $(9,965) 

 Six Months Ended June 30, 2020
(amounts in thousands)
Unrealized Gains (Losses) Available for Sale Securities (1)
Unrealized 
Gains (Losses) on Cash Flow  Hedges (2)
Total
Balance - December 31, 2019$14,287  $(15,537) $(1,250) 
Unrealized gains (losses) arising during period, before tax26,217  (34,066) (7,849) 
Income tax effect(6,816) 9,035  2,219  
Other comprehensive income (loss) before reclassifications19,401  (25,031) (5,630) 
Reclassification adjustments for (gains) losses included in net income, before tax(8,328) 4,196  (4,132) 
Income tax effect2,165  (1,118) 1,047  
Amounts reclassified from accumulated other comprehensive income (loss) to net income
(6,163) 3,078  (3,085) 
Net current-period other comprehensive income (loss)13,238  (21,953) (8,715) 
Balance - June 30, 2020$27,525  $(37,490) $(9,965) 
(1)Reclassification amounts for available for sale debt securities are reported as gain or loss on sale of investment securities on the consolidated statements of income.
(2)Reclassification amounts for cash flow hedges are reported as interest expense for the applicable hedged items on the consolidated statements of income.


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Three Months Ended June 30, 2019
(amounts in thousands)
Unrealized Gains (Losses) on Available for Sale Securities (1)
Unrealized Gains (Losses) on Cash Flow Hedges (2)
Total
Balance - March 31, 2019$(8,556) $(6,363) $(14,919) 
Unrealized gains (losses) arising during period, before tax20,755  (14,102) 6,653  
Income tax effect(5,397) 3,667  (1,730) 
Other comprehensive income (loss) before reclassifications15,358  (10,435) 4,923  
Reclassification adjustments for losses (gains) included in net income, before tax—  4  4  
Income tax effect—  (1) (1) 
Amounts reclassified from accumulated other comprehensive income (loss) to net income
—  3  3  
Net current-period other comprehensive income (loss)15,358  (10,432) 4,926  
Balance - June 30, 2019$6,802  $(16,795) $(9,993) 


Six Months Ended June 30, 2019
(amounts in thousands)
Unrealized Gains (Losses) on Available for Sale Securities (1)
Unrealized
Gains (Losses) on Cash Flow Hedges (2)
Total
Balance - December 31, 2018$(21,741) $(922) $(22,663) 
Unrealized gains (losses) arising during period, before tax38,572  (21,041) 17,531  
Income tax effect(10,029) 5,471  (4,558) 
Other comprehensive income (loss) before reclassifications28,543  (15,570) 12,973  
Reclassification adjustments for losses (gains) included in net income, before tax—  (409) (409) 
Income tax effect—  106  106  
Amounts reclassified from accumulated other comprehensive income (loss) to net income
—  (303) (303) 
Net current-period other comprehensive income 28,543  (15,873) 12,670  
Balance - June 30, 2019$6,802  $(16,795) $(9,993) 
(1)Reclassification amounts for available for sale debt securities are reported as gain or loss on sale of investment securities on the consolidated statements of income.
(2)Reclassification amounts for cash flow hedges are reported as interest expense for the applicable hedged items on the consolidated statements of income.
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NOTE 5 — INVESTMENT SECURITIES
The amortized cost and fair value of investment securities as of June 30, 2020 and December 31, 2019 are summarized in the tables below:
 
June 30, 2020 (1)
(amounts in thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
Available for sale debt securities:
Agency-guaranteed residential mortgage-backed securities $140,019  $4,291  $—  $144,310  
Agency-guaranteed collateralized mortgage obligations145,061  765  —  145,826  
State and political subdivision debt securities (2)
17,496  893  —  18,389  
Corporate notes (3)
324,986  31,286  (39) 356,233  
Available for sale debt securities$627,562  $37,235  $(39) 664,758  
Interest-only GNMA securities (4)
14,396  
Equity securities (5)
2,228  
Total investment securities, at fair value$681,382  

 December 31, 2019
(amounts in thousands)Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
Available for sale debt securities:
Agency-guaranteed residential mortgage-backed securities $273,252  $5,069  $—  $278,321  
Corporate notes (3)
284,639  14,238  —  298,877  
Available for sale debt securities$557,891  $19,307  $—  577,198  
Interest-only GNMA securities (4)
16,272  
Equity securities (5)
2,406  
Total investment securities, at fair value$595,876  
(1)Accrued interest on AFS debt securities totaled $3.2 million at June 30, 2020 and is included in accrued interest receivable on the consolidated balance sheet.
(2)Includes both taxable and non-taxable municipal securities.
(3)Includes corporate securities issued by domestic bank holding companies.
(4)Reported at fair value with fair value changes recorded in non-interest income based on a fair value option election.
(5)Includes equity securities issued by a foreign entity.

On June 28, 2019, Customers obtained ownership of certain interest-only GNMA securities that served as the primary collateral for loans made to one commercial mortgage warehouse customer through a Uniform Commercial Code private sale transaction. In connection with the acquisition of the interest-only GNMA securities, Customers recognized a pre-tax loss of $7.5 million for the three months ended June 30, 2019 for the shortfall in the fair value of the interest-only GNMA securities compared to its credit exposure to this commercial mortgage warehouse customer. Upon acquisition, Customers elected the fair value option for these interest-only GNMA securities. The fair value of these securities at June 30, 2020 was $14.4 million.
During the three and six months ended June 30, 2020, Customers recognized unrealized gains of $1.2 million and unrealized losses of $0.2 million, respectively, on its equity securities. During the three and six months ended June 30, 2019, Customers recognized unrealized losses of $0.3 million and $0.3 million, respectively, on its equity securities. These unrealized gains and losses are reported as unrealized gain (loss) on investment securities within non-interest income on the consolidated statements of income.
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Proceeds from the sale of available for sale debt securities were $109.2 million for the three and six months ended June 30, 2020. Realized gains from the sale of available for sale debt securities were $4.4 million and $8.3 million for the three and six months ended June 30, 2020, respectively. There were no sales of available for sale debt securities for the three and six months ended June 30, 2019. These gains (losses) were determined using the specific identification method and were reported as gain (loss) on sale of investment securities within non-interest income on the consolidated statements of income.
The following table shows debt securities by stated maturity.  Debt securities backed by mortgages and interest-only GNMA securities have expected maturities that differ from contractual maturities because borrowers have the right to call or prepay and, therefore, these debt securities are classified separately with no specific maturity date:
 June 30, 2020
(amounts in thousands)Amortized
Cost		Fair
Value
Due in one year or less$7,954  $8,003  
Due after one year through five years62,687  64,280  
Due after five years through ten years252,845  282,450  
Due after ten years18,996  19,889  
Agency-guaranteed residential mortgage-backed securities140,019  144,310  
Agency-guaranteed collateralized mortgage obligations145,061  145,826  
Interest-only GNMA securities—  14,396  
Total debt securities$627,562  $679,154  

Gross unrealized losses and fair value of Customers' available for sale debt securities aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2020 were as follows:
 June 30, 2020
 Less Than 12 Months12 Months or MoreTotal
(amounts in thousands)Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
Available for sale debt securities:
Corporate notes 4,961  (39) —  —  4,961  (39) 
Total$4,961  $(39) $—  $—  $4,961  $(39) 

At June 30, 2020, there was one available for sale debt security with unrealized losses in the less-than-twelve-month category and no available for sale debt securities with unrealized losses in the twelve-month-or-more category. The unrealized loss was principally due to changes in market interest rates that resulted in a negative impact on the respective note's fair value. All amounts related to the corporate notes are expected to be recovered when market prices recover or at maturity. Customers does not intend to sell the security, and it is not more likely than not that Customers will be required to sell the security before recovery of the amortized cost basis. At December 31, 2019, there were no available for sale debt securities in an unrealized loss position.

At June 30, 2020 and December 31, 2019, Customers Bank had pledged investment securities aggregating $16.9 million and $20.4 million in fair value, respectively, as collateral against its borrowings primarily with an unused line of credit with another financial institution. These counterparties do not have the ability to sell or repledge these securities.
At June 30, 2020 and December 31, 2019, no securities holding of any one issuer, other than the U.S. Government and its agencies, amounted to greater than 10% of shareholders' equity.
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NOTE 6 – LOANS HELD FOR SALE
The composition of loans held for sale as of June 30, 2020 and December 31, 2019 was as follows:
(amounts in thousands)June 30, 2020December 31, 2019
Commercial loans:
Multi-family loans, at lower of cost or fair value$441,732  $482,873  
Commercial mortgage loans, at lower of cost or fair value17,600  —  
Total commercial loans held for sale459,332  482,873  
Consumer loans:
Home equity conversion mortgages, at lower of cost or fair value1,325  1,325  
Residential mortgage loans, at fair value3,507  2,130  
Total consumer loans held for sale4,832  3,455  
Loans held for sale$464,164  $486,328  

Total loans held for sale as of June 30, 2020 and December 31, 2019 included NPLs of $18.9 million and $1.3 million, respectively.

NOTE 7 — LOANS AND LEASES RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES
The following table presents loans and leases receivable as of June 30, 2020 and December 31, 2019.
(amounts in thousands)June 30, 2020December 31, 2019
Loans and leases receivable, mortgage warehouse, at fair value$2,793,164  $2,245,758  
Loans receivable, PPP4,760,427  —  
Loans receivable:
Commercial:
Multi-family1,581,839  1,907,331  
Commercial and industrial (1)
2,099,442  1,891,152  
Commercial real estate owner occupied544,772  551,948  
Commercial real estate non-owner occupied1,244,773  1,222,772  
Construction128,834  117,617  
Total commercial loans and leases receivable5,599,660  5,690,820  
Consumer:
Residential real estate348,109  382,634  
Manufactured housing66,865  71,359  
Other consumer1,257,813  1,174,175  
Total consumer loans receivable1,672,787  1,628,168  
Loans and leases receivable (2)
7,272,447  7,318,988  
Allowance for credit losses(159,905) (56,379) 
Total loans and leases receivable, net of allowance for credit losses$14,666,133  $9,508,367  
(1)Includes direct finance equipment leases of $96.4 million and $89.2 million at June 30, 2020 and December 31, 2019, respectively.
(2)Includes deferred (fees) costs and unamortized (discounts) premiums, net of $(83.1) million and $2.1 million at June 30, 2020 and December 31, 2019, respectively.
Customers' total loans and leases receivable portfolio includes loans receivable which are reported at fair value based on an election made to account for these loans at fair value and loans and leases receivable which are predominately reported at their outstanding unpaid principal balance, net of charge-offs and deferred costs and fees and unamortized premiums and discounts and are evaluated for impairment. The total amount of accrued interest recorded for total loans was $47.1 million and $34.8 million at June 30, 2020 and December 31, 2019, respectively, and is presented in accrued interest receivable in the consolidated balance sheet. At June 30, 2020, there were $55.9 million of individually evaluated loans that were collateral-dependent. Substantially all individually evaluated loans are collateral-dependent and consisted primarily of commercial and industrial, commercial real estate, and residential real estate loans.
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Collateral-dependent commercial and industrial loans were secured by accounts receivable, inventory and equipment; collateral-dependent commercial real estate loans were secured by commercial real estate assets; and residential real estate loans were secured by residential real estate assets.
Loans receivable, PPP:
On March 27, 2020, the CARES Act was signed into law and created funding for a new product called the PPP. The PPP is administered by the SBA and is intended to assist organizations with payroll related expenses. Customers had $4.8 billion of PPP loans outstanding as of June 30, 2020, which are fully guaranteed by the SBA and earn a fixed interest rate of 1.00%. Customers recognized interest income, including origination fees, of $11.7 million for the three and six months ended June 30, 2020, respectively.
Loans receivable, mortgage warehouse, at fair value:
Mortgage warehouse loans consist of commercial loans to mortgage companies. These mortgage warehouse lending transactions are subject to master repurchase agreements. As a result of the contractual provisions, for accounting purposes control of the underlying mortgage loan has not transferred and the rewards and risks of the mortgage loans are not assumed by Customers. The mortgage warehouse loans are designated as loans held for investment and reported at fair value based on an election made to account for the loans at fair value. Pursuant to the agreements, Customers funds the pipelines for these mortgage lenders by sending payments directly to the closing agents for funded mortgage loans and receives proceeds directly from third party investors when the underlying mortgage loans are sold into the secondary market. The fair value of the mortgage warehouse loans is estimated as the amount of cash initially advanced to fund the mortgage, plus accrued interest and fees, as specified in the respective agreements. The interest rates on these loans are variable, and the lending transactions are short-term, with an average life under 30 days from purchase to sale. The primary goal of these lending transactions is to provide liquidity to mortgage companies.
At June 30, 2020 and December 31, 2019, all of Customers' commercial mortgage warehouse loans were current in terms of payment. As these loans are reported at their fair value, they do not have an ACL and are therefore excluded from ACL-related disclosures.
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Loans and leases receivable:
The following tables summarize loans and leases receivable by loan and lease type and performance status as of June 30, 2020 and December 31, 2019:
 June 30, 2020
(amounts in thousands)30-59 Days past due60-89 Days past due90 Days or more past dueTotal past due
Loans and leases not past due (2)
Total loans and leases (3)
Multi-family$—  $16,790  $7,013  $23,803  $1,558,036  $1,581,839  
Commercial and industrial523  123  9,974  10,620  2,088,822  2,099,442  
Commercial real estate owner occupied—  4,888  4,022  8,910  535,862  544,772  
Commercial real estate non-owner occupied97  —  30,257  30,354  1,214,419  1,244,773  
Construction—  —  —  —  128,834  128,834  
Residential real estate8,631  441  7,857  16,929  331,180  348,109  
Manufactured housing (5)
1,172  —  5,069  6,241  60,624  66,865  
Other consumer11,415  —  4,887  16,302  1,241,511  1,257,813  
Total$21,838  $22,242  $69,079  $113,159  $7,159,288  $7,272,447  

December 31, 2019
(amounts in thousands)
30-89 Days past due (1)
90 Days or more past due (1)
Total past due (1)
Non-accrual
Current (2)
Purchased-credit-impaired loans (4)
Total loans and leases (5)
Multi-family$2,133  —  $2,133  $4,117  $1,901,336  $1,688  $1,909,274  
Commercial and industrial2,395  —  2,395  4,531  1,882,700  354  1,889,980  
Commercial real estate owner occupied5,388  —  5,388  1,963  537,992  6,664  552,007  
Commercial real estate non-owner occupied8,034  —  8,034  76  1,211,892  3,527  1,223,529  
Construction—  —  —  —  118,418  —  118,418  
Residential real estate5,924  —  5,924  6,128  359,491  3,471  375,014  
Manufactured housing3,699  1,794  5,493  1,655  61,649  1,601  70,398  
Other consumer5,756  $—  5,756  1,551  1,170,793  183  1,178,283  
Total$33,329  $1,794  $35,123  $20,021  $7,244,271  $17,488  $7,316,903  
(1)Includes past due loans and leases that are accruing interest because collection is considered probable.
(2)Loans and leases where next payment due is less than 30 days from the report date. The June 30, 2020 table excludes PPP loans of $4.8 billion which are all current as of June 30, 2020.
(3)Includes purchased credit deteriorated loans of $15.7 million at June 30, 2020.
(4)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. Due to 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.
(5)Amounts exclude deferred costs and fees and unamortized premiums and discounts.
As of June 30, 2020 and December 31, 2019, the Bank had $0.1 million and $0.2 million, respectively, of residential real estate held in OREO. As of June 30, 2020 and December 31, 2019, the Bank had initiated foreclosure proceedings on $0.7 million and $0.9 million, respectively, in loans secured by residential real estate.
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Nonaccrual Loans and Leases
The following table presents the amortized cost of loans and leases on nonaccrual status.
 
June 30, 2020 (1)
December 31, 2019 (2)
(amounts in thousands)Nonaccrual loans with no related allowanceNonaccrual loans with related allowanceTotal nonaccrual loansNonaccrual loans with no related allowanceNonaccrual loans with related allowanceTotal nonaccrual loans
Multi-family$4,004  $3,009  $7,013  $4,117  $—  $4,117  
Commercial and industrial9,000  974  9,974  3,083  1,448  4,531  
Commercial real estate owner occupied3,933  89  4,022  1,109  854  1,963  
Commercial real estate non-owner occupied30,257  —  30,257  76  —  76  
Construction—  —  —  —  —  —  
Residential real estate7,857  —  7,857  4,559  1,569  6,128  
Manufactured housing536  2,795  3,331  —  1,655  1,655  
Other consumer1,808  3,079  4,887  140  1,411  1,551  
Total$57,395  $9,946  $67,341  $13,084  $6,937  $20,021  
(1) Presented at amortized cost basis.
(2) Amounts exclude deferred costs and fees and unamortized premiums and discounts.
Interest income of $0.6 million and $0.3 million was recognized on nonaccrual loans for the three months ended June 30, 2020 and 2019, respectively. Interest income of $0.7 million and $0.5 million was recognized on nonaccrual loans for the six months ended June 30, 2020 and 2019, respectively.
Allowance for credit losses on loans and leases
The changes in the allowance for credit losses on loans and leases for the three and six months ended June 30, 2020 and 2019 are presented in the tables below.
Three Months Ended June 30, 2020Multi-familyCommercial and industrialCommercial real estate owner occupiedCommercial real estate non-owner occupiedConstructionResidential real estateManufactured housingOther consumerTotal
(amounts in thousands)
Beginning balance, at March 31, 2020$8,750  $18,806  $8,527  $18,530  $1,934  $4,180  $4,987  $83,569  $149,283  
Charge-offs—  (20) —  (2,801) —  —  —  (8,304) (11,125) 
Recoveries—  25  2  —  113  26  —  635  801  
Provision for credit loss expense5,947  (6,509) 2,876  10,764  3,250  344  1,027  3,247  20,946  
Ending Balance,
June 30, 2020		$14,697  $12,302  $11,405  $26,493  $5,297  $4,550  $6,014  $79,147  $159,905  
Six Months Ended
June 30, 2020
Ending Balance,
December 31, 2019		$6,157  $15,556  $2,235  $6,243  $1,262  $3,218  $1,060  $20,648  $56,379  
Cumulative effect of change in accounting principle2,171  759  5,773  7,918  (98) 1,518  3,802  57,986  79,829  
Charge-offs—  (117) —  (15,598) —  —  —  (14,550) (30,265) 
Recoveries—  79  5  —  116  55  —  975  1,230  
Provision for loan and lease losses6,369  (3,975) 3,392  27,930  4,017  (241) 1,152  14,088  52,732  
Ending Balance,
June 30, 2020		$14,697  $12,302  $11,405  $26,493  $5,297  $4,550  $6,014  $79,147  $159,905  

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Three Months Ended June 30, 2019Multi-familyCommercial and industrialCommercial real estate owner occupiedCommercial real estate non-owner occupiedConstructionResidential real estateManufactured housingOther consumerTotal
(amounts in thousands)
Ending Balance,
March 31, 2019		$10,630  $12,647  $3,425  $6,015  $584  $6,572  $117  $3,689  $43,679  
Charge-offs—  (183) (66) —  —  (69) —  (932) (1,250) 
Recoveries7  338  97  —  114  8  —  49  613  
Provision for loan and lease losses(711) 934  (96) 144  (49) (2,343) 6  7,461  5,346  
Ending Balance,
June 30, 2019		$9,926  $13,736  $3,360  $6,159  $649  $4,168  $123  $10,267  $48,388  
Six Months Ended
June 30, 2019
Ending Balance,
December 31, 2018		$11,462  $12,145  $3,320  $6,093  $624  $3,654  $145  $2,529  $39,972  
Charge-offs(541) (183) (74) —  —  (109) —  (1,687) (2,594) 
Recoveries7  457  225  —  120  15  —  73  897  
Provision for loan and lease losses(1,002) 1,317  (111) 66  (95) 608  (22) 9,352  10,113  
Ending Balance,
June 30, 2019		$9,926  $13,736  $3,360  $6,159  $649  $4,168  $123  $10,267  $48,388  

At June 30, 2020, the ACL was $159.9 million, an increase of $23.7 million from the January 1, 2020 balance of $136.2 million. The increase resulted primarily from the impact of reserve build for the COVID-19 pandemic including the change in macroeconomic forecasts, an increase in net charge-offs, mostly attributed to the commercial real estate non-owner occupied and other consumer portfolios, and portfolio growth mainly in the other consumer portfolio. Commercial real estate non-owner occupied charge-offs are attributable to two collateral dependent loans. Other consumer charge-offs are attributable to delinquencies and defaults of originated and purchased unsecured other consumer loans through arrangements with fintech companies and other market place lenders.
PPP loans include an embedded credit enhancement guarantee from the SBA, which guarantees 100% of all principal and interest owed by the borrower. Therefore, Customers did not include an ACL for PPP loans as of June 30, 2020.
Troubled Debt Restructurings
At June 30, 2020 and December 31, 2019, there were $14.8 million and $13.3 million, respectively, in loans reported as 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 it satisfies a minimum performance requirement of six months, however, it will remain classified as impaired. Generally, the Bank requires sustained performance for nine months before returning a TDR to accrual status. Customers had no lease receivables that had been restructured as a TDR as of June 30, 2020 and December 31, 2019, respectively.
The CARES Act and certain regulatory agencies recently issued guidance stating certain loan modifications to borrowers experiencing financial distress as a result of the economic impacts created by COVID-19 may not be required to be treated as TDRs under U.S GAAP. For COVID-19 related loan modifications which met the loan modification criteria under either the CARES Act or the criteria specified by the regulatory agencies, Customers elected to suspend TDR accounting for such loan modifications. At June 30, 2020, commercial and consumer deferments related to COVID-19 were $974.0 million and $81.1 million, respectively.
The following table presents loans modified in a TDR by type of concession for the three and six months ended June 30, 2020 and 2019. There were no modifications that involved forgiveness of debt for the three and six months ended June 30, 2020 and 2019.
Three Months Ended June 30,Six Months Ended June 30,
 2020201920202019
(dollars in thousands)Number of loansRecorded investmentNumber of loansRecorded investmentNumber of loansRecorded investmentNumber of loansRecorded investment
Extensions of maturity2  $140  —  $—  6  $385  2  $514  
Interest-rate reductions20  843  2  47  32  1,373  12  432  
Total22  $983  2  $47  38  $1,758  14  $946  
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As of June 30, 2020, there were no commitments to lend additional funds to debtors whose loans have been modified in TDRs. As of December 31, 2019, there were no commitments to lend additional funds to debtors whose loans have been modified in TDRs.
The following table presents, by loan type, the number of loans modified in TDRs and the related recorded investment, for which there was a payment default within twelve months following the modification:
June 30, 2020June 30, 2019
(dollars in thousands)Number of loansRecorded investmentNumber of loansRecorded investment
Manufactured housing—  $—  3  $108  
Commercial and industrial—  —  1  —  
Commercial real estate owner occupied1  958  —  —  
Residential real estate4  313  —  —  
Total loans5  $1,271  4  $108  
Loans modified in TDRs 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 ACL.
Purchased Credit-Deteriorated Loans
Customers adopted ASC 326 using the prospective transition approach for financial assets purchased with credit deterioration that were previously classified as PCI and accounted for under ASC 310-30. In accordance with the standard, Customers did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2020, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $0.2 million of the allowance for credit losses on PCD loans and leases. The remaining noncredit discount of $0.3 million, based on the adjusted amortized cost basis, will be accreted into interest income at the effective interest rate as of January 1, 2020. As of June 30, 2020, the amortized cost basis of PCD assets amounted to $15.7 million.

