Disclosures About Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2023

Fair Value Disclosures [Abstract]

Disclosures About Fair Value of Financial Instruments

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 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 ("ASC 820"), as explained below.

In accordance with ASC 820, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for Customers' various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The fair value guidance provides a consistent definition of fair value, focusing on an exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.

The fair value guidance also establishes a fair value hierarchy and describes the following three levels used to classify fair value measurements.

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require 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, 2023 and December 31, 2022:

Financial Instruments Recorded at Fair Value on a Recurring Basis

Investment securities:

The fair values of equity securities with a readily determinable fair value, AFS 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).

When quoted market prices are not available, Customers employs an independent pricing service that utilizes matrix pricing to calculate fair value. Such fair value measurements consider observable data such as dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayments speeds, credit information, and respective terms and conditions for debt instruments. Management maintains procedures to monitor the pricing service's results and has an established process to challenge their valuations, or methodologies, that appear unusual or unexpected.

Customers also utilizes internally and externally developed models that use unobservable inputs due to limited or no market activity of the instrument. These models use unobservable inputs that are inherently judgmental and reflect our best estimates of the assumptions a market participant would use to calculate fair value. Certain unobservable inputs in isolation may have either a directionally consistent or opposite impact on the fair value of the instrument for a given change in that input. When multiple inputs are used within the valuation techniques, a change in one input in a certain direction may be offset by an opposite change from another input. 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.

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.

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 ("ASC 326"), in which the Bank has measured impairment generally based on the fair value of the loan’s collateral or DCF analysis. Fair value is generally determined based upon independent third-party appraisals of the properties that collateralize the loans, DCF 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.

The following information should not be interpreted as an estimate of Customers' fair value in its entirety because fair value calculations are only provided for a limited portion of Customers' assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making these estimates, comparisons between Customers' disclosures and those of other companies may not be meaningful.

The estimated fair values of Customers' financial instruments at June 30, 2023 and December 31, 2022 were as follows:

					Fair Value Measurements at June