Credit Quality Indicators
The ACL represents management's estimate of expected losses in Customers' loans and leases receivable portfolio, excluding commercial mortgage warehouse loans reported at fair value pursuant to a fair value option election and PPP loans receivable. Multi-family, commercial and industrial, owner occupied commercial real estate, non-owner occupied commercial real estate, and construction loans are rated based on an internally assigned risk rating system which is assigned at the time of loan origination and reviewed on a periodic, or on an “as needed” basis. Residential real estate loans, manufactured housing and other consumer loans are evaluated based on the payment activity of the loan.
To facilitate the monitoring of credit quality within the multi-family, commercial and industrial, owner occupied commercial real estate, non-owner occupied commercial real estate, and construction loan portfolios, and as an input in the ACL lifetime loss rate model for the C&I portfolio, 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 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 manage those loans and leases. The 2019 Form 10-K describes Customers Bancorp’s risk rating grades.
Risk ratings are not established for certain consumer loans, including residential real estate, home equity, 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 non-performing. The following tables present the credit ratings of loans and leases receivable as of June 30, 2020 and December 31, 2019. PPP loans are excluded in the tables below as these loans are fully guaranteed by the SBA.



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Term Loans Amortized Cost Basis by Origination Year
(in thousands)20202019201820172016PriorRevolving loans amortized cost basisRevolving loans converted to termTotal
Multi-family loans:
Pass$124,920  $23,534  $170,856  $417,942  $264,780  $507,568  $—  $—  $1,509,600  
Special mention—  —  —  19,509  1,960  17,753  —  —  39,222  
Substandard—  —  —  12,006  13,862  7,149  —  —  33,017  
Doubtful—  —  —  —  —  —  —  —  —  
Total multi-family loans$124,920  $23,534  $170,856  $449,457  $280,602  $532,470  $—  $—  $1,581,839  
Commercial and industrial loans and leases:
Pass$439,083  $462,717  $152,557  $109,701  $52,470  $94,383  $698,721  $—  $2,009,632  
Special mention—  7,258  2,297  17,402  116  25  17,957  —  45,055  
Substandard6,360  5,327  12,776  1,663  7,530  3,042  8,057  —  44,755  
Doubtful—  —  —  —  —  —  —  —  —  
Total commercial and industrial loans and leases$445,443  $475,302  $167,630  $128,766  $60,116  $97,450  $724,735  $—  $2,099,442  
Commercial real estate owner occupied loans:
Pass$31,240  $184,684  $86,611  $72,708  $48,643  $95,921  $1,628  $—  $521,435  
Special mention—  —  480  9,484  —  392  —  —  10,356  
Substandard—  —  —  350  2,255  10,376  —  —  12,981  
Doubtful—  —  —  —  —  —  —  —  —  
Total commercial real estate owner occupied loans$31,240  $184,684  $87,091  $82,542  $50,898  $106,689  $1,628  $—  $544,772  
Commercial real estate non-owner occupied:
Pass$117,101  $117,140  $117,600  $249,173  $199,822  $376,641  $—  $—  $1,177,477  
Special mention—  —  —  —  —  10,477  —  —  10,477  
Substandard—  —  —  —  2,437  26,461  —  —  28,898  
Doubtful—  —  27,921  —  —  —  —  —  27,921  
Total commercial real estate non-owner occupied loans$117,101  $117,140  $145,521  $249,173  $202,259  $413,579  $—  $—  $1,244,773  
Construction:
Pass$4,862  $88,550  $23,358  $—  $9,803  $—  $2,261  $—  $128,834  
Special mention—  —  —  —  —  —  —  —  —  
Substandard—  —  —  —  —  —  —  —  —  
Doubtful—  —  —  —  —  —  —  —  —  
Total construction loans$4,862  $88,550  $23,358  $—  $9,803  $—  $2,261  $—  $128,834  
Total commercial loans and leases receivable$723,566  $889,210  $594,456  $909,938  $603,678  $1,150,188  $728,624  $—  $5,599,660  
Residential real estate loans:
Performing$2,349  $54,663  $64,362  $67,128  $46,654  $83,669  $21,803  $—  $340,628  
Non-performing66  —  857  823  865  4,441  429  —  7,481  
Total residential real estate loans$2,415  $54,663  $65,219  $67,951  $47,519  $88,110  $22,232  $—  $348,109  
Manufactured housing loans:
Performing$—  $311  $640  $80  $43  $62,072  $—  $—  $63,146  
Non-performing—  —  —  —  —  3,719  —  —  3,719  
Total manufactured housing loans$—  $311  $640  $80  $43  $65,791  $—  $—  $66,865  
Other consumer loans:
Performing$165,436  $943,581  $135,926  $6,034  $648  $1,292  $32  $—  $1,252,949  
Non-performing243  3,610  853  23  —  135  —  —  4,864  
Total other consumer loans$165,679  $947,191  $136,779  $6,057  $648  $1,427  $32  $—  $1,257,813  
Total consumer loans$168,094  $1,002,165  $202,638  $74,088  $48,210  $155,328  $22,264  $—  $1,672,787  
Loans and leases receivable$891,660  $1,891,375  $797,094  $984,026  $651,888  $1,305,516  $750,888  $—  $7,272,447  

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 December 31, 2019
(amounts in thousands)Multi-familyCommercial and industrialCommercial real estate owner occupiedCommercial real estate non-owner occupiedConstructionResidential real estateManufactured housingOther consumer
Total (3)
Pass/Satisfactory$1,816,200  $1,841,074  $536,777  $1,129,838  $118,418  $—  $—  $—  $5,442,307  
Special Mention69,637  26,285  8,286  6,949  —  —  —  —  111,157  
Substandard23,437  22,621  6,944  86,742  —  —  —  —  139,744  
Performing (1)
—  —  —  —  —  362,962  63,250  1,170,976  1,597,188  
Non-performing (2)
—  —  —  —  —  12,052  7,148  7,307  26,507  
Total$1,909,274  $1,889,980  $552,007  $1,223,529  $118,418  $375,014  $70,398  $1,178,283  $7,316,903  
(1)Includes residential real estate, manufactured housing, and other consumer loans not assigned internal ratings.
(2)Includes residential real estate, manufactured housing, and other consumer loans that are past due and still accruing interest or on nonaccrual status.
(3)Excludes commercial mortgage warehouse loans reported at fair value.
Loan Purchases and Sales
Purchases and sales of loans were as follows for the three and six months ended June 30, 2020 and 2019:
Three Months Ended June 30,Six Months Ended June 30,
(amounts in thousands)2020201920202019
Purchases (1)
Residential real estate$—  $39,474  $495  $105,858  
Other consumer (2)
18,008  384,116  209,768  450,252  
Total$18,008  $423,590  $210,263  $556,110  
Sales (3)
Other consumer—  —  1,822  —  
Total$—  $—  $1,822  $—  
(1)Amounts reported in the above table are the unpaid principal balance at time of purchase. The purchase price was 98.5% and 100.6% of loans outstanding for the three months ended June 30, 2020 and 2019, respectively. The purchase price was 100.4% and 99.9% of loans outstanding for the six months ended June 30, 2020 and 2019, respectively.
(2)Other consumer loan purchases for the three and six months ended June 30, 2020 and 2019 consist of third-party originated unsecured consumer loans. None of the loans are considered sub-prime at the time of origination. Customers considers sub-prime borrowers to be those with FICO scores below 660.
(3)Amounts reported in the above table are the unpaid principal balance at time of sale. There were no loan sales in the three and six months ended June 30, 2019.
Loans Pledged as Collateral
Customers has pledged eligible real estate and commercial and industrial loans as collateral for borrowings from the FHLB and FRB in the amount of $8.5 billion and $4.6 billion at June 30, 2020 and December 31, 2019, respectively. The increase in loans pledged as collateral relates to $4.4 billion of PPP loans that were pledged to the FRB in accordance with borrowing from the PPPLF.


NOTE 8 — LEASES
Lessee
Customers has operating leases for its branches, LPOs, and administrative offices, with remaining lease terms ranging between 1 month and 7 years. These operating leases comprise substantially all of Customers' obligations in which Customers is the lessee. Most lease agreements consist of initial lease terms ranging between 1 and 5 years, with options to renew the leases or extend the term up to 15 years at Customers' sole discretion. Some operating leases include variable lease payments that are based on an index or rate, such as the CPI. Variable lease payments are not included in the liability or right of use asset and are recognized in the period in which the obligation for those payments are incurred. Customers' operating lease agreements do not contain any material residual value guarantees or material restrictive covenants. Pursuant to these agreements, Customers does not have any commitments that would meet the definition of a finance lease.
As most of Customers' operating leases do not provide an implicit rate, Customers utilized its incremental borrowing rate based on the information available at either the adoption of ASC 842 or the commencement date of the lease, whichever was later, when determining the present value of lease payments.
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The following table summarizes operating lease ROU assets and operating lease liabilities and their corresponding balance sheet location:
(amounts in thousands)ClassificationJune 30, 2020December 31, 2019
ASSETS
Operating lease ROU assetsOther assets$20,570  $20,232  
LIABILITIES
Operating lease liabilitiesOther liabilities$21,725  $21,358  
The following table summarizes operating lease cost and its corresponding income statement location for the periods presented:
Three Months Ended June 30,Six Months Ended June 30,
(amounts in thousands)Classification2020201920202019
Operating lease cost (1)
Occupancy expenses$1,474  $1,462  $2,954  $2,931  
(1) There were no variable lease costs for the three and six months ended June 30, 2020 and 2019, and sublease income for operating leases is immaterial.
Maturities of non-cancelable operating lease liabilities were as follows at June 30, 2020:
(amounts in thousands)June 30, 2020
2020$2,794  
20215,357  
20224,744  
20233,702  
20242,613  
Thereafter3,001  
Total minimum payments22,211  
Less: interest486  
Present value of lease liabilities$21,725  
Customers does not have leases where it is involved with the construction or design of an underlying asset. Customers has legally binding minimum lease payments of $0.3 million for leases signed but not yet commenced as of June 30, 2020. Cash paid pursuant to the operating lease liability was $1.5 million and $3.0 million for the three and six months ended June 30, 2020, respectively. Cash paid pursuant to the operating lease liability was $1.4 million and $2.8 million for the three and six months ended June 30, 2019, respectively. These payments were reported as cash flows used in operating activities in the statement of cash flows.
The following table summarizes the weighted average remaining lease term and discount rate for Customers' operating leases at June 30, 2020 and December 31, 2019:
(amounts in thousands)June 30, 2020December 31, 2019
Weighted average remaining lease term (years)
Operating leases5.1 years5.0 years
Weighted average discount rate
Operating leases2.96 %2.90 %
Equipment Lessor
CCF is a wholly-owned subsidiary of Customers Bank and is referred to as the Equipment Finance Group. CCF is primarily focused on originating equipment operating and direct finance equipment leases for a broad range of asset classes. It services vendors, dealers, independent finance companies, bank-owned leasing companies and strategic direct customers in the plastics, packaging, machine tool, construction, transportation and franchise markets. Lease terms typically range from 24 months to 120 months. CCF offers the following lease products: Capital Lease, Purchase Upon Termination, TRAC, Split-TRAC, and FMV. Direct finance equipment leases are included in commercial and industrial loans and leases receivable.
The estimated residual values for direct finance and operating leases are established by utilizing internally developed analyses, external studies, and/or third-party appraisals to establish a residual position. For the direct finance leases, only for a Split-TRAC is there a
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residual risk and the unguaranteed portions are typically nominal. Expected credit losses on direct financing leases and the related estimated residual values are included in the allowance for credit losses on loans and leases.
Leased assets under operating leases are carried at amortized cost net of accumulated depreciation and any impairment charges and are presented in other assets. The depreciation expense of the leased assets is recognized on a straight-line basis over the contractual term of the leases up to the expected residual value. The expected residual value and, accordingly, the monthly depreciation expense, may change throughout the term of the lease. Operating lease rental income for leased assets is recognized in commercial lease income on a straight-line basis over the lease term. Customers periodically reviews its operating leased assets for impairment. An impairment loss is recognized if the carrying amount of the operating leased asset exceeds its fair value and is not recoverable. The carrying amount of operating leased assets is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the lease payments and the estimated residual value upon the eventual disposition of the equipment.
The following table summarizes lease receivables and investment in operating leases and their corresponding balance sheet location at June 30, 2020 and December 31, 2019:
(amounts in thousands)ClassificationJune 30, 2020December 31, 2019
ASSETS
Direct financing leases
Lease receivablesLoans and leases receivable$96,924  $91,762  
Guaranteed residual assetsLoans and leases receivable7,730  7,435  
Unguaranteed residual assetsLoans and leases receivable3,271  1,260  
Deferred initial direct costsLoans and leases receivable666  721  
Unearned incomeLoans and leases receivable(11,569) (11,300) 
Net investment in direct financing leases$97,022  $89,878  
Operating leases
Investment in operating leasesOther assets$116,850  $107,850  
Accumulated depreciationOther assets(21,310) (14,251) 
Deferred initial direct costsOther assets1,148  1,052  
Net investment in operating leases96,688  94,651  
Total lease assets$193,710  $184,529  

COVID-19 Impact on Leases

Customers granted concessions to lessees as a result of the business impact of the COVID-19 pandemic. At June 30, 2020, the book value of finance and operating leases with payment deferments were $31.7 million and $16.7 million, respectively. The concessions did not have a material impact in interest income from leases for the three months ended June 30, 2020. Additionally, Customers did not receive any concessions on its operating leases in which Customers is the lessee.





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NOTE 9 - BORROWINGS

Short-term debt
Short-term debt at June 30, 2020 and December 31, 2019 was as follows:

 June 30, 2020December 31, 2019
(dollars in thousands)AmountRateAmountRate
FHLB advances$850,000  1.48 %$500,000  2.15 %
Federal funds purchased—  — %538,000  1.60 %
Total short-term debt$850,000  $1,038,000  

The following is a summary of additional information relating to Customers' short-term debt:
 
June 30, 2020December 31, 2019
(dollars in thousands)
FHLB advances
Maximum outstanding at any month end$910,000  $1,190,150  
Average balance during the year667,212  793,304  
Weighted-average interest rate during the year0.89 %2.66 %
Federal funds purchased
Maximum outstanding at any month end842,000  600,000  
Average balance during the year379,549  271,400  
Weighted-average interest rate during the year0.21 %2.28 %

At June 30, 2020 and December 31, 2019, Customers Bank had aggregate availability under federal funds lines totaling $1.2 billion and $0.6 billion, respectively.

Long-term debt
FHLB and FRB advances
Long-term FHLB and FRB advances at June 30, 2020 and December 31, 2019 were as follows:

June 30, 2020December 31, 2019
(dollars in thousands)AmountRateAmountRate
FHLB advances$—  0.00 %$350,000  2.36 %
FRB PPP Liquidity Facility advances4,419,967  0.35 %—  — %
Total long-term FHLB and FRB advances$4,419,967  $350,000  

Beginning in second quarter 2020, Customers began participating in the PPPLF, in which Federal Reserve Banks extend non-recourse loans to institutions that are eligible to make PPP loans. Only PPP loans that are guaranteed by the SBA under the PPP, with respect to both principal and interest that are originated by an eligible institution, may be pledged as collateral to the Federal Reserve Banks.

The maximum borrowing capacity with the FHLB and FRB at June 30, 2020 and December 31, 2019 was as follows:

(amounts in thousands)June 30, 2020December 31, 2019
Total maximum borrowing capacity with the FHLB$2,958,717  $3,445,416  
Total maximum borrowing capacity with the FRB (1)
152,410  136,842  
Qualifying loans serving as collateral against FHLB and FRB advances3,814,247  4,496,983  
(1) Amounts reported in the above table exclude borrowings under the PPPLF, which are limited to the face value of the loans originated under the PPP. At June 30, 2020, Customers had $4.4 billion of borrowings under the PPPLF, with a borrowing capacity of up to $4.8 billion, which is the face value of the qualifying loans Customers has originated under the PPP.
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Senior and Subordinated Debt

Long-term senior notes and subordinated debt at June 30, 2020 and December 31, 2019 were as follows:

June 30, 2020December 31, 2019
(dollars in thousands)
Issued byRankingAmountAmountRateIssued AmountDate IssuedMaturityPrice
Customers BancorpSenior$24,492  $24,432  4.500 %$25,000  September 2019September 2024100.000 %
Customers BancorpSenior99,341  99,198  3.950 %100,000  June 2017June 202299.775 %
Total other borrowings123,833  123,630  
Customers Bancorp
Subordinated (1)(2)
72,131  72,040  5.375 %74,750  December 2019December 2034100.000 %
Customers Bank
Subordinated (1)(3)
109,124  109,075  6.125 %110,000  June 2014June 2029100.000 %
Total subordinated debt$181,255  $181,115  

(1)The subordinated notes qualify as Tier 2 capital for regulatory capital purposes.
(2)Customers Bancorp 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 December 30, 2029.
(3)The subordinated notes will bear an annual fixed rate of 6.125% until June 26, 2024. From June 26, 2024 until maturity, the notes will bear an annual interest rate equal to the three-month LIBOR plus 344.3 basis points. 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.


NOTE 10 — REGULATORY CAPITAL
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 the 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.
In first quarter 2020, U.S federal banking regulatory agencies permitted banking organizations to phase-in, for regulatory capital purposes, the day-one impact of the new CECL accounting rule on retained earnings over a period of three years. As part of its response to the impact of COVID-19, on March 31, 2020, the U.S. federal banking regulatory agencies issued an interim final rule that provided the option to temporarily delay certain effects of CECL on regulatory capital for two years, followed by a three-year transition period. The interim final rule allows banking organizations to delay for two years 100% of the day-one impact of adopting CECL and 25% of the cumulative change in the reported allowance for credit losses since adopting CECL. Customers has elected to adopt the interim final rule, which is reflected in the regulatory capital data presented below.
In April 2020, the U.S. federal banking regulatory agencies issued an interim final rule that permits banks to exclude the impact of participating in the SBA PPP program in their regulatory capital ratios. Specifically, PPP loans are zero percent risk weighted and a bank can exclude all PPP loans pledged as collateral to the PPPLF from its average total consolidated assets for purposes of calculating the Tier 1 capital to average assets ratio (i.e. leverage ratio). Customers applied this regulatory guidance in the calculation of its regulatory capital ratios presented below.
Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Bancorp to maintain minimum amounts and ratios (set forth in the following table) of common equity Tier 1, Tier 1, and total capital to risk-weighted assets, and Tier 1 capital to average assets (as defined in the regulations). At June 30, 2020 and December 31, 2019, the Bank and the Bancorp satisfied all capital requirements to which they were subject.
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Generally, to comply with the regulatory definition of adequately capitalized, or well capitalized, respectively, or to comply with the Basel III capital requirements, an institution must at least maintain the common equity Tier 1, Tier 1 and total risk-based capital ratios and the Tier 1 leverage ratio in excess of the related minimum ratios as set forth in the following table:
Minimum Capital Levels to be Classified as:
 ActualAdequately CapitalizedWell CapitalizedBasel III Compliant
(amounts in thousands)AmountRatioAmountRatioAmountRatioAmountRatio
As of June 30, 2020:
Common equity Tier 1 capital (to risk-weighted assets)
Customers Bancorp, Inc.$853,818  7.765 %$494,780  4.500 %N/AN/A$769,657  7.000 %
Customers Bank$1,168,276  10.636 %$494,291  4.500 %$713,976  6.500 %$768,897  7.000 %
Tier 1 capital (to risk-weighted assets)
Customers Bancorp, Inc.$1,071,289  9.743 %$659,706  6.000 %N/AN/A$934,584  8.500 %
Customers Bank$1,168,276  10.636 %$659,055  6.000 %$878,740  8.000 %$933,661  8.500 %
Total capital (to risk-weighted assets)
Customers Bancorp, Inc.$1,311,527  11.928 %$879,608  8.000 %N/AN/A$1,154,486  10.500 %
Customers Bank$1,351,665  12.305 %$878,740  8.000 %$1,098,424  10.000 %$1,153,346  10.500 %
Tier 1 capital (to average assets)
Customers Bancorp, Inc.$1,071,289  8.790 %$487,512  4.000 %N/AN/A$487,512  4.000 %
Customers Bank$1,168,276  9.593 %$487,151  4.000 %$608,938  5.000 %$487,151  4.000 %
As of December 31, 2019:
Common equity Tier 1 capital (to risk-weighted assets)
Customers Bancorp, Inc.$821,810  7.984 %$463,211  4.500 %N/AN/A$720,551  7.000 %
Customers Bank$1,164,652  11.323 %$462,842  4.500 %$668,549  6.500 %$719,976  7.000 %
Tier 1 capital (to risk-weighted assets)
Customers Bancorp, Inc.$1,039,281  10.096 %$617,615  6.000 %N/AN/A$874,955  8.500 %
Customers Bank$1,164,652  11.323 %$617,122  6.000 %$822,829  8.000 %$874,256  8.500 %
Total capital (to risk-weighted assets)
Customers Bancorp, Inc.$1,256,309  12.205 %$823,487  8.000 %N/AN/A$1,080,827  10.500 %
Customers Bank$1,330,155  12.933 %$822,829  8.000 %$1,028,537  10.000 %$1,079,964  10.500 %
Tier 1 capital (to average assets)
Customers Bancorp, Inc.$1,039,281  9.258 %$449,026  4.000 %N/AN/A$449,026  4.000 %
Customers Bank$1,164,652  10.379 %$448,851  4.000 %$561,064  5.000 %$448,851  4.000 %

The Basel III Capital Rules require that we maintain a 2.500% capital conservation buffer with respect to each of CET1, Tier 1 and total capital to risk-weighted assets, which provides for capital levels that exceed the minimum risk-based capital adequacy requirements. A financial institution with a conservation buffer of less than the required amount is subject to limitations on capital distributions, including dividend payments and stock repurchases, and certain discretionary bonus payments to executive officers.

NOTE 11 — 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. 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. Many of these instruments lack an available trading market as characterized by a willing buyer and a willing seller engaging in an exchange transaction. For fair value disclosure purposes, Customers utilized certain fair value measurement criteria under 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.
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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 adjustments to 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 June 30, 2020 and December 31, 2019:
Financial Instruments Recorded at Fair Value on a Recurring Basis
Investment securities:
The fair values of equity securities, available for sale debt securities and debt securities reported at fair value based on a fair value option election are determined by obtaining quoted market prices on nationally recognized and foreign securities exchanges (Level 1), quoted prices in markets that are not active (Level 2), 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 internally and externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3). These assets are classified as Level 1, 2 or 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Loans held for sale - Residential mortgage loans (fair value option):
Customers 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 classified as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Loans receivable - Commercial mortgage warehouse loans (fair value option):
The fair value of commercial 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 the mortgage loans and the finalization of the sale of the loans to an investor. Changes in fair value are not generally expected to be recognized because at inception of the transaction the underlying mortgage 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 under 30 days from purchase to sale. These assets are classified as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Derivatives (assets and liabilities):
The fair values of interest rate swaps, interest rate caps and credit derivatives are determined using models that incorporate readily observable market data into a market standard methodology. This methodology nets the discounted future cash receipts and the discounted expected cash payments. The discounted variable cash receipts and 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 Customers and its counterparties. These assets and liabilities are classified as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
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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. Customers 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 Customers' internal experience (i.e., pull-through rate). These assets and liabilities are classified 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.
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.
Financial Instruments Recorded at Fair Value on a Nonrecurring Basis
Collateral-dependent loans:
Collateral-dependent loans are those loans that are accounted for under ASC 326, Financial Instruments - Credit Losses, 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, discounted cash flows based upon the expected proceeds, sales agreements or letters of intent with third parties. These assets are generally classified as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Other real estate owned:
The fair value of OREO is determined by 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 classified as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

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The estimated fair values of Customers' financial instruments at June 30, 2020 and December 31, 2019 were as follows.
   Fair Value Measurements at June 30, 2020
(amounts in thousands)Carrying AmountEstimated Fair ValueQuoted Prices in Active Markets for Identical Assets
(Level 1)		Significant Other Observable Inputs
(Level 2)		Significant Unobservable Inputs
(Level 3)
Assets:
Cash and cash equivalents$1,067,330  $1,067,330  $1,067,330  $—  $—  
Debt securities, available for sale664,758  664,758  —  664,758  —  
Interest-only GNMA securities14,396  14,396  —  —  14,396  
Equity securities2,228  2,228  2,228  —  —  
Loans held for sale464,164  464,164  —  21,107  443,057  
Total loans and leases receivable, net of allowance for credit losses on loans and leases14,666,133  15,287,585  —  2,793,164  12,494,421  
FHLB, Federal Reserve Bank and other restricted stock91,023  91,023  —  91,023  —  
Derivatives65,127  65,127  —  65,075  52  
Liabilities:
Deposits$10,965,875  $10,972,163  $9,095,495  $1,876,668  $—  
FRB advances4,419,967  4,419,967  —  4,419,967  —  
FHLB advances850,000  855,519  —  855,519  —  
Other borrowings123,833  100,200  —  100,200  —  
Subordinated debt181,255  174,572  —  174,572  —  
Derivatives125,304  125,304  —  125,304  —  

   Fair Value Measurements at December 31, 2019
(amounts in thousands)Carrying AmountEstimated Fair ValueQuoted Prices in Active Markets for Identical Assets
(Level 1)		Significant Other Observable Inputs
(Level 2)		Significant Unobservable Inputs
(Level 3)
Assets:
Cash and cash equivalents$212,505  $212,505  $212,505  $—  $—  
Debt securities, available for sale577,198  577,198  —  577,198  —  
Interest-only GNMA securities16,272  16,272  —  —  16,272  
Equity securities2,406  2,406  2,406  —  —  
Loans held for sale486,328  486,328  —  2,130  484,198  
Total loans and leases receivable, net of allowance for credit losses on loans and leases9,508,367  9,853,037  —  2,245,758  7,607,279  
FHLB, Federal Reserve Bank and other restricted stock84,214  84,214  —  84,214  —  
Derivatives23,608  23,608  —  23,529  79  
Liabilities:
Deposits$8,648,936  $8,652,340  $6,980,402  $1,671,938  $—  
Federal funds purchased538,000  538,000  538,000  —  —  
FHLB advances850,000  852,162  —  852,162  —  
Other borrowings123,630  127,603  —  127,603  —  
Subordinated debt181,115  192,217  —  192,217  —  
Derivatives45,939  45,939  —  45,939  —  

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For financial assets and liabilities measured at fair value on a recurring and nonrecurring basis, the fair value measurements by level within the fair value hierarchy used at June 30, 2020 and December 31, 2019 were as follows:
 June 30, 2020
 Fair Value Measurements at the End of the Reporting Period Using
(amounts in thousands)Quoted Prices in Active Markets for Identical Assets
(Level 1)		Significant Other Observable Inputs
(Level 2)		Significant Unobservable Inputs
(Level 3)		Total
Measured at Fair Value on a Recurring Basis:
Assets
Available for sale debt securities:
Agency-guaranteed residential mortgage-backed securities $—  $144,310  $—  $144,310  
Agency-guaranteed collateralized mortgage obligations—  145,826  —  145,826  
State and political subdivision debt securities—  18,389  —  18,389  
Corporate notes—  356,233  —  356,233  
Interest-only GNMA securities—  —  14,396  14,396  
Equity securities2,228  —  —  2,228  
Derivatives—  65,075  52  65,127  
Loans held for sale – fair value option—  3,507  —  3,507  
Loans receivable, mortgage warehouse – fair value option—  2,793,164  —  2,793,164  
Total assets – recurring fair value measurements$2,228  $3,526,504  $14,448  $3,543,180  
Liabilities
Derivatives $—  $125,304  $—  $125,304  
Measured at Fair Value on a Nonrecurring Basis:
Assets
Loans held for sale$—  $17,600  $—  $17,600  
Collateral-dependent loans—  —  45,208  45,208  
Total assets – nonrecurring fair value measurements$—  $17,600  $45,208  $62,808  

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 December 31, 2019
 Fair Value Measurements at the End of the Reporting Period Using
(amounts in thousands)Quoted Prices in Active Markets for Identical Assets
(Level 1)		Significant Other Observable Inputs
(Level 2)		Significant Unobservable Inputs
(Level 3)		Total
Measured at Fair Value on a Recurring Basis:
Assets
Available for sale debt securities:
Agency-guaranteed residential mortgage–backed securities $—  $278,321  $—  $278,321  
Corporate notes—  298,877  —  298,877  
Interest-only GNMA securities—  —  16,272  16,272  
Equity securities2,406  —  —  2,406  
Derivatives —  23,529  79  23,608  
Loans held for sale – fair value option—  2,130  —  2,130  
Loans receivable, mortgage warehouse – fair value option—  2,245,758  —  2,245,758  
Total assets – recurring fair value measurements$2,406  $2,848,615  $16,351  $2,867,372  
Liabilities
Derivatives $—  $45,939  $—  $45,939  
Measured at Fair Value on a Nonrecurring Basis:
Assets
Impaired loans, net of specific reserves of $852
$—  $—  $14,272  $14,272  
Other real estate owned—  —  78  78  
Total assets – nonrecurring fair value measurements$—  $—  $14,350  $14,350  

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The changes in residential mortgage loan commitments (Level 3 assets) measured at fair value on a recurring basis for the three and six months ended June 30, 2020 and 2019 are summarized in the tables below. Additional information about residential mortgage loan commitments can be found in NOTE 12 - DERIVATIVES INSTRUMENTS AND HEDGING ACTIVITIES.
Residential Mortgage Loan Commitments
Three Months Ended June 30,
(amounts in thousands)20202019
Balance at March 31$215  $77  
Issuances52  145  
Settlements(215) (77) 
Balance at June 30$52  $145  

Residential Mortgage Loan Commitments
Six Months Ended June 30,
(amounts in thousands)20202019
 
Balance at December 31$79  $69  
Issuances267  222  
Settlements(294) (146) 
Balance at June 30$52  $145  
There were no transfers between levels during the three and six months ended June 30, 2020 and 2019.
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The following table summarizes financial assets and financial liabilities measured at fair value as of June 30, 2020 and December 31, 2019 on a recurring and nonrecurring basis for which Customers utilized Level 3 inputs to measure fair value. The unobservable Level 3 inputs noted below contain a level of uncertainty that may differ from what is realized in an immediate settlement of the assets. Therefore, Customers may realize a value higher or lower than the current estimated fair value of the assets. The interest-only GNMA securities are Level 3 assets measured at fair value on a recurring basis under a fair value option election. For the three and six months ended June 30, 2020, cash settlements of $0.9 million and $1.9 million were applied to the carrying value of the interest-only GNMA securities, net of premium amortization expense. At June 30, 2020, Customers used an internally developed discounted cash flow model to value the interest-only GNMA securities. The significant unobservable input used in the discounted cash flow model included prepayment speed. Significant increases (decreases) in this input would result in a significantly lower (higher) fair value measurement.
 Quantitative Information about Level 3 Fair Value Measurements
June 30, 2020Fair Value
Estimate		Valuation TechniqueUnobservable Input
Range 
(Weighted Average) (4)
(amounts in thousands)    
Collateral-dependent – real estate$44,244  
Collateral appraisal (1)

Business asset valuation (3)
Liquidation expenses (2)

Business asset valuation (4)
8% - 10%
(8%)

11% - 45%
(20%)
Collateral-dependent loans – commercial & industrial964  
Collateral appraisal (1)

Business asset valuation (3)
Liquidation expenses (2)

Business asset valuation adjustments (4)
8% - 8%
(8%)

8% - 45%
(25%)
Interest-only GNMA securities14,396  Discounted cash flowConstant prepayment rate
4% - 15%
(10%)
Residential mortgage loan commitments52  Adjusted market bidPull-through rate
78% - 78%
(78%)
(1)Obtained from approved independent appraisers. Appraisals are current and in compliance with credit policy. Customers does not generally discount appraisals. 
 Fair value is also estimated based on sale agreements or letters of intent with third parties.
(2)Appraisals are adjusted by management for liquidation expenses. The range and weighted average of liquidation expense adjustments are presented as a percentage of the appraisal.
(3)Business asset valuation obtained from independent party.
(4)Business asset valuations may be adjusted by management for qualitative factors including economic conditions and the condition of the business assets. The range and weighted average of the business asset adjustments are presented as a percent of the business asset valuation.
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 Quantitative Information about Level 3 Fair Value Measurements
December 31, 2019Fair Value
Estimate		Valuation TechniqueUnobservable Input
Range 
(Weighted Average) (4)
(amounts in thousands)    
Impaired loans – real estate$12,767  
Collateral appraisal (1)


Business asset valuation (3)
Liquidation expenses (2)


Business asset valuation (4)
8% - 10%
(8%)

34% - 45%
(37%)
Impaired loans – commercial & industrial1,505  
Collateral appraisal (1)


Business asset valuation (3)
Liquidation expenses (2)


Business asset valuation adjustments (4)
8% - 8%
(8%)

8% - 50%
(22%)
Interest-only GNMA securities16,272  Discounted cash flowConstant prepayment rate
9% - 14%
12%
Other real estate owned78  
Collateral appraisal (1)
Liquidation expenses (2)
8% - 9%
(9%)
Residential mortgage loan commitments79  Adjusted market bidPull-through rate
85% - 85%
(85%)
(1)Obtained from approved independent appraisers. Appraisals are current and in compliance with credit policy. Customers does not generally discount appraisals.
(2)Appraisals are adjusted by management for liquidation expenses. The range and weighted average of liquidation expense adjustments are presented as a percentage of the appraisal.
(3)Business asset valuation obtained from independent party.
(4)Business asset valuations may be adjusted by management for qualitative factors including economic conditions and the condition of the business assets. The range and weighted average of the business asset adjustments are presented as a percent of the business asset valuation.


NOTE 12 — 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 and deposits. 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 primarily 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 changes in the fair value of derivatives designated and qualifying as cash flow hedges are recorded in accumulated other comprehensive income (loss) and subsequently reclassified into earnings in the period that the hedged item affects earnings. To date, such derivatives were used to hedge the variable cash flows associated with the forecasted issuances of debt and a certain variable-rate deposit relationship.
Customers discontinues cash flow hedge accounting if it is probable the forecasted hedged transactions will not occur in the initially identified time period. At such time, the associated gains and losses deferred in accumulated other comprehensive income (loss) are reclassified immediately into earnings and any subsequent changes in the fair value of such derivatives are recognized directly in earnings.
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Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on Customers' variable-rate debt and a variable-rate deposit relationship. Customers expects to reclassify $16.8 million of losses from accumulated other comprehensive income (loss) to interest expense during the next 12 months.
Customers is hedging its exposure to the variability in future cash flows for forecasted transactions (3-month FHLB advances and federal funds purchased) and a variable-rate deposit relationship over a maximum period of 70 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).
At June 30, 2020, Customers had five outstanding interest rate derivatives with notional amounts totaling $1.1 billion that were designated as cash flow hedges of interest-rate risk. At December 31, 2019, Customers had four outstanding interest rate derivatives with notional amounts totaling $725.0 million that were designated as cash flow hedges of interest rate-risk. The outstanding cash flow hedges at June 30, 2020 expire between June 2021 and May 2026.
Derivatives Not Designated as Hedging Instruments
Customers executes interest rate swaps (typically the loan customers will swap a floating-rate loan for a fixed-rate loan) and interest rate caps with commercial banking customers to facilitate their respective risk management strategies. The customer interest rate swaps and interest rate caps are simultaneously offset by interest rate swaps and interest rate caps that Customers executes with a third party in order to minimize interest-rate risk exposure resulting from such transactions. As the interest rate swaps and interest rate caps associated with this program do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and caps and the offsetting third-party market swaps and caps are recognized directly in earnings. At June 30, 2020, Customers had 158 interest rate swaps with an aggregate notional amount of $1.6 billion and four interest rate caps with an aggregated notional amount of $76.6 million related to this program. At December 31, 2019, Customers had 140 interest rate swaps with an aggregate notional amount of $1.4 billion and four interest rate caps with an aggregate notional amount of $78.6 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 June 30, 2020 and December 31, 2019, Customers had an outstanding notional balance of residential mortgage loan commitments of $3.6 million and $4.5 million, respectively.
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 June 30, 2020 and December 31, 2019, Customers had outstanding notional balances of credit derivatives of $171.3 million and $167.1 million, respectively.
Fair Value of Derivative Instruments on the Balance Sheet
The following tables present the fair value of Customers' derivative financial instruments as well as their presentation on the balance sheet as of June 30, 2020 and December 31, 2019.
 June 30, 2020
 Derivative AssetsDerivative Liabilities
(amounts in thousands)Balance Sheet LocationFair ValueBalance Sheet LocationFair Value
Derivatives designated as cash flow hedges:
Interest rate swapsOther assets$—  Other liabilities$51,589  
Total$—  $51,589  
Derivatives not designated as hedging instruments:
Interest rate swapsOther assets$63,224  Other liabilities$73,067  
Interest rate capsOther assets18  Other liabilities18  
Credit contractsOther assets1,833  Other liabilities630  
Residential mortgage loan commitmentsOther assets52  Other liabilities—  
Total$65,127  $73,715  

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December 31, 2019
Derivative AssetsDerivative Liabilities
(amounts in thousands)Balance Sheet LocationFair ValueBalance Sheet LocationFair Value
Derivatives designated as cash flow hedges:
Interest rate swapsOther assets$—  Other liabilities$21,374  
Total$—  $21,374  
Derivatives not designated as hedging instruments:
Interest rate swapsOther assets$23,301  Other liabilities$24,797  
Interest rate capsOther assets9  Other liabilities9  
Credit contractsOther assets219  Other liabilities(241) 
Residential mortgage loan commitmentsOther assets79  Other liabilities—  
Total$23,608  $24,565  
Effect of Derivative Instruments on Net Income
The following tables present amounts included in the consolidated statements of income related to derivatives not designated as hedges for the three and six months ended June 30, 2020 and 2019.
Amount of Income (Loss) Recognized in Earnings
Three Months Ended June 30,Six Months Ended June 30,
(amounts in thousands)Income Statement Location2020201920202019
Derivatives not designated as hedging instruments:
Interest rate swapsOther non-interest income$(5,563) $386  $(6,578) $98  
Interest rate capsOther non-interest income—  —  —  —  
Credit contractsOther non-interest income1,405  41  1,274  144  
Residential mortgage loan commitmentsMortgage banking income(164) 68  (27) 76  
Total$(4,322) $495  $(5,331) $318  
Effect of Derivative Instruments on Comprehensive Income

The following table presents the effect of Customers' derivative financial instruments on comprehensive income for the three and six months ended June 30, 2020 and 2019.

Amount of Gain (Loss) Recognized in OCI on Derivatives (1)
Location of Gain (Loss) Reclassified from Accumulated OCI into Income Amount of Gain (Loss) Reclassified from Accumulated OCI into Income
Three Months Ended
June 30,
Three Months Ended
June 30,
(amounts in thousands)2020201920202019
Derivatives in cash flow hedging relationships:
Interest rate swaps$(4,685) $(10,435) Interest expense$(2,718) $(4) 

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Amount of Gain (Loss) Recognized in OCI on Derivatives (1)
Location of Gain (Loss) Reclassified from Accumulated OCI into Income Amount of Gain (Loss) Reclassified from Accumulated OCI into Income
Six Months Ended
June 30,
Six Months Ended
June 30,
(amounts in thousands)2020201920202019
Derivatives in cash flow hedging relationships:
Interest rate swaps$(25,031) $(15,570) Interest expense$(4,196) $409  
(1) Amounts presented are net of taxes. See NOTE 4 - CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) for the total effect on other comprehensive income (loss) from derivatives designated as cash flow hedges for the periods presented.

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 June 30, 2020, 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 $127.7 million. In addition, Customers, which has collateral posting thresholds with certain of these counterparties, had posted $124.6 million of cash as collateral at June 30, 2020. Customers records cash posted as collateral as a reduction in the outstanding balance of cash and cash equivalents and an increase in the balance of other assets.
Disclosures about Offsetting Assets and Liabilities
The following tables present derivative instruments that are subject to enforceable master netting arrangements. Customers' interest rate swaps and interest rate caps with institutional counterparties are subject to master netting arrangements and are included in the table below. Interest rate swaps and interest rate caps with commercial banking customers and residential mortgage loan commitments are not subject to master netting arrangements and are excluded from the table below. Customers has not made a policy election to offset its derivative positions.
 Gross Amounts Recognized on the Consolidated Balance SheetsGross Amounts Not Offset in the Consolidated Balance Sheet
(amounts in thousands)Financial InstrumentsCash Collateral Received/(Posted)Net Amount
June 30, 2020
Interest rate derivative assets with institutional counterparties$—  $—  $—  $—  
Interest rate derivative liabilities with institutional counterparties$124,561  $—  $(124,561) $—  
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 Gross Amounts Recognized on the Consolidated Balance SheetsGross Amounts Not Offset in the Consolidated Balance Sheet
(amounts in thousands)Financial InstrumentsCash Collateral Received/(Posted)Net Amount
December 31, 2019
Interest rate derivative assets with institutional counterparties$432  $—  $—  $432  
Interest rate derivative liabilities with institutional counterparties$45,727  $—  $(45,727) $—  

NOTE 13 — BUSINESS SEGMENTS
Customers’ segment financial reporting reflects the manner in which its chief operating decision makers allocate resources and assess performance. Management has determined that Customers’ operations consist of two reportable segments - Customers Bank 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 Customers Bank Business Banking segment is delivered predominately to commercial customers in Southeastern Pennsylvania, New York, New Jersey, Massachusetts, Rhode Island, New Hampshire, Washington, D.C., and Illinois 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, commercial mortgage companies, and equipment finance. Revenues are generated primarily through net interest income (the difference between interest earned on loans and leases, 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 BOLI.
The BankMobile segment provides state-of-the-art high-tech digital banking and disbursement services to consumers, students, and the "under banked" nationwide, along with "Banking as a Service" offerings with white label partners. BankMobile is a full-service fintech banking platform 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 interest income on other consumer loans, interchange and card revenue, deposit and wire transfer fees and university fees. The majority of expenses for BankMobile are related to the segment's operation of the ongoing business acquired through the Disbursement business acquisition and costs associated with the development of white label products for its partner.

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The following tables present the operating results for Customers' reportable business segments for the three and six months ended June 30, 2020 and 2019. The segment financial results include directly attributable revenues and expenses. Consistent with the presentation of segment results to Customers' chief operating decision makers, overhead costs and preferred stock dividends are assigned to the Customers Bank Business Banking segment. The tax benefit assigned to BankMobile was based on an estimated effective tax rate of 23.20% for 2020 and 23.15% for 2019, respectively.
Three Months Ended June 30, 2020Three Months Ended June 30, 2019
(amounts in thousands)Customers Bank Business BankingBankMobileConsolidatedCustomers Bank Business BankingBankMobileConsolidated
Interest income (1)
$112,455  $12,763  

$125,218  $103,014  $8,936  $111,950  
Interest expense32,856  380  33,236  47,061  210  47,271  
Net interest income79,599  12,383  91,982  55,953  8,726  64,679  
Provision for credit losses on loans and leases19,623  1,323  20,946  (2,206) 7,552  5,346  
Non-interest income 11,683  10,553  22,236  970  11,066  12,036  
Non-interest expense44,270  19,236  63,506  38,107  21,475  59,582  
Income (loss) before income tax expense (benefit)27,389  2,377  29,766  21,022  (9,235) 11,787  
Income tax expense (benefit)6,611  437  7,048  4,629  (2,138) 2,491  
Net income (loss)20,778  1,940  22,718  16,393  (7,097) 9,296  
Preferred stock dividends3,581  —  3,581  3,615  —  3,615  
Net income (loss) available to common shareholders$17,197  $1,940  $19,137  $12,778  $(7,097) $5,681  
(1) Amounts reported include funds transfer pricing of $1.6 million and $2.2 million, for the three months ended June 30, 2020 and 2019, respectively, credited to BankMobile for the value provided to the Customers Bank Business Banking segment for the use of excess low/no cost deposits.

Six Months Ended June 30, 2020Six Months Ended June 30, 2019
(amounts in thousands)Customers Bank Business BankingBankMobileConsolidatedCustomers Bank Business BankingBankMobileConsolidated
Interest income (1)
$225,171  $25,390  $250,561  $195,885  $17,140  $213,025  
Interest expense 76,533  726  77,259  88,666  376  89,042  
Net interest income148,638  24,664  173,302  107,219  16,764  123,983  
Provision for credit losses on loans and leases46,921  5,811  52,732  770  9,343  10,113  
Non-interest income 22,819  21,348  44,167  8,547  23,207  31,754  
Non-interest expense88,130  41,835  129,965  73,491  40,075  113,566  
Income (loss) before income tax expense (benefit)36,406  (1,634) 34,772  41,505  (9,447) 32,058  
Income tax expense (benefit)9,334  (379) 8,955  9,510  (2,187) 7,323  
Net income (loss) 27,072  (1,255) 25,817  31,995  (7,260) 24,735  
Preferred stock dividends7,196  —  7,196  7,229  —  7,229  
Net income (loss) available to common shareholders$19,876  $(1,255) $18,621  $24,766  $(7,260) $17,506  
As of June 30, 2020 and 2019
Goodwill and other intangibles$3,629  $10,946  $14,575  $3,629  $12,218  $15,847  
Total assets (2)
$17,316,394  $586,724  $17,903,118  $10,555,141  $627,286  $11,182,427  
Total deposits$10,303,112  $662,763  $10,965,875  $7,729,580  $456,197  $8,185,777  
Total non-deposit liabilities (2)
$5,895,690  $33,706  $5,929,396  $1,970,391  $34,854  $2,005,245  
(1) Amounts reported include funds transfer pricing of $3.1 million and $7.8 million, for the six months ended June 30, 2020 and 2019, respectively, credited to BankMobile for the value provided to the Customers Bank Business Banking segment for the use of excess low/no cost deposits.
(2) Amounts reported exclude inter-segment receivables/payables.

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NOTE 14 - NON-INTEREST REVENUES
Customers' revenue from contracts with customers in scope of ASC 606 is recognized within non-interest income.
The following table presents Customers' non-interest revenues affected by ASC 606 by business segment for the three and six months ended June 30, 2020 and 2019:

Three Months Ended June 30, 2020Three Months Ended June 30, 2019
(amounts in thousands)Customers Bank Business BankingBankMobileConsolidatedCustomers Bank Business BankingBankMobileConsolidated
Revenue from contracts with customers:
Revenue recognized at point in time:
Interchange and card revenue$193  $6,285  $6,478  $219  $6,541  $6,760  
Deposit fees502  2,819  3,321  433  2,915  3,348  
University fees - card and disbursement fees—  389  389  —  167  167  
Total revenue recognized at point in time695  9,493  10,188  652  9,623  10,275  
Revenue recognized over time:
University fees - subscription revenue—  1,007  1,007  —  968  968  
Total revenue recognized over time—  1,007  1,007  —  968  968  
Total revenue from contracts with customers$695  $10,500  $11,195  $652  $10,591  $11,243  

Six Months Ended June 30, 2020Six Months Ended June 30, 2019
(amounts in thousands)Customers Bank Business BankingBankMobileConsolidatedCustomers Bank Business BankingBankMobileConsolidated
Revenue from contracts with customers:
Revenue recognized at point in time:
Interchange and card revenue$463  $12,824  $13,287  $398  $15,167  $15,565  
Deposit fees1,054  5,728  6,782  733  4,824  5,557  
University fees - card and disbursement fees—  681  681  —  522  522  
Total revenue recognized at point in time1,517  19,233  20,750  1,131  20,513  21,644  
Revenue recognized over time:
University fees - subscription revenue—  1,999  1,999  —  1,947  1,947  
Total revenue recognized over time—  1,999  1,999  —  1,947  1,947  
Total revenue from contracts with customers$1,517  $21,232  $22,749  $1,131  $22,460  $23,591  

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NOTE 15 — LOSS CONTINGENCIES

Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there are any such matters that will have a material effect on the consolidated financial statements that are not currently accrued for. However, in light of the uncertainties inherent in these matters, it is possible that the ultimate resolution may have a material adverse effect on Customers’ results of operations for a particular period, and future changes in circumstances or additional information could result in accruals or resolution in excess of established accruals, which could adversely affect Customers’ results of operations, potentially materially.
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 Trading as Lifestyle 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, 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 has filed Preliminary Objections to the Second Amended Complaint seeking dismissal of Plaintiff's claim against Customers Bank and Robert White, named as co-defendants. The Court has dismissed certain counts and determined to allow certain other counts to proceed. 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.
United States Department of Education Matter
In third quarter 2018, Customers received a Final Program Review Determination ("FPRD") letter dated September 5, 2018 from the DOE regarding a focused program review of Higher One's/Customers Bank's administration, as a third party servicer, of the programs authorized pursuant to Title IV of the Higher Education Act of 1965. The DOE program review covered the award years beginning in 2013 through the FPRD issuance date, including the time period when Higher One was acting as the third party servicer prior to Customers' acquisition of the Disbursement business on June 15, 2016. The FPRD determined that, with respect to students enrolled at specified partner institutions, Higher One/Customers did not provide convenient fee-free access to ATMs or bank branch offices in such locations as required by the DOE’s cash management regulations. Those regulations, which were in effect during the period covered by the program review and were revised during that period, seek, among other purposes, to ensure that students can make fee-free cash withdrawals.  The FPRD determined that students incurred prohibited costs in accessing Title IV credit balance funds, and the FPRD classifies those costs as financial liabilities of Customers. The FPRD also requires Customers to take prospective action to increase ATM access for students at certain of its partner institutions. Customers disagreed with the FPRD and appealed the asserted financial liabilities of $6.5 million, and a request for review has been submitted to trigger an administrative process before the DOE’s Office of Hearing and Appeals.
On March 26, 2020, the DOE and Customers filed a Joint Motion to Dismiss with Prejudice (the "Joint Motion") with the United States Department of Education. The Joint Motion states that the DOE and Customers reached an agreement that resolves the liabilities at issue in the appeal. The Joint Motion was granted on April 27, 2020. As part of the settlement, the liabilities assessed in the FPRD were reduced to $3.0 million (the "settlement amount"). Customers had previously recorded a liability in the amount of $1.0 million during third quarter 2019 and increased its liability by an additional $1.0 million in first quarter 2020. The remaining $1.0 million is expected to be funded from funds in an escrow account set-up at the time of Customers' acquisition of the Disbursement business from Higher One in 2016.

Bureau of the Fiscal Service Notice of Direct Debit (U.S. Treasury Check Reclamation)
On June 21, 2019, Customers received a Notice of Direct Debit (U.S. Treasury Check Reclamation) from the Bureau of the Fiscal Service (“Reclamation Notice”). The Reclamation Notice represented a demand to Customers for the return of funds on a U.S. Treasury check for approximately $5.4 million. Customers filed a written protest pursuant to Code of Federal Regulations, Title 31, Chapter II, Part 240, which resulted in a suspension of the direct debit by the Bureau of the Fiscal Service. On January 31, 2020, Customers received an Abandonment Notice from the Bureau of Fiscal Service instructing Customers to disregard the Notice of Direct Debit as the Bureau of Fiscal Service would not be seeking reclamation of these funds.
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NOTE 16 – SUBSEQUENT EVENTS

On August 6, 2020, BankMobile Technology, Inc. ("BMT"), a subsidiary of Customers Bank, and Megalith Financial Acquisition Corp. (“MFAC”), a special purpose acquisition company, entered into a definitive merger agreement. BMT is the technology arm of Customers' BankMobile reporting segment. Upon closing of the transaction, the combined company will operate as BM Technologies Inc. (the "Company") and expects to be listed on the New York Stock Exchange. All BMT serviced deposits and loans will remain at Customers Bank immediately after the closing of the transaction. Upon the closing of the transaction, BM Technologies will be a financial technology company bringing banks and business partners together through its digital banking platform.

Merger Consideration

The aggregate consideration to be paid pursuant to the merger to the Bank will be an amount (the “Merger Consideration”) equal to: (i) $140.0 million minus (ii) $9.3 million (representing a sponsor equity adjustment), plus (or minus, if negative) (iii) BMT’s net working capital less a target net working capital of $10.0 million, minus (iv) the aggregate amount of any outstanding indebtedness of BMT at closing, and minus (v) the amount of any unpaid transaction expenses of BMT, Megalith’s transaction expenses and other liabilities of Megalith due and owing at the closing.

The Merger Consideration will consist of cash and stock. The cash portion of the Merger Consideration (“Cash Consideration”) will be equal to (i) the amount of any proceeds of the PIPE Investment; plus (ii) an amount equal to one-half (1/2) of the difference between the (A) cash and cash equivalents of Megalith, including any funds in the trust account after giving effect to the completion of the redemption of shares of Megalith’s public stockholders (“Redemption”), less (B) a cash reserve to be used for the benefit of the Company in the Merger, in the amount of $10.0 million (such difference between clause (A) and (B) which resulting amount if otherwise negative shall be equal to zero, being which resulting amount if otherwise negative shall be equal to zero, being the “Remaining Trust Account Amount”); minus (iii) Megalith’s transaction expenses and other liabilities of Megalith due and owing at the closing; plus (iv) the cash and cash equivalents of BMT; minus (v) BMT’s unpaid transaction expenses; minus (vi) a cash reserve in the amount of $5.0 million. The stock portion of the Merger Consideration consists of a number of shares of Megalith’s Class A common stock with an aggregate value (the “Merger Consideration Share Amount”) equal to (a) the Merger Consideration, minus (b) the Cash Consideration, with the Bank receiving a number of shares of Megalith Class A common stock equal to the Merger Consideration Share Amount, divided by $10.38 (the “Per Share Price”).

The Merger Consideration is subject to adjustment after the closing based on confirmed amounts of the net working capital, the outstanding indebtedness of BMT and any unpaid transaction expenses of BMT, as of the closing date. If the adjustment is a negative adjustment in favor of Megalith, the Bank will deliver to Megalith a number of shares of Class A common stock of Megalith with a value equal to the absolute value of the adjustment amount (with each share valued at the Per Share Price). If the adjustment is a positive adjustment in favor of BMT, Megalith will issue to the Bank an additional number of shares of Class A common Stock of Megalith with a value equal to the adjustment amount (with each share valued at the Per Share Price). The Merger Consideration is also subject to reduction for the indemnification obligations of the Bank.

Certain Relationships

Mr. Jay Sidhu, who currently serves as Chief Executive Officer and Chairman of the Board of Customers Bancorp and Executive Chairman of the Bank, also serves as Executive Chairman of Megalith, is one of the managing members of Megalith’s sponsor and is a Megalith stockholder. Mr. Bhanu Choudhrie, who currently serves as a member of the board of directors of Customers Bancorp and the Bank also serves as a director of Megalith, is one of the managing members of Megalith’s sponsor and is a Megalith stockholder. Mr. Samvir Sidhu, the son of Jay Sidhu, currently serves as the Bank’s Vice Chairman and Chief Operating Officer and as Customers Bancorp’s Head of Corporate Development, previously served as the Chief Executive Officer of Megalith, currently serves as a director of Megalith and is a Megalith stockholder. Ms. Luvleen Sidhu, the daughter of Jay Sidhu, currently serves as the Chief Executive Officer and as a director of BMT and is expected to continue to serve in those roles with the Company. Certain of these individuals also expect to participate in the private placement by Megalith of shares of its Class A common stock to be completed in connection with the closing.

In light of these relationships, Customers Bancorp appointed a special committee consisting of independent directors with their own counsel and financial advisors. The special committee reviewed the transaction, obtained a fairness opinion in connection with the transaction, and made a unanimous recommendation to Customers Bancorp’s board of directors for approval. Customers Bancorp’s board of directors approved the transaction by a majority vote, with the above-mentioned directors recusing themselves from the deliberation and voting process and no director voting against the transaction.

The business combination is expected to close in the fourth quarter 2020, pending MFAC stockholder approval, regulatory approval and the satisfaction or waiver of additional conditions to closing.


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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Note Regarding Forward-Looking Statements

This report and all attachments hereto, as well as other written or oral communications made from time to time by us, may contain forward-looking information within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements with respect to Customers Bancorp, Inc.’s strategies, goals, beliefs, expectations, estimates, intentions, capital raising efforts, financial condition and results of operations, future performance and business. Statements preceded by, followed by, or that include the words ”may,” ”could,” ”should,” ”pro forma,” ”looking forward,” ”would,” ”believe,” ”expect,” ”anticipate,” ”estimate,” ”intend,” ”plan,” or similar expressions generally indicate a forward-looking statement. These forward-looking statements involve risks and uncertainties that are subject to change based on various important factors (some of which, in whole or in part, are beyond Customers Bancorp, Inc.’s control). Numerous competitive, economic, regulatory, legal and technological events and factors, among others, could cause Customers Bancorp, Inc.’s financial performance to differ materially from the goals, plans, objectives, intentions and expectations expressed in such forward-looking statements, including: the adverse impact on the U.S. economy, including the markets in which we operate, of the coronavirus outbreak, and the impact of a slowing U.S. economy and increased unemployment on the performance of our loan and lease portfolio, the market value of our investment securities, the demand for our products and services and the availability of sources of funding; the effects of actions by the federal government, including the Board of Governors of the Federal Reserve System and other government agencies, that affect market interest rates and the money supply; actions that we and our customers take in response to these developments and the effects such actions have on our operations, products, services and customer relationships; the effects of changes in accounting standards or policies, including Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (CECL) and matters relating to the announced merger of BankMobile Technologies, Inc. (“BMT”), including the possibility of events, changes or other circumstances occurring or existing that could result in the planned merger of BMT not being completed, the possibility that the planned merger of BMT may be more expensive to complete than anticipated, the risks associated with Customers' significant ownership of BM Technologies, Inc. common stock and BM Technologies, Inc.'s ability to service its debt following completion of the merger, the possibility that the expected benefits to Customers and our shareholders of the planned merger may not be achieved, the possibility of Customers incurring liabilities relating to the disposition of BMT, the costs of providing certain ongoing services to BM Technologies following completion of the merger, including the time commitment of Customers' management and other personnel in providing such services, or the possible effects on Customers' results of operations if the planned merger of BMT is not completed in a timely fashion or at all. Customers Bancorp, Inc. cautions that the foregoing factors are not exclusive, and neither such factors nor any such forward-looking statement takes into account the impact of any future events. All forward-looking statements and information set forth herein are based on management’s current beliefs and assumptions as of the date hereof and speak only as of the date they are made. For a more complete discussion of the assumptions, risks and uncertainties related to our business, you are encouraged to review Customers Bancorp, Inc.’s filings with the Securities and Exchange Commission, including its most recent annual report on Form 10-K for the year ended December 31, 2019, subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K, including any amendments thereto, that update or provide information in addition to the information included in the Form 10-K and Form 10-Q filings, if any. Customers Bancorp, Inc. does not undertake to update any forward-looking statement whether written or oral, that may be made from time to time by Customers Bancorp, Inc. or by or on behalf of Customers Bank, except as may be required under applicable law.
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, 2020.  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' 2019 Form 10-K.
Overview
Like most financial institutions, Customers derives the majority of its income from interest it receives on its interest-earning assets, such as loans, leases and investments. Customers' primary source of funds for making these loans, leases and investments are its deposits and borrowings, on which it pays interest. Consequently, one of the key measures of Customers' success is the amount of its 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 difference between the interest income generated by interest earning assets and the interest expense on interest-bearing liabilities, relative to the amount of average interest earning assets, which is referred to as net interest margin.
BankMobile, a division of Customers Bank, derives a majority of its revenue from interest income on other consumer loans, interchange and card revenue and deposit fees.

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There is credit risk inherent in loans and leases requiring Customers to maintain an ACL to absorb credit losses on existing loans and leases that may become uncollectible. Customers maintains this allowance by charging a provision for credit losses on loan and lease losses against its operating earnings. Customers has included a detailed discussion of this process, as well as several tables describing its ACL, in NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION and NOTE 7 - LOANS AND LEASES RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES to Customers' unaudited quarterly financial statements.

Impact of COVID-19

In March 2020, the outbreak of COVID-19 was recognized as a pandemic by the World Health Organization. The spread of COVID-19 has created a global public health crisis that has resulted in unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that Customers serves. Governmental responses to the pandemic have included orders closing businesses not deemed essential and directing individuals to restrict their movements, observe social distancing and shelter in place. These actions, together with responses to the pandemic by businesses and individuals, have resulted in rapid decreases in commercial and consumer activity, temporary closures of many businesses that have led to a loss of revenues and a rapid increase in unemployment, material decreases in oil and gas prices and in business valuations, disrupted global supply chains, market downturns and volatility, changes in consumer behavior related to pandemic fears, related emergency response legislation and an expectation that Federal Reserve policy will maintain a low interest rate environment for the foreseeable future.

Customers has taken deliberate actions to ensure that it has the necessary balance sheet strength to serve its clients and communities, including increases in liquidity and reserves supported by a strong capital position. Customers' business and consumer customers are experiencing varying degrees of financial distress, which is expected to continue in coming months. In order to protect the health of its customers and team members, and to comply with applicable government directives, Customers has modified its business practices, including restricting team member travel, directing team members to work from home insofar as is possible and implementing its business continuity plans and protocols to the extent necessary. Customers also has made donations that have resulted in more than $1 million, either directly or indirectly, to communities in its footprint for urgent basic needs and has been re-targeting existing sponsorship and grants to non-profit organizations to support COVID-19 related activities.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The CARES Act includes the SBA Paycheck Protection Program ("PPP"), a nearly $350 billion program designed to aid small- and medium-sized businesses through federally guaranteed loans distributed through banks. These loans are intended to guarantee an eight-week or 24-week period of payroll and other costs to help those businesses remain viable and allow their workers to pay their bills. On April 16, 2020, the SBA announced that all available funds had been exhausted and applications were no longer being accepted. As of that date, Customers had obtained approvals for approximately 1,267 clients totaling approximately $385 million in approved PPP loans. On April 22, 2020, an additional $310 billion of funds for the PPP was signed into law. As of June 30, 2020, Customers has helped thousands of small businesses by originating about $4.8 billion in PPP loans directly or through fintech partnerships.

In response to the COVID-19 pandemic, Customers has also implemented a short-term loan modification program to provide temporary payment relief to certain of its borrowers who meet the program's qualifications. This program allows for a deferral of payments for a maximum of 90 days at a time. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan. Through July 24, 2020, total commercial deferments declined to less than $700 million, or down to about 8.0%, from a peak of $1.2 billion and total consumer deferments declined to $60 million, or 3.7%, from a peak of $108 million.

The FRB has taken a range of actions to support the flow of credit to households and businesses. For example, on March 15, 2020, the FRB reduced the target range for the federal funds rate to 0 to 0.25% and announced that it would increase its holdings of U.S. Treasury securities and agency mortgage-backed securities and begin purchasing agency commercial mortgage-backed securities. The FRB has also encouraged depository institutions to borrow from the discount window and has lowered the primary credit rate for such borrowing by 150 basis points while extending the term of such loans up to 90 days. Reserve requirements have been reduced to zero as of March 26, 2020. The FRB has also established, or has taken steps to establish, a range of facilities and programs to support the U.S. economy and U.S. marketplace participants in response to economic disruptions associated with COVID-19, including among others, Main Street Lending facilities to purchase loan participations, under specified conditions, from banks lending to small and medium U.S. businesses and the PPPLF, which was created to bolster the effectiveness of the PPP by taking loans as collateral at face value. While Customers has not participated in all of these facilities or programs to date, it may participate in some or all of these facilities or programs, including as a lender, agent, or intermediary on behalf of clients or customers at various times in the future. As of June 30, 2020, Customers borrowed $4.4 billion from the PPPLF to fund the origination of about $4.8 billion of PPP loans.

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Significant uncertainties as to future economic conditions exist, and Customers has taken deliberate actions in response, including higher levels of on-balance sheet liquidity and maintaining strong capital ratios. Additionally, the economic pressures, coupled with the implementation of an expected lifetime loss methodology for determining our provision for credit losses as required by CECL have contributed to an increased provision for credit losses on loans and leases and off-balance sheet credit exposures in 2020. Customers continues to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act; however, the extent to which the COVID-19 pandemic will impact Customers' operations and financial results during the remainder of 2020 is highly uncertain.
New Accounting Pronouncements
For information about the impact that recently adopted, including CECL, or issued accounting guidance will have on us, please refer to NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION to Customers' interim unaudited financial statements.
Critical Accounting Policies
Customers has adopted various accounting policies that govern the application of U.S. GAAP and that are consistent with general practices within the banking industry in the preparation of its consolidated financial statements. Customers' significant accounting policies are described in “NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION” in Customers' audited financial statements included in its 2019 Form 10-K and updated in this Form 10-Q for the quarterly period ended June 30, 2020 in “NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION."
Certain accounting policies involve significant judgments and assumptions by Customers that have a material impact on the carrying value of certain assets. 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.
The critical accounting policies that are both important to the portrayal of Customers' financial condition and results of operations and require complex, subjective judgments are the accounting policies for the following: ACL and the Valuation of Interest-Only GNMA Securities. These critical accounting policies and material estimates, along with the related disclosures, are reviewed by Customers' Audit Committee of the Board of Directors.
Allowance for Credit Losses
Customers' ACL at June 30, 2020 represents Customers' current estimate of the lifetime credit losses expected from its loan and lease portfolio and its unfunded lending-related commitments that are not unconditionally cancellable. Management estimates the ACL by projecting a lifetime loss rate conditional on a forecast of economic parameters and other qualitative adjustments, for the loans and leases' expected remaining term.

Customers uses external sources in the creation of its forecasts, including current economic conditions and forecasts for macroeconomic variables over its reasonable and supportable forecast period (e.g., GDP growth rate, unemployment rate, BBB spread, commercial real estate and home price index). After the reasonable and supportable forecast period, which ranges from two to five years, the models revert the forecasted macroeconomic variables to their historical long-term trends, without specific predictions for the economy, over the expected life of the pool, while also incorporating prepayment assumptions into its lifetime loss rates. Internal factors that impact the quarterly allowance estimate include the level of outstanding balances, portfolio performance and assigned risk ratings. Significant loan/borrower attributes utilized in the models include property type, initial loan to value, assigned risk ratings, delinquency status, origination date, maturity date, initial FICO scores, and borrower state.

The ACL may be affected materially by a variety of qualitative factors that Customers considers to reflect its current judgement of various events and risks that are not measured in our statistical procedures, including uncertainty related to the economic forecasts used in the modeled credit loss estimates, nature and volume, credit underwriting policy exceptions, peer comparison, industry data, and model and data limitations. The qualitative allowance for economic forecast risk is further informed by multiple alternative scenarios to arrive at a composite scenario supporting the period-end ACL balance. The evaluation process is inherently imprecise and subjective as it requires significant management judgment based on underlying factors that are susceptible to changes, sometimes materially and rapidly. Customers recognizes that this approach may not be suitable in certain economic environments such that additional analysis may be performed at management's discretion. Due in part to its subjectivity, the qualitative evaluation may be materially impacted during periods of economic uncertainty and late breaking events that could lead to revision of reserves to reflect management's best estimate of expected credit losses.
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The ACL is established in accordance with our ACL policy. The ACL Committee, which includes the Chief Financial Officer, Chief Risk Officer, and Chief Credit Officer, among others, reviews the adequacy of the ACL each quarter, together with Customers' risk management team. The ACL policy, significant judgements and the related disclosures are reviewed by Customers' Audit Committee of the Board of Directors.

The significant increase in our estimated ACL as of June 30, 2020 as compared to our January 1, 2020 estimate was primarily attributable to the significant economic impact of COVID-19, along with loan growth in Customers' commercial and consumer loan portfolios. The total reserve build for the ACL for the three months and six months ended June 30, 2020 was $20.4 million and $53.1 million, with an ending balance of $163.7 million ($159.9 million for loans and leases and $3.8 million for unfunded lending-related commitments) as of June 30, 2020.

To determine the ACL as of June 30, 2020, Customers utilized the Moody's June 2020 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 assumed a deep recession in second quarter 2020, which included a significant drop in GDP and elevated unemployment compared to the first quarter 2020 forecast for current market conditions, followed by a strong recovery in the second half of 2020. The qualitative adjustment considered a more optimistic scenario that aligned with management's expectation of expected credit losses that resulted in a reduction to the modelled ACL. Customers continues to monitor the impact of the COVID-19 pandemic and related policy measures on the economy and, if the depth of the recession or pace of the expected recovery is worse than expected, further meaningful provisions for credit losses could be required.

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 the current COVID-19 pandemic, 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 current COVID-19 pandemic has 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.

For more information, see NOTE 7 - LOANS AND LEASES RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES ON LOANS AND LEASES to the unaudited consolidated financial statements.

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Results of Operations
The following table sets forth the condensed statements of income for the three and six months ended June 30, 2020 and 2019:

Three Months Ended June 30,QTDSix Months Ended June 30,YTD
(dollars in thousands)20202019Change% Change20202019Change% Change
Net interest income$91,982  $64,679  $27,303  42.2 %$173,302  $123,983  $49,319  39.8 %
Provision for credit losses20,946  5,346  15,600  291.8 %52,732  10,113  42,619  421.4 %
Total non-interest income22,236  12,036  10,200  84.7 %44,167  31,754  12,413  39.1 %
Total non-interest expense63,506  59,582  3,924  6.6 %129,965  113,566  16,399  14.4 %
Income before income tax expense29,766  11,787  17,979  152.5 %34,772  32,058  2,714  8.5 %
Income tax expense7,048  2,491  4,557  182.9 %8,955  7,323  1,632  22.3 %
Net income22,718  9,296  13,422  144.4 %25,817  24,735  1,082  4.4 %
Preferred stock dividends3,581  3,615  (34) (0.9)%7,196  7,229  (33) (0.5)%
Net income available to common shareholders$19,137  $5,681  $13,456  236.9 %$18,621  $17,506  $1,115  6.4 %

Customers reported net income available to common shareholders of $19.1 million and $18.6 million for the three and six months ended June 30, 2020, respectively, compared to net income available to common shareholders of $5.7 million and $17.5 million for the three and six months ended June 30, 2019, respectively. Factors contributing to the change in net income available to common shareholders for the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019 were as follows:
Net interest income
Net interest income increased $27.3 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 as average interest-earning assets increased by $4.1 billion and NIM expanded by one basis point to 2.65% for the three months ended June 30, 2020 from 2.64% for the three months ended June 30, 2019 resulting from the Federal Reserve interest rate cuts of 225 basis points beginning in August 2019 and the shift in the mix of interest-earning assets and interest-bearing liabilities drove a 96 basis point decline in the yield on interest-earning assets and a 124 basis point decline in the cost of interest-bearing liabilities for the three months ended June 30, 2020. The largest shift in the mix of interest-earning assets and interest-bearing liabilities was the origination of $4.8 billion ($2.8 billion average balance) in PPP loans yielding 1.71% and related PPPLF borrowings of $4.4 billion ($0.9 billion average balance) costing 0.35%. Customers' total cost of funds, including non-interest bearing deposits was 0.99% and 2.04% for the three months ended June 30, 2020 and 2019, respectively.
Net interest income increased $49.3 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 as average interest-earning assets increased by $2.9 billion and NIM expanded by 18 basis points to 2.80% for the six months ended June 30, 2020 from 2.62% for the six months ended June 30, 2019 resulting from the Federal Reserve interest rate cuts of 225 basis points beginning in August 2019 and the shift in the mix of interest-earning assets and interest-bearing liabilities drove a 45 basis point decline in the yield on interest-earning assets and an 83 basis point decline in the cost of interest-bearing liabilities for the six months ended June 30, 2020. The largest shift in the mix of interest-earning assets and interest-bearing liabilities was the origination of $4.8 billion ($1.4 billion average balance) in PPP loans yielding 1.71% and related PPPLF borrowings of $4.4 billion ($0.5 billion average balance) costing 0.35%. Customers' total cost of funds, including non-interest bearing deposits was 1.30% and 2.00% for the six months ended June 30, 2020 and 2019, respectively.

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Provision for credit losses

The $15.6 million increase in the provision for credit losses for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, reflects Customers' adoption of CECL and the impact of COVID-19. Upon adoption of the CECL standard on January 1, 2020, the allowance for credit losses for loans and leases and off-balance sheet credit exposures increased by $79.8 million and $3.4 million, respectively. The allowance for credit losses 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 income statement. The allowance for credit losses on loans and leases held for investment, represented 2.20% of total loans and leases receivable, excluding PPP loans (non-GAAP measure, please refer to the non-GAAP reconciliation within Loans and Leases - Asset Quality), at June 30, 2020, compared to 0.63% at June 30, 2019. Net charge-offs for the three months ended June 30, 2020 were $10.3 million, or 32 basis points of average loans and leases on an annualized basis, compared to net charge-offs of $0.6 million, or three basis points on an annualized basis for the three months ended June 30, 2019. The increase in net charge-offs for the three months ended June 30, 2020, compared to the three months ended June 30, 2019, was primarily due to a partial charge-off of $2.8 million for one commercial real estate collateral dependent loan during the three months ended June 30, 2020 and an increase in charge-offs of other consumer loans, coinciding with the growth of the portfolio year-over-year.

The $42.6 million increase in the provision for credit losses for the six months ended June 30, 2020 compared to the six months ended June 30, 2019, reflects Customers' adoption of CECL and the impact of COVID-19. Net charge-offs for the six months ended June 30, 2020 were $29.0 million, or 52 basis points of average loans and leases on an annualized basis, compared to net charge-offs of $1.7 million, or 4 basis points on an annualized basis for the six months ended June 30, 2019. The increase in net charge-offs for the six months ended June 30, 2020, compared to the six months ended June 30, 2019, was primarily due to partial charge-offs of $15.6 million for two commercial real estate collateral dependent loans during the six months ended June 30, 2020 and an increase in charge-offs of other consumer loans, coinciding with the growth of the portfolio year-over-year.

Non-interest income
The $10.2 million increase in non-interest income for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 primarily resulted from a $7.5 million loss realized upon the acquisition of certain interest-only GNMA securities during the three months ended June 30, 2019, $4.4 million in realized gain on sale of investment securities during the three months ended June 30, 2020 and increases of $1.7 million in commercial lease income, $1.5 million in unrealized gain on equity securities issued by a foreign entity and $0.9 million in mortgage warehouse transactions fees. These increases were offset in part by decreases of $5.3 million in other non-interest income and $0.3 million in interchange and card revenue for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.
The $12.4 million increase in non-interest income for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily resulted from a $7.5 million loss realized upon the acquisition of certain interest-only GNMA securities during the six months ended June 30, 2019, $8.3 million of gains realized from the sale of investment securities during the six months ended June 30, 2020 and increases of $3.6 million in commercial lease income, $1.5 million in mortgage warehouse transactional fees, and $1.2 million in deposit fees. These increases were offset in part by decreases of $7.5 million in other non-interest income and $2.3 million in interchange and card revenue for the six months ended June 30, 2020 compared to the six months ended June 30, 2020.
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Non-interest expense
The $3.9 million increase in non-interest expense for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 primarily resulted from increases of $4.4 million in salaries and employee benefits, $1.4 million in commercial lease depreciation, $1.2 million in loan workout, and $0.9 million in technology, communication and bank operations. These increases were offset in part by decreases of $1.4 million in provision for operating losses, $1.2 million in professional services, $0.8 million in other non-interest expense, and $0.8 million in advertising and promotion for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.
The $16.4 million increase in non-interest expense for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily resulted from increases of $6.9 million in salaries and employee benefits, $2.9 million in commercial lease depreciation, $2.5 million in other non-interest expense, $2.0 million in technology, communication and bank operations, $1.9 million in professional services, $1.2 million in loan workout, and $1.1 million in FDIC assessments, taxes and regulatory fees. These increases were offset in part by a decrease of $2.2 million in provision for operating losses for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.
Income tax expense
Customers' effective tax rate was 23.7% for the three months ended June 30, 2020 compared to 21.1% for the three months ended June 30, 2019. The increase in the effective tax rate primarily resulted from a favorable return to provision adjustment for the three months ended June 30, 2019.
Customers' effective tax rate was 25.75% for the six months ended June 30, 2020 compared to 22.84% for the six months ended June 30, 2019. The increase in the effective tax rate primarily resulted from discrete provision items, which increased income tax expense, for the six months ended June 30, 2020, compared to a favorable return to provision adjustment, which lowered income tax expense, for the six months ended June 30, 2019.
Preferred stock dividends
Preferred stock dividends were $3.6 million for both the three months ended June 30, 2020 and 2019. There were no changes to the amount of preferred stock outstanding or the dividends paid during the three months ended June 30, 2020 and 2019. On June 15, 2020, Series C preferred stock became floating at three-month LIBOR plus 5.300%, or 5.60%, compared to a fixed rate of 7.00%.
Preferred stock dividends were $7.2 million for both the six months ended June 30, 2020 and 2019. There were no changes to the amount of preferred stock outstanding or the dividends paid during the six months ended June 30, 2020 and 2019. On June 15, 2020, Series C preferred stock became floating at three-month LIBOR plus 5.300%, or 5.60%, compared to a fixed rate of 7.00%.
NET INTEREST INCOME
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 tables summarize 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, 2020 and 2019. 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.
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Three Months Ended June 30,Three Months Ended June 30,
202020192020 vs. 2019
(dollars in thousands)Average balanceInterest income or expenseAverage yield or costAverage balanceInterest income or expenseAverage yield or costDue to rateDue to volumeTotal
Assets
Interest-earning deposits $384,622  $113  0.12 %$78,666  $590  3.01 %$(1,001) $524  $(477) 
Investment securities (1)
705,389  6,155  3.49 %687,048  6,481  3.77 %(493) 167  (326) 
Loans and leases:
Commercial loans to mortgage companies2,456,067  17,740  2.91 %1,658,070  19,678  4.76 %(9,305) 7,367  (1,938) 
Multi-family loans2,009,847  19,345  3.87 %3,097,537  29,630  3.84 %228  (10,513) (10,285) 
Commercial and industrial loans and leases (2)
2,460,060  24,775  4.05 %2,041,315  26,411  5.19 %(6,434) 4,798  (1,636) 
PPP loans2,754,920  11,706  1.71 %—  —  — %—  11,706  11,706  
Non-owner occupied commercial real estate loans1,392,131  13,179  3.81 %1,181,455  13,329  4.53 %(2,307) 2,157  (150) 
Residential mortgages429,609  3,771  3.53 %723,160  7,724  4.28 %(1,192) (2,761) (3,953) 
Other consumer loans1,288,999  27,931  8.72 %289,511  6,795  9.41 %(533) 21,669  21,136  
Total loans and leases (3)
12,791,633  118,447  3.72 %8,991,048  103,567  4.62 %(22,850) 37,730  14,880  
Other interest-earning assets98,377  503  2.06 %94,388  1,312  5.58 %(862) 53  (809) 
Total interest-earning assets13,980,021  125,218  3.60 %9,851,150  111,950  4.56 %(26,868) 40,136  13,268  
Non-interest-earning assets695,563  520,692  
Total assets $14,675,584  $10,371,842  
Liabilities
Interest checking accounts$2,482,222  4,605  0.75 %$836,154  4,078  1.96 %(3,705) 4,232  527  
Money market deposit accounts3,034,457  6,449  0.85 %3,168,957  17,842  2.26 %(10,667) (726) (11,393) 
Other savings accounts1,177,554  5,677  1.94 %484,303  2,608  2.16 %(291) 3,360  3,069  
Certificates of deposit1,734,062  6,507  1.51 %1,972,792  11,452  2.33 %(3,680) (1,265) (4,945) 
Total interest-bearing deposits (4)
8,428,295  23,238  1.11 %6,462,206  35,980  2.23 %(21,512) 8,770  (12,742) 
FRB PPP liquidity facility942,258  822  0.35 %—  —  — %—  822  822  
Borrowings2,282,761  9,176  1.62 %1,462,362  11,291  3.09 %(6,755) 4,640  (2,115) 
Total interest-bearing liabilities11,653,314  33,236  1.15 %7,924,568  47,271  2.39 %(30,600) 16,565  (14,035) 
Non-interest-bearing deposits (4)
1,890,955  1,345,494  
Total deposits and borrowings13,544,269  0.99 %9,270,062  2.04 %
Other non-interest-bearing liabilities142,181  115,717  
Total liabilities 13,686,450  9,385,779  
Shareholders' equity989,134  986,063  
Total liabilities and shareholders' equity$14,675,584  $10,371,842  
Net interest income91,982  64,679  $3,732  $23,571  $27,303  
Tax-equivalent adjustment (5)
225  183  
Net interest earnings$92,207  $64,862  
Interest spread2.61 %2.51 %
Net interest margin2.65 %2.63 %
Net interest margin tax equivalent (5)
2.65 %2.64 %
Net interest margin tax equivalent, excluding PPP loans (6)
2.97 %2.64 %
(1)For presentation in this table, average balances and the corresponding average yields for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.
(2)Includes owner occupied commercial real estate loans.
(3)Includes non-accrual loans, the effect of which is to reduce the yield earned on loans and leases, and deferred loan fees.
(4)Total costs of deposits (including interest bearing and non-interest-bearing) were 0.91% and 1.85% for the three months ended June 30, 2020 and 2019, respectively.
(5)Non-GAAP tax-equivalent basis, using an estimated marginal tax rate of 26% for both the three months ended June 30, 2020 and 2019, presented to approximate interest income as a taxable asset. Management uses 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 Customers’ financial results. 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.
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(6)Non-GAAP tax-equivalent basis, as described in note (5) for the three months ended June 30, 2020 and 2019, excluding net interest income from PPP loans and related borrowings, along with the related PPP loan balances and PPP fees receivable from interest-earning assets. Management uses 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 Customers’ financial results. 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.
Net interest income increased $27.3 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 as average interest-earning assets increased by $4.1 billion and NIM expanded by one basis point to 2.65% for the three months ended June 30, 2020 from 2.64% for the three months ended June 30, 2019 resulting from the Federal Reserve interest rate cuts of 225 basis points beginning in August 2019 and the shift in the mix of interest-earning assets and interest-bearing liabilities drove a 96 basis point decline in the yield on interest-earning assets and a 124 basis point decline in the cost of interest-bearing liabilities for the three months ended June 30, 2020. The largest shift in the mix of interest-earning assets and interest-bearing liabilities was the origination of $4.8 billion ($2.8 billion average balance) in PPP loans yielding 1.71% and related PPPLF borrowings of $4.4 billion ($0.9 billion average balance) costing 0.35%. Customers' total cost of funds, including non-interest bearing deposits was 0.99% and 2.04% for the three months ended June 30, 2020 and 2019, respectively.
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Six Months Ended June 30,Six Months Ended June 30,
202020192020 vs. 2019
(dollars in thousands)Average
Balance		Interest
Income or
Expense		Average
Yield or
Cost (%)		Average
Balance		Interest
Income or
Expense		Average
Yield or
Cost		Due to rateDue to volumeTotal
Assets    
Interest-earning deposits $578,435  $2,974  1.03 %$81,947  $1,120  2.76 %(1,104) 2,958  1,854  
Investment securities (1)
635,838  11,132  3.50 %689,422  12,722  3.69 %(633) (957) (1,590) 
Loans and leases:
Commercial loans to mortgage companies2,148,863  35,254  3.30 %1,462,362  35,430  4.89 %(13,734) 13,558  (176) 
Multi-family loans2,111,853  41,712  3.97 %3,175,233  60,006  3.81 %2,451  (20,745) (18,294) 
Commercial and industrial loans and leases (2)
2,460,435  53,513  4.37 %1,981,559  50,744  5.16 %(8,456) 11,225  2,769  
PPP loans1,377,460  11,706  1.71 %—  —  — %—  11,706  11,706  
Non-owner occupied commercial real estate loans1,363,795  27,616  4.07 %1,175,428  26,225  4.50 %(2,629) 4,020  1,391  
Residential mortgages437,782  8,171  3.75 %709,529  14,859  4.22 %(1,506) (5,182) (6,688) 
Other consumer loans1,274,024  56,555  8.93 %203,381  9,419  9.34 %(433) 47,569  47,136  
Total loans and leases (3)
11,174,212  234,527  4.22 %8,707,492  196,683  4.55 %(15,039) 52,883  37,844  
Other interest-earning assets89,890  1,928  4.31 %87,503  2,500  5.76 %(639) 67  (572) 
Total interest-earning assets12,478,375  250,561  4.04 %9,566,364  213,025  4.49 %(22,912) 60,448  37,536  
Non-interest-earning assets646,120  501,013  
Total assets $13,124,495  $10,067,377  
Liabilities
Interest checking accounts$1,888,160  9,221  0.98 %$825,672  7,893  1.93 %(5,276) 6,604  1,328  
Money market deposit accounts3,335,006  22,662  1.37 %3,156,988  35,179  2.25 %(14,422) 1,905  (12,517) 
Other savings accounts1,159,479  11,483  1.99 %432,893  4,508  2.10 %(248) 7,223  6,975  
Certificates of deposit1,629,416  14,225  1.76 %1,763,634  19,624  2.24 %(3,984) (1,415) (5,399) 
Total interest-bearing deposits (4)
8,012,061  57,591  1.45 %6,179,187  67,204  2.19 %(26,378) 16,765  (9,613) 
FRB PPP liquidity facility471,129  822  0.35 %—  —  — %—  822  822  
Borrowings1,756,080  18,846  2.16 %1,447,606  21,838  2.19 %(7,095) 4,103  (2,992) 
Total interest-bearing liabilities10,239,270  77,259  1.52 %7,626,793  89,042  2.35 %(36,978) 25,195  (11,783) 
Non-interest-bearing deposits (4)
1,732,163  1,353,112  
Total deposits and borrowings11,971,433  1.30 %8,979,905  2.00 %
Other non-interest-bearing liabilities145,818  110,090  
Total liabilities 12,117,251  9,089,995  
Shareholders' equity1,007,244  977,382  
Total liabilities and shareholders' equity$13,124,495  $10,067,377  
Net interest income173,302  123,983  $14,066  $35,253  $49,319  
Tax-equivalent adjustment (5)
430  364  
Net interest earnings$173,732  $124,347  
Interest spread2.74 %2.49 %
Net interest margin2.79 %2.61 %
Net interest margin tax equivalent (5)
2.80 %2.62 %
Net interest margin tax equivalent, excluding PPP loans (6)
2.98 %2.62 %

(1)For presentation in this table, average balances and the corresponding average yields for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.
(2)Includes owner occupied commercial real estate loans.
(3)Includes non-accrual loans, the effect of which is to reduce the yield earned on loans and leases, and deferred loan fees.
(4)Total costs of deposits (including interest bearing and non-interest-bearing) were 1.19% and 1.80% for the six months ended June 30, 2020 and 2019, respectively.
(5)Non-GAAP tax-equivalent basis, using an estimated marginal tax rate of 26% for both the six months ended June 30, 2020 and 2019, presented to approximate interest income as a taxable asset. Management uses 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 Customers’ financial results. 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. Please refer to the reconciliation schedule that follows this table.
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(6)Non-GAAP tax-equivalent basis, as described in note (5) for the six months ended June 30, 2020 and 2019, excluding net interest income from PPP loans and related borrowings, along with the related PPP loan balances and PPP fees receivable from interest-earning assets. Management uses 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 Customers’ financial results. 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. Please refer to the reconciliation schedule that follows this table.

Net interest income increased $49.3 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 as average interest-earning assets increased by $2.9 billion and NIM expanded by 18 basis points to 2.80% for the six months ended June 30, 2020 from 2.62% for the six months ended June 30, 2019, resulting from the Federal Reserve interest rate cuts of 225 basis points beginning in August 2019 and the shift in the mix of interest-earning assets drove a 45 basis point decline in the yield on interest-earnings assets and an 83 basis point decline in the cost of interest-bearing liabilities for the six months ended June 30, 2020. The largest shift in the mix of interest-earning assets and interest-bearing liabilities was the origination of $4.8 billion ($1.4 billion average balance) in PPP loans yielding 1.71% and related PPPLF borrowings of $4.4 billion ($0.5 billion average balance) costing 0.35%. Customers' total cost of funds, including non-interest bearing deposits was 1.30% and 2.00% for the six months ended June 30, 2020 and 2019, respectively.

Customers’ net interest margin tables contain non-GAAP financial measures calculated using non-GAAP amounts. These measures include net interest margin tax equivalent and net interest margin tax equivalent, excluding PPP loans. Management uses these non-GAAP measures to present the current period presentation to historical periods in prior filings. In addition, management believes the use of these non-GAAP measures provides additional clarity when assessing the Bancorp’s financial results. 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.

A reconciliation of net interest margin tax equivalent and net interest margin tax equivalent, excluding PPP loans for the three and six months ended June 30, 2020 and 2019 are set forth below.

Three Months Ended June 30,Six Months Ended June 30,
(dollars in thousands)2020201920202019
Net interest income (GAAP)$91,982  $64,679  $173,302  $123,983  
Tax-equivalent adjustment225  183  430  364  
Net interest income tax equivalent (Non-GAAP)$92,207  $64,862  $173,732  $124,347  
Loans receivable, PPP net interest income(9,308) —  (9,308) —  
Net interest income tax equivalent, excluding PPP loans (Non-GAAP)$82,899  $64,862  $164,424  $124,347  
Average total interest-earning assets (GAAP)$13,980,021  $9,851,150  $12,478,375  $9,566,364  
Average PPP loans(2,754,920) —  (1,377,460) —  
Adjusted average total interest-earning assets (Non-GAAP)$11,225,101  $9,851,150  $11,100,915  $9,566,364  
Net interest margin (GAAP)2.65 %2.63 %2.79 %2.61 %
Net interest margin tax equivalent (Non-GAAP)2.65 %2.64 %2.80 %2.62 %
Net interest margin tax equivalent, excluding PPP loans (Non-GAAP)2.97 %2.64 %2.98 %2.62 %


PROVISION FOR CREDIT LOSSES

The provision for credit losses is a charge to earnings to maintain the allowance for credit losses at a level consistent with management’s assessment of expected lifetime losses in the loan and lease portfolio at the balance sheet date. During first quarter 2020, Customers adopted ASU 2016-13. Upon adoption, the allowance for credit losses for loans and leases and lending-related unfunded commitments increased by $79.8 million and $3.4 million, respectively, with the after-tax cumulative effect recorded to retained earnings. Customers recorded $20.9 million and a credit of $0.4 million of provision for credit losses for loans and leases and lending-related commitments, respectively, for the three months ended June 30, 2020 utilizing the CECL methodology. The additional provision for credit losses during the three months ended June 30, 2020 resulted primarily from the impact of the reserve build due to changes in management's economic forecast since March 31, 2020 due to the COVID-19 pandemic, portfolio growth, and net charge-offs. Customers recorded $52.7 million and $0.4 million of provision for credit losses for loans and leases and lending-related commitments, respectively, for the six months ended June 30, 2020. The increase resulted primarily from the impact of reserve build for the COVID-19 pandemic,
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portfolio growth, and net-charge-offs.

For more information about the provision and ACL and our loss experience, see “Credit Risk” and “Asset Quality” herein.
NON-INTEREST INCOME
The table below presents the components of non-interest income for the three and six months ended June 30, 2020 and 2019.
 Three Months Ended June 30,QTDSix Months Ended June 30,YTD
(dollars in thousands)20202019Change% Change20202019Change% Change
Interchange and card revenue$6,478  $6,760  $(282) (4.2)%$13,287  $15,565  $(2,278) (14.6)%
Deposit fees3,321  3,348  (27) (0.8)%6,782  5,557  1,225  22.0 %
Commercial lease income4,508  2,730  1,778  65.1 %8,776  5,131  3,645  71.0 %
Bank-owned life insurance1,757  1,836  (79) (4.3)%3,519  3,653  (134) (3.7)%
Mortgage warehouse transactional fees2,582  1,681  901  53.6 %4,533  2,995  1,538  51.4 %
Gain (loss) on sale of SBA and other loans23  —  23  NM34  —  34  NM
Mortgage banking income38  250  (212) (84.8)%334  417  (83) (19.9)%
Loss upon acquisition of interest-only GNMA securities—  (7,476) 7,476  NM—  (7,476) 7,476  NM
Gain (loss) on sale of investment securities4,353  —  4,353  NM8,328  —  8,328  NM
Unrealized gain (loss) on investment securities1,200  (347) 1,547  NM(178) (345) 167  NM
Other(2,024) 3,254  (5,278) (162.2)%(1,248) 6,257  (7,505) (119.9)%
Total non-interest income$22,236  $12,036  $10,200  84.7 %$44,167  $31,754  $12,413  39.1 %
Interchange and card revenue
The $0.3 million decrease in interchange and card revenue for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 primarily resulted from lower activity volumes at the BankMobile segment, primarily due to COVID-19.
The $2.3 million decrease in interchange and card revenue for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily resulted from lower activity volumes at the BankMobile segment, primarily due to COVID-19.
Deposit fees
The $27 thousand decrease in deposit fees for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 primarily resulted from lower activity volumes.
The $1.2 million increase in deposit fees for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily resulted from an increase in service charges on certain deposit accounts relating to a change in the fee structure at the BankMobile segment.
Commercial lease income
Commercial lease income represents income earned on commercial operating leases originated by Customers' Equipment Finance Group in which Customers is the lessor. The $1.8 million increase in commercial lease income for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 primarily resulted from the continued growth of Customers' equipment finance business.
The $3.6 million increase in commercial lease income for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily resulted from the continued growth of Customers' equipment finance business.
Mortgage warehouse transactional fees
The $0.9 million increase in mortgage warehouse transactional fees for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 primarily resulted from an increase in refinancing activity driven by the decline in market interest rates during the three months ended June 30, 2020 compared to the three months ended June 30, 2019.
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The $1.5 million increase in mortgage warehouse transactional fees for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily resulted from an increase in refinancing activity driven by the decline in market interest rates during the six months ended June 30, 2020 compared to the six months ended June 30, 2019.
Gain (loss) on sale of investment securities
The $4.4 million increase in gain (loss) on sale of investment securities for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 reflects $4.4 million of gains realized from the sale of $30.0 million of corporate bonds and $6.3 million in non-agency-guaranteed collateralized mortgage obligations during the three months ended June 30, 2020.
The $8.3 million increase in gain (loss) on sale of investment securities for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 reflects the gains realized from the sale of $100.5 million of agency-guaranteed residential mortgage-backed securities, $30.0 million of corporate bonds, and $6.3 million in non-agency-guaranteed collateralized mortgage obligations during the six months ended June 30, 2020.
Unrealized gain (loss) on investment securities
The $1.5 million increase in unrealized gain (loss) on investment securities for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 reflects an increase in the fair value of equity securities issued by a foreign entity for the three months ended June 30, 2020, respectively.
The $0.2 million decrease in unrealized gain (loss) on investment securities for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 reflects a smaller decline in the fair value of equity securities issued by a foreign entity for the six months ended June 30, 2020.
Loss on acquisition of interest-only GNMA securities
The $7.5 million loss realized upon the acquisition of certain interest-only GNMA securities during the three and six months ended June 30, 2019 resulted from a mortgage warehouse customer that unexpectedly ceased operations in second quarter 2019. Customers took possession of the interest-only GNMA securities that served as the primary collateral for loans made to this mortgage warehouse customer. The shortfall in the fair value of the interest-only GNMA securities upon acquisition resulted in a write-down of $7.5 million in second quarter 2019. Customers views this as an isolated event that is not indicative of the overall credit quality of the mortgage warehouse portfolio. There are no other loans in the mortgage warehouse portfolio secured by interest-only securities.
Other non-interest income
The $5.3 million decrease in other non-interest income for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 primarily resulted from a negative mark-to-market derivative credit valuation adjustment of $3.3 million mostly resulting from an interest rate swap associated with a non-performing borrower, a market value adjustment loss on one loan held for sale of $1.5 million, and a decline in swap premiums of $0.9 million.
The $7.5 million decrease in other non-interest income for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily resulted from a negative credit value adjustment of $6.2 million, due to changes in market interest rates and from an interest rate swap associated with a non-performing borrower, and a market value adjustment loss on one loan held for sale of $1.5 million, partially offset by an increase in swap premiums of $0.6 million.

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NON-INTEREST EXPENSE
The table below presents the components of non-interest expense for the three and six months ended June 30, 2020 and 2019.
 Three Months Ended June 30,QTDSix Months Ended June 30,YTD
(dollars in thousands)20202019Change% Change20202019Change% Change
Salaries and employee benefits$31,296  $26,920  $4,376  16.3 %$59,607  $52,743  $6,864  13.0 %
Technology, communication and bank operations13,310  12,402  908  7.3 %26,360  24,355  2,005  8.2 %
Professional services4,552  5,718  (1,166) (20.4)%12,223  10,291  1,932  18.8 %
Occupancy3,025  3,064  (39) (1.3)%6,057  5,967  90  1.5 %
Commercial lease depreciation3,643  2,252  1,391  61.8 %7,070  4,174  2,896  69.4 %
FDIC assessments, non-income taxes and regulatory fees2,368  2,157  211  8.9 %5,235  4,145  1,090  26.3 %
Provision for operating losses1,068  2,446  (1,378) (56.3)%1,980  4,225  (2,245) (53.1)%
Advertising and promotion582  1,360  (778) (57.2)%2,222  2,169  53  2.4 %
Merger and acquisition related expenses25  —  25  NM75  —  75  NM
Loan workout1,808  643  1,165  181.2 %2,175  963  1,212  125.9 %
Other real estate owned12  (14) 26  (185.7)%20  43  (23) (53.5)%
Other1,817  2,634  (817) (31.0)%6,941  4,491  2,450  54.6 %
Total non-interest expense$63,506  $59,582  $3,924  6.6 %$129,965  $113,566  $16,399  14.4 %
Salaries and employee benefits
The $4.4 million increase in salaries and employee benefits for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 primarily resulted from an increase in average full-time equivalent team members and annual merit increases.
The $6.9 million increase in salaries and employee benefits for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily resulted from an increase in average full-time equivalent team members and annual merit increases.
Technology, communication, and bank operations
The $0.9 million increase in technology, communication, and bank operations expense for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 primarily resulted from the continued investment in Customers' white label partnership and digital transformation efforts.
The $2.0 million increase in technology, communication, and bank operations expense for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily resulted from the continued investment in Customers' white label partnership and digital transformation efforts.
Professional services
The $1.2 million decrease in professional services for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 primarily resulted from management's continued efforts to monitor and control expenses.
The $1.9 million increase in professional services for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily resulted from consulting services associated with supporting Customers' white label partnership and digital transformation efforts, partially offset by management's continued efforts to monitor and control expenses.
Commercial lease depreciation
The $1.4 million increase in commercial lease depreciation for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 primarily resulted from the continued growth of the operating lease arrangements originated by Customers' Equipment Finance Group in which Customers is the lessor.
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The $2.9 million increase in commercial lease depreciation for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily resulted from the continued growth of the operating lease arrangements originated by Customers' Equipment Finance Group in which Customers is the lessor.
FDIC assessments, non-income taxes, and regulatory fees
The $0.2 million increase in FDIC assessments, non-income taxes, and regulatory fees for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 primarily resulted from higher fees resulting from management's decision to grow the balance sheet beyond $10 billion in assets, as higher premiums become applicable.
The $1.1 million increase in FDIC assessments, non-income taxes, and regulatory fees for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily resulted from higher fees resulting from management's decision to grow the balance sheet beyond $10 billion in assets, as higher premiums become applicable.
Provision for operating losses
The provision for operating losses primarily consists of losses resulting from fraud or theft-based transactions that have generally been disputed by deposit account holders. The $1.4 million decrease in provision for operating losses for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 primarily resulted from initiatives implemented by management to reduce fraud and theft-based losses during the three months ended June 30, 2020.
The $2.2 million decrease in provision for operating losses for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily resulted from initiatives implemented by management to reduce fraud and theft-based losses during the six months ended June 30, 2020.
Advertising and promotion expenses
The $0.8 million decrease in advertising and promotion expenses for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 primarily resulted from a reduction in the promotion of Customers' digital banking products and service offerings available through BankMobile and its white label partnership.
The $0.1 million increase in advertising and promotion expenses for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily resulted from the promotion of Customers' digital banking products and service offerings available through BankMobile and its white label partnership, primarily in first quarter 2020.
Other non-interest expense
The $0.8 million decrease in other non-interest expense for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 primarily resulted from a reduction in certain product development costs related to Customers' white label partnership.
The $2.5 million increase in other non-interest expense for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 primarily resulted from a legal contingency accrual of $1.0 million related to the settlement of the previously disclosed DOE matter during the three months ended March 31, 2020, certain product development costs related to our white label partnership, and an increase in the provision for credit losses on off-balance sheet credit exposures of $0.4 million coinciding with the adoption of CECL and the impact of COVID-19.


INCOME TAXES
The table below presents income tax expense and the effective tax rate for the three and six months ended June 30, 2020 and 2019.

Three Months Ended June 30,QTDSix Months Ended June 30,YTD
(dollars in thousands)20202019Change% Change20202019Change% Change
Income before income tax expense$29,766  $11,787  $17,979  152.5 %$34,772  $32,058  $2,714  8.5 %
Income tax expense$7,048  $2,491  $4,557  182.9 %$8,955  $7,323  $1,632  22.3 %
Effective tax rate23.68 %21.13 %25.75 %22.84 %

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The $4.6 million increase in income tax expense for the three months ended June 30, 2020, when compared to the same period in the prior year, primarily resulted from an increase in pre-tax income and a favorable return to provision adjustment for the three months ended June 30, 2019. The increase in the effective tax for the three months ended June 30, 2020, when compared to the same period in the prior year, primary resulted from the favorable return to provision adjustment, which decreased tax expense for the three months ended June 30, 2019.
The $1.6 million increase in income tax expense for the six months ended June 30, 2020, when compared to the same period in the prior year, primarily resulted from an increase in pre-tax income and the discrete provision items which increased income tax expense for the six months ended June 30, 2020, compared to a favorable return to provision adjustment for the six months ended June 30, 2019. The increase in the effective tax for the six months ended June 30, 2020, when compared to the same period in the prior year, primary resulted from the discrete provision items, which increased income tax expense for the six months ended June 30, 2020, compared to a favorable return to provision adjustment, which lowered income tax expense for the six months ended June 30, 2019.

PREFERRED STOCK DIVIDENDS

Preferred stock dividends were $3.6 million for both the three months ended June 30, 2020 and 2019. There were no changes to the amount of preferred stock outstanding or the dividends paid during the three months ended June 30, 2020 and 2019. On June 15, 2020, Series C preferred stock became floating at three-month LIBOR plus 5.300%, compared to a fixed rate of 7.00%.

Preferred stock dividends were $7.2 million for both the six months ended June 30, 2020 and 2019. There were no changes to the amount of preferred stock outstanding or the dividends paid during the six months ended June 30, 2020 and 2019. On June 15, 2020, Series C preferred stock became floating at three-month LIBOR plus 5.300%, compared to a fixed rate of 7.00%.


Financial Condition
General
Customers' total assets were $17.9 billion at June 30, 2020. This represented a $6.4 billion increase from total assets of $11.5 billion at December 31, 2019. The increase in total assets was primarily driven by increases of $4.8 billion in PPP loans, $854.8 million in cash and cash equivalents, $547.4 million in loans receivable, mortgage warehouse, at fair value, $286.2 million in other assets, and $85.5 million in investment securities, partially offset by an increase in allowance for loan and lease losses of $103.5 million.
Total liabilities were $16.9 billion at June 30, 2020. This represented a $6.4 billion increase from $10.5 billion at December 31, 2019. The increase in total liabilities primarily resulted from increases of $4.4 billion in the PPPLF, $2.3 billion in total deposits, and $228.1 million in accrued interest payable and other liabilities, offset in part by a reduction in federal funds purchased of $0.5 billion.
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The following table presents certain key condensed balance sheet data as of June 30, 2020 and December 31, 2019:

(dollars in thousands)June 30,
2020		December 31,
2019		Change% Change
Cash and cash equivalents$1,067,330  $212,505  $854,825  402.3 %
Investment securities, at fair value681,382  595,876  85,506  14.3 %
Loans held for sale464,164  486,328  (22,164) (4.6)%
Loans receivable, mortgage warehouse, at fair value2,793,164  2,245,758  547,406  24.4 %
Loans receivable, PPP4,760,427  —  4,760,427  NM
Loans and leases receivable7,272,447  7,318,988  (46,541) (0.6)%
Allowance for credit losses on loan and lease losses(159,905) (56,379) (103,526) 183.6 %
Total assets17,903,118  11,520,717  6,382,401  55.4 %
Total deposits10,965,875  8,648,936  2,316,939  26.8 %
Federal funds purchased—  538,000  (538,000) (100.0)%
FHLB advances850,000  850,000  —  — %
Other borrowings123,833  123,630  203  0.2 %
Subordinated debt181,255  181,115  140  0.1 %
FRB PPP liquidity facility4,419,967  —  4,419,967  NM
Total liabilities16,895,271  10,467,922  6,427,349  61.4 %
Total shareholders’ equity1,007,847  1,052,795  (44,948) (4.3)%
Total liabilities and shareholders’ equity$17,903,118  $11,520,717  $6,382,401  55.4 %

Cash and Cash Equivalents
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 $44.6 million and $33.1 million at June 30, 2020 and December 31, 2019, respectively.  Cash and due from banks balances vary from day to day, primarily due to variations in customers’ deposit activities with the Bank.
Interest-earning deposits consist of cash deposited at other banks, primarily the FRB. Interest-earning deposits were $1.0 billion and $179.4 million at June 30, 2020 and December 31, 2019, 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 decisions made to maximize Customers' net interest income, while effectively managing interest-rate risk and liquidity. The increase in interest-earning deposits since December 31, 2019 primarily resulted from increased brokered deposits used as bridge financing for the origination of PPP loans until the loans were pledged as eligible collateral to the FRB PPPLF.
Investment Securities
The investment securities portfolio is an important source of interest income and liquidity. It consists primarily of mortgage-backed securities (guaranteed by an agency of the United States government), state and political subdivision debt securities, corporate securities, interest-only GNMA securities, and marketable equity securities. In addition to generating revenue, the investment portfolio is maintained to manage interest-rate risk, provide liquidity, serve as collateral for other borrowings, and diversify the credit risk of interest-earning assets. The portfolio is structured to optimize net interest income, given changes in the economic environment, liquidity position and balance sheet mix.
At June 30, 2020, investment securities totaled $681.4 million compared to $595.9 million at December 31, 2019. The increase in investment securities primarily resulted from the purchases of agency-guaranteed mortgage-backed securities, state and political subdivision debt securities, and corporate securities totaling $280.4 million, and unrealized gains of $17.9 million, partially offset by the sale of $142.8 million of agency-guaranteed mortgage-backed securities, corporate bonds, of which $33.6 million was settled in July 2020, and non-agency-guaranteed collateralized mortgage obligations, maturities, calls and principal repayments totaling $78.5 million for the six months ended June 30, 2020.
For financial reporting purposes, available for sale debt securities are carried at fair value. Unrealized gains and losses on available for sale debt securities are included in other comprehensive income (loss) and reported as a separate component of shareholders’ equity, net of the related tax effect. Changes in the fair value of marketable equity securities and securities reported at fair value based on a fair value option election are recorded in non-interest income in the period in which they occur.
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LOANS AND LEASES
Existing lending relationships are primarily with small and middle market businesses and individual consumers primarily in Southeastern Pennsylvania (Bucks, Berks, Chester, Philadelphia and Delaware Counties); Rye Brook, New York (Westchester County); Hamilton, New Jersey (Mercer County); Boston, Massachusetts; Providence, Rhode Island; Portsmouth, New Hampshire (Rockingham County); Manhattan and Melville, New York; and Chicago, Illinois. The portfolio of loans to mortgage banking businesses is nationwide. The loan portfolio consists primarily of loans to support mortgage banking companies’ funding needs, multi-family/commercial real estate and commercial and industrial loans. Customers continues to focus on small and middle market business loans to grow its commercial lending efforts, particularly its commercial and industrial loan and lease portfolio and its specialty mortgage lending business. Customers also focuses its lending efforts on local-market mortgage and home equity lending and the origination and purchase of unsecured consumer loans (other consumer loans), including personal, student loan refinancing, and home improvement loans through arrangements with fintech companies and other market place lenders for both the Customers Bank Business Banking and BankMobile segments nationwide.
Commercial Lending
Customers' commercial lending is divided into five groups: Business Banking, Small and Middle Market Business Banking, Multi-Family and Commercial Real Estate Lending, Mortgage Banking Lending, and Equipment Finance. 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 primarily on companies with annual revenues ranging from $1 million to $100 million, which typically have credit requirements between $0.5 million and $10 million.
As of June 30, 2020, Customers had $13.6 billion in commercial loans outstanding, totaling approximately 89.0% of its total loan and lease portfolio, which includes loans held for sale and loans receivable, mortgage warehouse, at fair value and PPP loans, compared to commercial loans outstanding of $8.4 billion, comprising approximately 83.8% of its total loan and lease portfolio, at December 31, 2019. Included in the $13.6 billion in commercial loans outstanding as of June 30, 2020 was $4.8 billion of PPP loans that Customers originated during the three months ended June 30, 2020. The PPP loans are fully guaranteed by the SBA and earn a fixed interest rate of 1.00%.
The small and middle market business banking platform originates loans, including SBA 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.
Customers' lending to mortgage banking businesses 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, generate fee income and attract escrow deposits. The underlying residential loans are taken as collateral for Customers' commercial loans to the mortgage companies. As of June 30, 2020 and December 31, 2019, commercial loans to mortgage banking businesses totaled $2.8 billion and $2.2 billion, respectively, and are reported as loans receivable, mortgage warehouse, at fair value on the consolidated balance sheet.
Customers intends to continue to deemphasize its lower-yielding multi-family loan portfolio, and invest in high credit quality higher-yielding commercial and industrial loans with the multi-family run-off. Customers' multi-family lending group continues to focus on retaining a portfolio of high-quality multi-family loans within Customers' covered markets while cross-selling other products and services. These lending activities primarily target the refinancing of loans with other banks using conservative underwriting standards and provide 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 June 30, 2020, Customers had multi-family loans of $2.0 billion outstanding, comprising approximately 13.2% of the total loan and lease portfolio, compared to $2.4 billion, or approximately 23.8% of the total loan and lease portfolio, at December 31, 2019.
The Equipment Finance Group offers equipment financing and leasing products and services for a broad range of asset classes. It services vendors, dealers, independent finance companies, bank-owned leasing companies and strategic direct customers in the plastics, packaging, machine tool, construction, transportation and franchise markets. As of June 30, 2020 and December 31, 2019, Customers
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had $283.1 million and $263.9 million, respectively, of equipment finance loans outstanding. As of June 30, 2020 and December 31, 2019, Customers had $96.4 million and $89.2 million of equipment finance leases, respectively. As of June 30, 2020 and December 31, 2019, Customers had $95.5 million and $93.6 million, respectively, of operating leases entered into under this program, net of accumulated depreciation of $21.3 million and $14.3 million, respectively.
On March 27, 2020, the CARES Act was signed by President Trump, which created funding for a new product called the PPP. The PPP is administered by the SBA and is intended to assist organizations with payroll related expenses. Customers, directly or through fintech partnerships, had $4.8 billion of PPP loans outstanding as of June 30, 2020, which are fully guaranteed by the SBA and earn a fixed interest rate of 1.00%. The average loan size of the PPP portfolio is approximately $50 thousand.
Consumer Lending
Customers provides unsecured consumer loans, residential mortgage, and home equity loans to customers. The other consumer loan portfolio consists largely of originated and purchased personal, student loan refinancing and home improvement loans. None of the loans are considered sub-prime at the time of origination. Customers considers sub-prime borrowers to be those with FICO scores below 660. Customers has been selective in the consumer loans it has been purchasing. Home equity 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 June 30, 2020, Customers had $1.7 billion in consumer loans outstanding, or 11.0% of the total loan and lease portfolio, compared to $1.6 billion, or 16.2% of the total loan and lease portfolio, as of December 31, 2019. Customers intends to temper its growth in consumer loans for the remainder of 2020.
Purchases and sales of consumer loans were as follows for the three and six months ended June 30, 2020 and 2019:
Three Months Ended June 30,Six Months Ended June 30,
(amounts in thousands)2020201920202019
Purchases (1)
Residential real estate$—  $39,474  $495  $105,858  
Other consumer (2)
18,008  384,116  209,768  450,252  
Total$18,008  $423,590  $210,263  $556,110  
Sales (3)
Other consumer—  —  1,822  —  
Total$—  $—  $1,822  $—  

(1)Amounts reported in the above table are the unpaid principal balance at time of purchase. The purchase price was 98.5% and 100.6% of loans outstanding for the three months ended June 30, 2020 and 2019, respectively. The purchase price was 100.4% and 99.9% of loans outstanding for the six months ended June 30, 2020 and 2019, respectively.
(2)Other consumer loan purchases for the three and six months ended June 30, 2020 and 2019 consist of third-party originated unsecured consumer loans. None of the loans are considered sub-prime at the time of origination. Customers considers sub-prime borrowers to be those with FICO scores below 660.
(3)Amounts reported in the above table are the unpaid principal balance at time of sale. There were no loan sales in the three and six months ended June 30, 2019.
Loans Held for Sale
The composition of loans held for sale as of June 30, 2020 and December 31, 2019 was as follows:
(amounts in thousands)June 30, 2020December 31, 2019
Commercial loans:
Multi-family loans, at lower of cost or fair value$441,732  $482,873  
Commercial mortgage loans, at lower of cost or fair value17,600  —  
Total commercial loans held for sale459,332  482,873  
Consumer loans:
Home equity conversion mortgages, at lower of cost or fair value1,325  1,325  
Residential mortgage loans, at fair value3,507  2,130  
Total consumer loans held for sale4,832  3,455  
Loans held for sale$464,164  $486,328  
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At June 30, 2020, loans held for sale totaled $464.2 million, or 3.04% of the total loan and lease portfolio, and $486.3 million, or 4.84% of the total loan and lease portfolio, at December 31, 2019. Loans held for sale are carried on the balance sheet at either fair value (due to the election of the fair value option) or at the lower of cost or fair value. An ACL is not recorded on loans that are classified as held for sale.
Total Loans and Leases Receivable
The composition of total loans and leases receivable (excluding loans held for sale) was as follows:
(amounts in thousands)June 30, 2020December 31, 2019
Loans and leases receivable, mortgage warehouse, at fair value$2,793,164  $2,245,758  
Loans receivable, PPP4,760,427  —  
Loans receivable:
Commercial:
Multi-family1,581,839  1,907,331  
Commercial and industrial (1)
2,099,442  1,891,152  
Commercial real estate owner occupied544,772  551,948  
Commercial real estate non-owner occupied1,244,773  1,222,772  
Construction128,834  117,617  
Total commercial loans and leases receivable5,599,660  5,690,820  
Consumer:
Residential real estate348,109  382,634  
Manufactured housing66,865  71,359  
Other consumer1,257,813  1,174,175  
Total consumer loans receivable1,672,787  1,628,168  
Loans and leases receivable (2)
7,272,447  7,318,988  
Allowance for credit losses(159,905) (56,379) 
Total loans and leases receivable, net of allowance for credit losses$14,666,133  $9,508,367  
(1)Includes direct finance equipment leases of $96.4 million and $89.2 million at June 30, 2020 and December 31, 2019, respectively.
(2)Includes deferred (fees) costs and unamortized (discounts) premiums, net of $(83.1) million and $2.1 million at June 30, 2020 and December 31, 2019, respectively.
Loans receivable, PPP
On March 27, 2020, the CARES Act was signed into law and which created funding for a new product called the PPP. The PPP is administered by the SBA and is intended to assist organizations with payroll related expenses. Customers had $4.8 billion of PPP loans outstanding as of June 30, 2020, which are fully guaranteed by the SBA and earn a fixed interest rate of 1.00%. Customers recognized interest income, including origination fees, of $11.7 million for the three and six months ended June 30, 2020, respectively.
Loans receivable, mortgage warehouse, at fair value
The mortgage warehouse product line primarily provides financing to mortgage companies nationwide from the time of origination of the underlying mortgage loans until the mortgage loans are sold into the secondary market. As a mortgage warehouse lender, Customers provides 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. These loans are reported as loans receivable, mortgage warehouse, at fair value on the consolidated balance sheets. Because these loans are reported at their fair value, they do not have an ACL and are therefore excluded from ACL-related disclosures. At June 30, 2020, all of Customers' commercial mortgage warehouse loans were current in terms of payment.
Customers is 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. Customers' mortgage warehouse lending team members monitor these mortgage originators by obtaining financial and other relevant information to reduce these risks during the lending period. Loans receivable, mortgage warehouse, at fair value totaled $2.8 billion and $2.2 billion at June 30, 2020 and December 31, 2019, respectively.
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Credit Risk
Customers manages credit risk by maintaining diversification in its loan and lease portfolio, establishing and enforcing prudent underwriting standards and collection efforts, and continuous and periodic loan and lease classification reviews. Management also considers the effect of credit risk on financial performance by reviewing quarterly and maintaining an adequate ACL. Credit losses are charged-off when they are identified, and provisions are added when it is estimated that a loss has occurred, to the ACL at least quarterly. The ACL is estimated at least quarterly.
The provision for credit losses on loans and leases was $20.9 million and $5.3 million for the three months ended June 30, 2020 and 2019, respectively. The ACL maintained for loans and leases receivable (excluding loans held for sale and loans receivable, mortgage warehouse, at fair value and PPP loans) was $159.9 million, or 2.20% of loans and leases receivable, excluding PPP loans, at June 30, 2020 and $56.4 million, or 0.77% of loans and leases receivable, at December 31, 2019. Net charge-offs were $10.3 million for the three months ended June 30, 2020, an increase of $9.7 million compared to the same period in 2019. The increase in the ACL resulted primarily from the impact of reserve build for the COVID-19 pandemic, an increase in net charge-offs, mostly attributable to the commercial real estate non-owner occupied and other consumer portfolios, and portfolio growth. Commercial real estate non-owner occupied charge-offs were attributable to the partial charge-off of two collateral dependent loans, which are not indicative of the overall commercial real estate portfolio. Other consumer charge-offs were attributable to originated and purchased unsecured consumer loans through arrangements with fintech companies and other market place lenders.
The table below presents changes in the Bank’s ACL for the periods indicated.
Analysis of the Allowance for Credit Losses on Loan and Lease Losses
 Three Months Ended June 30,Six Months Ended June 30,
(amounts in thousands)2020201920202019
Balance at beginning of the period$149,283  $43,679  $56,379  $39,972  
Cumulative effect of change in accounting principle—  —  79,829  —  
Loan and lease charge-offs (1)
Multi-family—  —  —  541  
Commercial and industrial 20  183  117  183  
Commercial real estate owner occupied—  66  —  74  
Commercial real estate non-owner occupied2,801  —  15,598  —  
Residential real estate—  69  —  109  
Other consumer 8,304  932  14,550  1,687  
Total Charge-offs11,125  1,250  30,265  2,594  
Loan and lease recoveries (1)
Multi-family—  7  —  7  
Commercial and industrial 25  338  79  457  
Commercial real estate owner occupied2  97  5  225  
Construction113  114  116  120  
Residential real estate26  8  55  15  
Other consumer 635  49  975  73  
Total Recoveries801  613  1,230  897  
Total net charge-offs10,324  637  29,035  1,697  
Provision for loan and lease losses 20,946  5,346  52,732  10,113  
Balance at the end of the period$159,905  $48,388  $159,905  $48,388  
(1)Charge-offs and recoveries on PCD loans that are accounted for in pools are recognized on a net basis when the pool matures.
The ACL is based on a quarterly evaluation of the loan and lease portfolio and is maintained at a level that management considers adequate to absorb expected lifetime credit losses as of the balance sheet date. All commercial loans, with the exception of PPP loans and commercial mortgage warehouse loans, which are reported at fair value, are assigned internal credit-risk ratings, based upon an assessment of the borrower, the structure of the transaction and the available collateral and/or guarantees. All loans and leases are monitored regularly by the responsible officer, and the risk ratings are adjusted when considered appropriate. The risk assessment allows
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management to identify problem loans and leases 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 ACL. Refer to Critical Accounting Policies herein and NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION to Customers' interim unaudited financial statements for Customers' adoption of CECL, also, refer to NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION to Customers' audited financial statements in its 2019 Form 10-K for further discussion on management's prior incurred loss methodology for estimating the ALLL.
Approximately 75% of Customers' 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”), primarily in the form of a first lien position. Current appraisals providing current value estimates of the property are received when Customers' 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 15 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 generally used to determine the estimated fair value of the underlying collateral, net of estimated selling costs, and compared to the outstanding loan balance to determine the amount of reserve necessary, if any. 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, net of estimated selling costs, and compared 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 326, individually assessed loans, consisting primarily of non-accrual and restructured loans, are considered in the methodology for determining the ACL. Individually assessed 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 operation or sale of such collateral. Shortfalls in the underlying collateral value for loans or leases determined to be collateral dependent are charged off immediately. Subsequent to an appraisal or other fair value estimate, management will assess whether there was a further decline in the value of the collateral based on changes in market conditions or property use that would require additional impairment to be recorded to reflect the particular situation, thereby increasing the ACL on loans and leases.
Asset Quality
Customers segments the loan and lease receivables by loan product or other characteristic generally defining a shared characteristic with other loans in the same group. Charge-offs from originated and acquired loans and leases are absorbed by the ACL. The CARES Act and certain regulatory agencies recently issued guidance stating certain loan modifications to borrowers experiencing financial distress as a result of the economic impacts created by COVID-19 may not be required to be treated as TDRs under U.S GAAP. For COVID-19 related loan modifications which met the loan modification criteria under either the CARES Act or the criteria specified by the regulatory agencies, Customers elected to suspend TDR accounting for such loan modifications. At June 30, 2020, commercial and consumer deferments related to COVID-19 were $974 million and $81.3 million, respectively. The schedule that follows includes both loans held for sale and loans held for investment.
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Asset Quality at June 30, 2020
(dollars in thousands)Total Loans and LeasesCurrent30-89 Days Past Due90 Days or More Past Due and AccruingNon-accrual/NPL (a)OREO (b)NPA (a)+(b)NPL to Loan and Lease Type (%)NPA to Loans and Leases + OREO (%)
Loan and Lease Type 
Multi-family$1,581,839  $1,558,036  $16,790  $—  $7,013  $—  $7,013  0.44 %0.44 %
Commercial & industrial (1)
2,099,442  2,088,822  646  —  9,974  —  9,974  0.48 %0.48 %
Commercial real estate owner occupied544,772  535,861  4,889  —  4,022  —  4,022  0.74 %0.74 %
Commercial real estate non-owner occupied1,244,773  1,214,419  97  —  30,257  —  30,257  2.43 %2.43 %
Construction128,834  128,834  —  —  —  —  —  — %— %
Total commercial loans and leases receivable5,599,660  5,525,972  22,422  —  51,266  —  51,266  0.92 %0.92 %
Residential348,109  331,180  9,072  —  7,857  35  7,892  2.26 %2.27 %
Manufactured housing66,865  60,625  1,171  1,738  3,331  96  3,427  4.98 %5.12 %
Other consumer1,257,813  1,241,511  11,415  —  4,887  —  4,887  0.39 %0.39 %
Total consumer loans receivable1,672,787  1,633,316  21,658  1,738  16,075  131  16,206  0.96 %0.97 %
Loans and leases receivable (1)
7,272,447  7,159,288  44,080  1,738  67,341  131  67,472  0.93 %0.93 %
Loans receivable, PPP4,760,427  4,760,427  —  —  —  —  —  — %— %
Loans receivable, mortgage warehouse, at fair value2,793,164  2,793,164  —  —  —  —  —  
Total loans held for sale 464,164  445,239  —  —  18,925  —  18,925  4.08 %4.08 %
Total portfolio$15,290,202  $15,158,118  $44,080  $1,738  $86,266  $131  $86,397  0.56 %0.57 %

Asset Quality at June 30, 2020 (continued)
(dollars in thousands)Total Loans and LeasesNon-accrual / NPLACLReserves to Loans and Leases (%)Reserves to NPLs (%)
Loan and Lease Type
Multi-family$1,581,839  $7,013  $14,697  0.93 %209.57 %
Commercial & industrial2,099,442  9,974  12,302  0.59 %123.34 %
Commercial real estate owner occupied544,772  4,022  11,405  2.09 %283.57 %
Commercial real estate non-owner occupied1,244,773  30,257  26,493  2.13 %87.56 %
Construction128,834  —  5,297  4.11 %— %
Total commercial loans and leases receivable5,599,660  51,266  70,194  1.25 %136.92 %
Residential348,109  7,857  4,550  1.31 %57.91 %
Manufactured housing66,865  3,331  6,014  8.99 %180.55 %
Other consumer1,257,813  4,887  79,147  6.29 %1619.54 %
Total consumer loans receivable1,672,787  16,075  89,711  5.36 %558.08 %
Loans and leases receivable (1)
7,272,447  67,341  159,905  2.20 %237.46 %
Loans receivable, PPP4,760,427  —  —  — %— %
Loans receivable, mortgage warehouse, at fair value2,793,164  —  —  
Total loans held for sale 464,164  18,925  —  — %— %
Total portfolio$15,290,202  $86,266  $159,905  1.05 %185.36 %
(1) Excluding loans receivable, PPP from total loans and leases receivable is a non-GAAP measure. Management believes the use of these non-GAAP measures provides additional clarity when assessing Customers' financial results. 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. Please refer to the reconciliation schedules that follow this table.

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Customers’ asset quality table contains non-GAAP financial measures calculated using non-GAAP amounts. These measures all exclude loans receivable, PPP from their calculations. Management uses these non-GAAP measures to present the current period presentation to historical periods in prior filings. In addition, management believes the use of these non-GAAP measures provides additional clarity when assessing the Bancorp’s financial results. 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.

A reconciliation of loans and leases receivable, excluding loans receivable, PPP and other related amounts, at June 30, 2020, are set forth below.

(dollars in thousands)Total Loans and LeasesCurrent30-89 Days Past Due90 Days or More Past Due and AccruingNon-accrual/NPL (a)OREO (b)NPA (a)+(b)NPL to Loan and Lease Type (%)NPA to Loans and Leases + OREO (%)
Loans and leases receivable (GAAP)$12,032,874  $11,919,715  $44,080  $1,738  $67,341  $131  $67,472  0.56 %0.56 %
Less: Loans receivable, PPP4,760,427  4,760,427  —  —  —  —  —  — %— %
Loans receivable, excluding loans receivable, PPP (Non-GAAP)$7,272,447  $7,159,288  $44,080  $1,738  $67,341  $131  $67,472  0.93 %0.93 %

(dollars in thousands)Total Loans and LeasesNon-accrual / NPLACLReserves to Loans and Leases (%)Reserves to NPLs (%)
Loans and leases receivable (GAAP)$12,032,874  $67,341  $159,905  1.33 %237.46 %
Less: Loans receivable, PPP4,760,427  —  —  — %— %
Loans receivable, excluding loans receivable, PPP (Non-GAAP)7,272,447  67,341  159,905  2.20 %237.46 %

The total loan and lease portfolio was $15.3 billion at June 30, 2020 compared to $10.1 billion at December 31, 2019 and $86.3 million, or 0.56% of loans and leases, were non-performing at June 30, 2020 compared to $21.3 million, or 0.21% of loans and leases, at December 31, 2019. The loan and lease portfolio was supported by an ACL of $159.9 million (185.36% of NPLs and 1.05% of total loans and leases) and $56.5 million (264.67% of NPLs and 0.56% of total loans and leases), at June 30, 2020 and December 31, 2019, respectively.


DEPOSITS

Customers offers a variety of deposit accounts, including checking, savings, MMDA, and time deposits.  Deposits are primarily obtained from Customers' geographic service area and nationwide through branchless digital banking, our white label relationship, deposit brokers, listing services and other relationships.

The components of deposits were as follows at the dates indicated:
(dollars in thousands)June 30, 2020December 31, 2019Change% Change
Demand, non-interest bearing$1,879,789  $1,343,391  $536,398  39.9 %
Demand, interest bearing2,666,209  1,235,292  1,430,917  115.8 %
Savings, including MMDA4,549,497  4,401,719  147,778  3.4 %
Non-time deposits9,095,495  6,980,402  2,115,093  30.3 %
Time, $100,000 and over503,405  402,161  101,244  25.2 %
Time, other1,366,975  1,266,373  100,602  7.9 %
Time deposits1,870,380  1,668,534  $201,846  12.1 %
Total deposits$10,965,875  $8,648,936  $2,316,939  26.8 %

Total deposits were $11.0 billion at June 30, 2020, an increase of $2.3 billion, or 26.8%, from $8.6 billion at December 31, 2019. Non-time deposits increased by $2.1 billion, or 30.3%, to $9.1 billion at June 30, 2020, from $7.0 billion at December 31, 2019. This increase primarily resulted from Customers' initiative to improve its net interest margin by expanding its sources of lower-cost funding. These efforts led to increases in non-interest bearing demand deposits of $0.5 billion and interest bearing demand deposits of $1.4 billion. Savings, including MMDA increased $0.1 billion, or 3.4%, to $4.5 billion at June 30, 2020, from $4.4 billion at December 31, 2019. Time deposits increased $0.2 billion, or 12.1%, to $1.9 billion at June 30, 2020, from $1.7 billion at December 31, 2019.
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At June 30, 2020, the Bank had $1.0 billion in state and municipal deposits to which it had pledged $1.0 billion of available borrowing capacity through the FHLB to the depositor through a letter of credit arrangement.


FHLB ADVANCES AND OTHER BORROWINGS
Borrowed funds from various sources are generally used to supplement deposit growth and meet other operating needs. Customers' borrowings include short-term and long-term advances from the FHLB, FRB, including from the PPPLF, federal funds purchased, senior unsecured notes and subordinated debt. Subordinated debt is also considered as Tier 2 capital for certain regulatory calculations.
Short-term debt
Short-term debt at June 30, 2020 and December 31, 2019 was as follows:
 June 30, 2020December 31, 2019
(dollars in thousands)AmountRateAmountRate
FHLB advances$850,000  1.48 %$500,000  2.15 %
Federal funds purchased—  — %538,000  1.60 %
Total short-term debt$850,000  $1,038,000  

Long-term debt
FHLB and FRB Advances
Long-term FHLB and FRB advances at June 30, 2020 and December 31, 2019, was as follows:
June 30, 2020December 31, 2019
(dollars in thousands)AmountRateAmountRate
FHLB advances$—  — %$350,000  2.36 %
FRB PPP Liquidity Facility advances4,419,967  0.35 %—  — %
Total long-term FHLB and FRB advances$4,419,967  $350,000  

Beginning in second quarter 2020, Customers began participating in the PPPLF, in which Federal Reserve Banks extend non-recourse loans to institutions that are eligible to make PPP loans. Only PPP loans that are guaranteed by the SBA under the PPP, with respect to both principal and interest that are originated by an eligible institution, may pledge as collateral to the Federal Reserve Banks.
The maximum borrowing capacity with the FHLB and FRB at June 30, 2020 and December 31, 2019 was as follows:

(dollars in thousands)June 30, 2020December 31, 2019
Total maximum borrowing capacity with the FHLB$2,958,717  $3,445,416  
Total maximum borrowing capacity with the FRB (1)
152,410  136,842  
Qualifying loans serving as collateral against FHLB and FRB advances3,814,247  4,496,983  
(1) Amounts reported in the above table exclude borrowings under the PPPLF, which are limited to the face value of the loans originated under the PPP. At June 30, 2020, Customers had $4.4 billion of borrowings under the PPPLF, with a borrowing capacity of up to $4.8 billion, which is the face value of the qualifying loans Customers has originated under the PPP.
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Senior Notes and Subordinated Debt
Long-term senior notes and subordinated debt at June 30, 2020 and December 31, 2019 were as follows:

June 30, 2020December 31, 2019
(dollars in thousands)
Issued byRankingAmountAmountRateIssued AmountDate IssuedMaturityPrice
Customers BancorpSenior$24,492  $24,432  4.500 %$25,000  September 2019September 2024100.000 %
Customers BancorpSenior99,341  99,198  3.950 %100,000  June 2017June 202299.775 %
Total other borrowings123,833  123,630  
Customers Bancorp
Subordinated (1)(2)
72,131  72,040  5.375 %74,750  December 2019December 2034100.000 %
Customers Bank
Subordinated (1)(3)
109,124  109,075  6.125 %110,000  June 2014June 2029100.000 %
Total subordinated debt$181,255  $181,115  

(1)The subordinated notes qualify as Tier 2 capital for regulatory capital purposes.
(2)Customers Bancorp 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 December 30, 2029.
(3)The subordinated notes will bear an annual fixed rate of 6.125% until June 26, 2024. From June 26, 2024 until maturity, the notes will bear an annual interest rate equal to the three-month LIBOR plus 344.3 basis points. 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.


SHAREHOLDERS' EQUITY

The components of shareholders' equity were as follows at the dates indicated:
(dollars in thousands)June 30, 2020December 31, 2019Change% Change
Preferred stock$217,471  $217,471  $—  — %
Common stock32,791  32,617  174  0.5 %
Additional paid in capital450,665  444,218  6,447  1.5 %
Retained earnings338,665  381,519  (42,854) (11.2)%
Accumulated other comprehensive loss, net(9,965) (1,250) (8,715) 697.2 %
Treasury stock(21,780) (21,780) —  — %
Total shareholders' equity$1,007,847  $1,052,795  $(44,948) (4.3)%

Shareholders’ equity decreased $44.9 million, or 4.3%, to $1.0 billion at June 30, 2020 when compared to shareholders' equity of $1.1 billion at December 31, 2019. The decrease primarily resulted from a decrease in retained earnings of $42.9 million and an increase in accumulated other comprehensive loss, net of $8.7 million, partially offset by an increase of $6.4 million in additional paid in capital. The decrease in retained earnings primarily resulted from the adoption of CECL on January 1, 2020, which reduced retained earnings by $61.5 million, and $7.2 million in preferred stock dividends, partially offset by net income of $25.8 million. The increase in accumulated other comprehensive loss, net primarily resulted from a decline in the fair value of cash flow hedges due to changes in market interest rates during the six months ended June 30, 2020, partially offset by an increase in the fair value of available for sale debt securities due to the timing of purchases and changes in market interest rates during the six months ended June 30, 2020. The increase in additional paid in capital resulted primarily from the issuance of common stock under share-based compensation arrangements for the six months ended June 30, 2020.


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 and lease 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 its 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 funding. Customers' principal sources of funds are deposits, borrowings, principal and interest payments on loans and
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leases, other funds from operations, and proceeds from common and preferred stock issuances.  Borrowing arrangements are maintained with the FHLB and the FRB to meet short-term liquidity needs.  Longer-term borrowing arrangements are also maintained with the FHLB and FRB. As of June 30, 2020, Customers' borrowing capacity with the FHLB was $3.0 billion, of which $0.9 billion was utilized in borrowings and $1.0 billion of available capacity was utilized to collateralize state and municipal deposits. As of December 31, 2019, Customers' borrowing capacity with the FHLB was $3.4 billion, of which $0.9 billion was utilized in borrowings and $1.4 billion of available capacity was utilized to collateralize state and municipal deposits. As of June 30, 2020 and December 31, 2019, Customers' borrowing capacity with the FRB was $152.4 million and $136.8 million, respectively.
Beginning in second quarter 2020, Customers began participating in the PPPLF, in which Federal Reserve Banks extend non-recourse loans to institutions that are eligible to make PPP loans. Only PPP loans that are guaranteed by the SBA under the PPP, with respect to both principal and interest that are originated by an eligible institution, may be pledged as collateral to the Federal Reserve Banks.
The table below summarizes Customers' cash flows for the six months ended June 30, 2020 and 2019:
Six Months Ended June 30,
(amounts in thousands)20202019Change% Change
Net cash provided by (used in) operating activities $39,577  $3,129  $36,448  1,164.8 %
Net cash provided by (used in) investing activities(5,375,772) (1,213,324) (4,162,448) 343.1 %
Net cash provided by (used in) financing activities6,191,020  1,243,855  4,947,165  397.7 %
Net increase (decrease) in cash and cash equivalents$854,825  $33,660  $821,165  2,439.6 %

Cash flows provided by (used in) operating activities
Cash provided by operating activities of $39.6 million for the six months ended June 30, 2020 primarily resulted from an increase accrued interest payable and other liabilities of $88.3 million, net income of $25.8 million, partially offset by an increase of $108.3 million in accrued interest receivable and other assets.
Cash provided by operating activities of $3.1 million for the six months ended June 30, 2020 primarily resulted from net income of $24.7 million, non-cash operating adjustments of $25.2 million, and an increase of $16.5 million in accrued interest payable and other liabilities, partially offset by an increase of $63.3 million in accrued interest receivable and other assets.
Cash flows provided by (used in) investing activities
Cash used in investing activities of $5.4 billion for the six months ended June 30, 2020 primarily resulted from a net increase in loans and leases, excluding mortgage warehouse loans of $4.5 billion primarily related to PPP loan originations, net originations of mortgage warehouse loans of $540.9 million, purchases of loans of $211.1 million, and purchases of investment securities available for sale of $280.4 million, partially offset by proceeds from sales, maturities, calls, and principal repayments of investment securities of $109.2 million.
Cash used in investing activities of $1.2 billion for the six months ended June 30, 2019 primarily resulted from net originations of mortgage warehouse loans of $622.4 million and purchases of loans of $555.6 million.
Cash flows provided by (used in) financing activities
Cash provided by financing activities of $6.2 billion for the six months ended June 30, 2020 primarily resulted from net increases in long-term borrowed funds from the FRB of $4.4 billion primarily to finance the PPP loan originations and deposits of $2.3 billion, partially offset by a net decrease in federal funds purchased of $538.0 million.
Cash provided by financing activities of $1.2 billion for the six months ended June 30, 2019 primarily resulted from increases in deposits of $1.0 billion, proceeds from long-term FHLB borrowings of $350.0 million, and federal funds purchased of $219.0 million, partially offset by repayments of short-term borrowed funds from the FHLB of $336.0 million, repayments of long-term debt of $25.0 million, and preferred stock dividends paid of $7.2 million.



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CAPITAL ADEQUACY
The Bank and Customers Bancorp are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet 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.
In first quarter 2020, U.S federal banking regulatory agencies permitted banking organizations to phase-in, for regulatory capital purposes, the day-one impact of the new CECL accounting rule on retained earnings over a period of three years. As part of its response to the impact of COVID-19, on March 31, 2020, the U.S. federal banking regulatory agencies issued an interim final rule that provided the option to temporarily delay certain effects of CECL on regulatory capital for two years, followed by a three-year transition period. The interim final rule allows banking organizations to delay for two years 100% of the day-one impact of adopting CECL and 25% of the cumulative change in the reported allowance for credit losses since adopting CECL. Customers has elected to adopt the interim final rule, which is reflected in the regulatory capital data presented below.
In April 2020, the U.S. federal banking regulatory agencies issued an interim final rule that permits banks to exclude the impact of participating in the SBA PPP program in their regulatory capital ratios. Specifically, PPP loans are zero percent risk weighted and a bank can exclude all PPP loans pledged as collateral to the PPPLF from its average total consolidated assets for purposes of calculating the Tier 1 capital to average assets ratio (i.e. leverage ratio). Customers applied this regulatory guidance in the calculation of its regulatory capital ratios presented below.

Quantitative measures established by regulation to ensure capital adequacy require the Bank and the Bancorp to maintain minimum amounts and ratios (set forth in the following table) of common equity Tier 1, Tier 1, and total capital to risk-weighted assets, and Tier 1 capital to average assets (as defined in the regulations). At June 30, 2020 and December 31, 2019, the Bank and the Bancorp met all capital adequacy requirements to which they were subject.
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Generally, to comply with the regulatory definition of adequately capitalized, or well capitalized, respectively, or to comply with the Basel III capital requirements, an institution must at least maintain the common equity Tier 1, Tier 1, and total risk-based capital ratios and the Tier 1 leverage ratio in excess of the related minimum ratios set forth in the following table:
Minimum Capital Levels to be Classified as:
 ActualAdequately CapitalizedWell CapitalizedBasel III Compliant
(dollars in thousands)AmountRatioAmountRatioAmountRatioAmountRatio
As of June 30, 2020:
Common equity Tier 1 capital (to risk-weighted assets)
Customers Bancorp, Inc.$853,818  7.765 %$494,780  4.500 %N/AN/A$769,657  7.000 %
Customers Bank$1,168,276  10.636 %$494,291  4.500 %$713,976  6.500 %$768,897  7.000 %
Tier 1 capital (to risk-weighted assets)
Customers Bancorp, Inc.$1,071,289  9.743 %$659,706  6.000 %N/AN/A$934,584  8.500 %
Customers Bank$1,168,276  10.636 %$659,055  6.000 %$878,740  8.000 %$933,661  8.500 %
Total capital (to risk-weighted assets)
Customers Bancorp, Inc.$1,311,527  11.928 %$879,608  8.000 %N/AN/A$1,154,486  10.500 %
Customers Bank$1,351,665  12.305 %$878,740  8.000 %$1,098,424  10.000 %$1,153,346  10.500 %
Tier 1 capital (to average assets)
Customers Bancorp, Inc.$1,071,289  8.790 %$487,512  4.000 %N/AN/A$487,512  4.000 %
Customers Bank$1,168,276  9.593 %$487,151  4.000 %$608,938  5.000 %$487,151  4.000 %
As of December 31, 2019:
Common equity Tier 1 capital (to risk-weighted assets)
Customers Bancorp, Inc.$821,810  7.984 %$463,211  4.500 %N/AN/A$720,551  7.000 %
Customers Bank$1,164,652  11.323 %$462,842  4.500 %$668,549  6.500 %$719,976  7.000 %
Tier 1 capital (to risk-weighted assets)
Customers Bancorp, Inc.$1,039,281  10.096 %$617,615  6.000 %N/AN/A$874,955  8.500 %
Customers Bank$1,164,652  11.323 %$617,122  6.000 %$822,829  8.000 %$874,256  8.500 %
Total capital (to risk-weighted assets)
Customers Bancorp, Inc.$1,256,309  12.205 %$823,487  8.000 %N/AN/A$1,080,827  10.500 %
Customers Bank$1,330,155  12.933 %$822,829  8.000 %$1,028,537  10.000 %$1,079,964  10.500 %
Tier 1 capital (to average assets)
Customers Bancorp, Inc.$1,039,281  9.258 %$449,026  4.000 %N/AN/A$449,026  4.000 %
Customers Bank$1,164,652  10.379 %$448,851  4.000 %$561,064  5.000 %$448,851  4.000 %
The capital ratios above reflect the capital requirements under "Basel III" adopted effective first quarter 2015 and the capital conservation buffer phased in beginning January 1, 2016. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers. As of June 30, 2020, the Bank and Customers Bancorp were in compliance with the Basel III requirements. See "NOTE 10 - REGULATORY CAPITAL" to Customers' unaudited financial statements for additional discussion regarding regulatory capital 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 the Bank's 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 sheet.
With commitments to extend credit, exposure 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
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conditional obligations as for on-balance sheet instruments.  Because they involve credit risk similar to extending a loan and lease, these financial instruments are subject to the Bank’s credit policy and other underwriting standards.
As of June 30, 2020 and December 31, 2019, the following off-balance sheet commitments, financial instruments and other arrangements were outstanding:
(amounts in thousands)June 30, 2020December 31, 2019
Commitments to fund loans and leases$404,528  $261,902  
Unfunded commitments to fund mortgage warehouse loans1,226,333  1,378,364  
Unfunded commitments under lines of credit and credit cards1,172,313  1,065,474  
Letters of credit26,419  48,856  
Other unused commitments2,466  2,736  
Commitments to fund loans and leases, unfunded commitments to fund mortgage warehouse loans, unfunded commitments under lines of credit, letters of credit, and credit cards are agreements to extend credit to or for the benefit of a customer in the ordinary course of the Bank's business.
Commitments to fund loans and leases and unfunded commitments under lines of credit may be obligations of the Bank 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.  The Bank evaluates each customer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if the Bank deems it necessary upon extension of credit, is based upon 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 its 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 the Bank to guarantee the performance of a customer to a third party. Letters of credit may obligate the Bank 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 and lease facilities to customers.
Effect of Government Monetary Policies
Our earnings are and will be affected by domestic economic conditions and the monetary and fiscal policies of the United States government and its agencies. An important function of the Federal Reserve Board is to regulate the money supply and interest rates. Among the instruments used to implement those objectives are open market operations in United States government securities and changes in reserve requirements against member bank deposits. These instruments are used in varying combinations to influence overall growth and distribution of bank loans and leases, investments, and deposits, and their use may also affect rates charged on loans and leases or paid for deposits.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Sensitivity
The largest component of Customers' net income is net interest income, and the majority of its financial instruments are interest rate sensitive assets and liabilities with various term structures and maturities.  One of the primary objectives of management is to optimize 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.  Customers' asset/liability committee actively seeks to monitor and control the mix of interest rate sensitive assets and interest rate sensitive liabilities.
Customers uses two complementary methods to analyze and measure interest rate sensitivity as part of the overall management of interest rate risk; they are income scenario modeling and estimates of EVE.  The combination of these two methods provides a reasonably comprehensive summary of the levels of interest rate risk of Customers' exposure to time factors and changes in interest rate environments.
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Income scenario modeling is used to measure interest rate sensitivity and manage interest rate risk.  Income scenario 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 scenario modeling, Customers has estimated the net interest income for the periods ending June 30, 2021 and December 31, 2020, based upon the assets, liabilities and off-balance sheet financial instruments in existence at June 30, 2020 and December 31, 2019. Customers has 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 at June 30, 2020, 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 downward rate shocks modeled will be revisited in the future if necessary and will be contingent upon additional Federal Reserve interest rate hikes. The following table reflects the estimated percentage change in estimated net interest income for the periods ending June 30, 2020 and December 31, 2019, resulting from changes in interest rates.
Net change in net interest income
% Change
Rate ShocksJune 30, 2020December 31, 2019
Up 3%7.8%3.3%
Up 2%5.8%2.7%
Up 1%3.2%1.6%
Down 1%4.2%(1.9)%
The net changes in net interest income in all scenarios are within Customers Bank's interest rate risk policy guidelines.
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 at June 30, 2020, current market interest rates were were only increased immediately by 100, 200, and 300 basis points. For downward rate shocks modeling a falling rate environment, current market rates were 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 downward rate shocks modeled will be revisited in the future if necessary and will be contingent upon additional Federal Reserve interest rate hikes. 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 June 30, 2020 and December 31, 2019, resulting from shocks to interest rates.
From base
Rate ShocksJune 30, 2020December 31, 2019
Up 3%(5.8)%(5.6)%
Up 2%(2.3)%(2.0)%
Up 1%(0.6)%(1.0)%
Down 1%(0.9)%(1.1)%
The net changes in EVE in all scenarios are within Customers Bank's interest rate risk policy guidelines.
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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Item 4. Controls and Procedures
(a) Management's Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, Customers Bancorp carried out an evaluation, under the supervision and with the participation of Customers Bancorp’s management, including Customers Bancorp’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Customers Bancorp’s disclosure controls and procedures as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Customers Bancorp’s disclosure controls and procedures were effective as of June 30, 2020.
(b) Changes in Internal Control Over Financial Reporting. During the quarter ended June 30, 2020, there have been no changes in Customers Bancorp's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Customers Bancorp's internal control over financial reporting.
The emergence of the COVID-19 pandemic during first quarter 2020 necessitated the execution of several Customers Bancorp contingency plans. Beginning in March 2020 and continuing through this filing date, Customers Bancorp had a substantial number of its team members working remotely under such contingency plans.
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Part II. OTHER INFORMATION
Item 1. Legal Proceedings
For information on Customers' legal proceedings, refer to “NOTE 15 – LOSS CONTINGENCIES” to the unaudited consolidated financial statements.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in “Risk Factors” included within the 2019 Form 10-K. There are no material changes from the risk factors included within the 2019 Form 10-K, other than the risks described below. The risks described within the 2019 Form 10-K and below are not the only risks facing us.  Additional risks and uncertainties not currently known to us or that we currently believe to be immaterial also may materially adversely affect our business, financial condition and/or operating results.  See “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Cautionary Note Regarding Forward-Looking Statements.”
The COVID-19 pandemic has impacted our business, and the ultimate impact on our business and financial results will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, lowered equity market valuations, created significant volatility and disruption in financial markets, and increased unemployment levels. In addition, the pandemic has resulted in temporary closures of many businesses and the institution of social distancing and sheltering in place requirements in many states and communities. As a result, the demand for our products and services may be significantly impacted. Furthermore, the pandemic has influenced and could further influence the recognition of credit losses in our loan and lease portfolios and has increased and could further increase our allowance for credit losses, particularly as businesses remain closed and as more customers may draw on their lines of credit or seek additional loans to help finance their businesses. Similarly, because of changing economic and market conditions affecting issuers, the securities we hold may lose value. Our business operations may also be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. In response to the pandemic, we have also enacted hardship relief assistance for customers experiencing financial difficulty as a result of COVID-19, including fee and penalty waivers, loan deferrals or other scenarios that may help our customers. In addition, we are a lender for the Small Business Administration's Paycheck Protection Program ("PPP") and other SBA, Federal Reserve or United States Treasury programs that have been or may be created in the future in response to the pandemic. These programs are new and their effects on Customers' business are uncertain. The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition, as well as our regulatory capital and liquidity ratios, will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

To the extent the COVID-19 pandemic continues to adversely affect the economy, and/or adversely affects our business, results of operations or financial condition, it may also have the effect of increasing the likelihood and/or magnitude of other risks described in the section captioned "Risk Factors" in our 2019 Form 10-K, including those risks related to business operations, industry/market, our securities and credit, or risks described in our other filings with the SEC.

Risks Related to the Proposed Sale of BankMobile Technologies to Megalith Financial Acquisition Corp.

We face a number of risks relating to our announced plans to sell BankMobile Technologies.
We have announced our plans to dispose of the technology arm of our BankMobile business through a merger transaction through which Megalith Financial Acquisition Corp. (“MFAC”), a special purpose acquisition company, will acquire the Bank’s subsidiary, BankMobile Technologies, Inc. (“BMT”). The completion of the merger will be subject to a number of conditions, including receipt by MFAC of stockholder approval of the transaction, receipt of all necessary regulatory approvals, MFAC meeting certain net tangible assets and minimum cash requirements and other conditions. Certain of the conditions will not be within our control, and we cannot guarantee you that we will be able to complete the merger on the terms we have agreed to with MFAC, or at all. The steps we take to complete this transaction may adversely affect our business and the value of Customers and/or BMT. Uncertainty as to our ability to complete the transaction and uncertainty as to the timing of the completion of the transaction may adversely affect analyst and shareholder views of our business and prospects, which could adversely affect our share price. Executing the merger may also result in the diversion of our management’s attention from Customers’ day-to-day operations generally, and the expenses we incur in executing the transaction may exceed our expectations, which may adversely affect our results of operations. In addition, even if we are successful
85
in completing the sale of BMT, it is possible that we and our shareholders may not receive the benefits we presently anticipate from this transaction.

Failure to complete the proposed sale of BMT could negatively impact our share price, our future business and financial results.
We cannot assure you that our proposed sale of BMT will be completed in the time frame we currently anticipate, or at all. If we do not complete the proposed sale, we and our shareholders will not receive the expected benefits of such proposed transactions, but we will have incurred significant costs in connection with our pursuit of the transaction. In addition, we cannot assure you that alternative opportunities to sell or otherwise divest BMT will be available to us, or, if available, will be on terms at least as favorable to us and our shareholders as the terms of the proposed merger with MFAC. 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 transactions are not completed, and uncertainty as to whether alternative transactions may be available for the disposition of BMT, 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 BMT, which could further adversely affect the value of our securities.

If we are unable to complete the proposed sale of BMT 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 BMT in a timely fashion, or at all, we will continue to face the risks and challenges associated with the BankMobile business, including those risks described in the “Risk Factors” discussion in our 2019 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 the BankMobile business, and any failure to preserve or increase the value of the BankMobile business could adversely affect our business as a whole and our ability to divest BMT in an alternative transaction on favorable terms, or at all.

We will continue to own a significant amount of the resulting company following the completion of BMT’s merger with MFAC and, as such, the future value of the stock consideration we receive in the merger and our ability to realize the value of our own ownership of BM Technologies shares will be subject to a number of risks and challenges.
Following completion of the proposed merger, we expect to own approximately 47% of the outstanding stock of BM Technologies, depending on the amount of shares MFAC stockholders elect to have redeemed in connection with the completion of the merger. As a result, the benefits we obtain from the stock consideration we will receive in the merger will depend on BM Technologies’s future performance, as well as factors impacting the value of fintech companies generally, conditions in the financial markets and other factors affecting public companies. Although our BankMobile division, as an operating segment of ours, recently became profitable, there can be no assurance that BMT, a component of our BankMobile division, will be profitable following completion of the merger or that BM Technologies will be able to successfully execute its business plan, address competitive conditions in its markets and take other actions necessary to increase its value and the value of our shareholdings. In addition, although we have stated that it is our plan to reduce our ownership stake in the post-merger company gradually following the closing of the transaction, we cannot assure you that we will be able to do so on favorable terms or in the time frame we currently anticipate. We also are subject to a lock-up agreement that will prevent us from disposing of any of the shares, except in limited circumstances, for a period of up to 180 days from the closing of the transaction.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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 not to exceed a 20% premium over the then current book value. On December 11, 2018, the Bancorp's board of directors amended the terms of the 2013 stock repurchase plan to adjust the repurchase terms and book value measurement date such that Customers was authorized to purchase shares of common stock at prices not to exceed the book value per share of Customers' common stock measured as of September 30, 2018. Customers repurchased all remaining authorized shares pursuant to this program in January 2019. Accordingly, there were no common shares repurchased during second quarter 2020.
Dividends on Common Stock
Customers Bancorp historically has not paid any cash dividends on its shares of common stock and does not expect to do so in the foreseeable future.
Any future determination relating to our 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 our 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.
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In addition, as a bank holding company, Customers Bancorp is subject to general regulatory restrictions on the payment of cash dividends. Federal bank regulatory agencies have the authority to prohibit bank holding companies from engaging in unsafe or unsound practices in conducting their business, which, depending on the financial condition and liquidity of the holding company at the time, could include the payment of dividends. Further, various federal and state statutory provisions limit the amount of dividends that bank subsidiaries can pay to their parent holding company without regulatory approval. Generally, subsidiaries are prohibited from paying dividends when doing so would cause them to fall below the regulatory minimum capital levels, and limits exist on paying dividends in excess of net income for specified periods.
Beginning January 1, 2015, the ability to pay dividends and the amounts that can be paid will be limited to the extent the Bank's capital ratios do not exceed the minimum required levels plus 250 basis points, as these requirements were phased in through January 1, 2019.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information

None
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Table of Contents
Item 6. Exhibits
Exhibit No.Description
2.1
*
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
10.1
88
Table of Contents
10.2
10.3
10.4
31.1
31.2
32.1
32.2
101
The following financial statements from the Customers’ Annual Report on Form 10-Q as of and for the year ended June 30, 2020, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements.
104Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document
101.SCHXBRL Taxonomy Extension Schema Document.
101.CALXBRL Taxonomy Extension Calculation Linkbase Document.
101.DEFXBRL Taxonomy Extension Definitions Linkbase Document.
101.LABXBRL Taxonomy Extension Label Linkbase Document.
101.PREXBRL Taxonomy Extension Presentation Linkbase Document.
* Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule will be furnished to the SEC upon its request.
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SIGNATURES
Pursuant to the requirements 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.
Customers Bancorp, Inc.
August 10, 2020By: /s/ Jay S. Sidhu
Name: Jay S. Sidhu
Title: Chairman and Chief Executive Officer
(Principal Executive Officer)
August 10, 2020By: /s/ Carla A. Leibold
Name: Carla A. Leibold
Title: Chief Financial Officer
(Principal Financial Officer)


90
Table of Contents
Exhibit Index
Exhibit No.Description
2.1
*
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
10.1
10.2
91
Table of Contents
10.3
10.4
31.1
31.2
32.1
32.2
101
The following financial statements from the Customers’ Annual Report on Form 10-Q as of and for the year ended June 30, 2020, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Shareholders' Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to the Consolidated Financial Statements.
104Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document
101.SCHXBRL Taxonomy Extension Schema Document.
101.CALXBRL Taxonomy Extension Calculation Linkbase Document.
101.DEFXBRL Taxonomy Extension Definitions Linkbase Document.
101.LABXBRL Taxonomy Extension Label Linkbase Document.
101.PREXBRL Taxonomy Extension Presentation Linkbase Document.
* Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule will be furnished to the SEC upon its request.
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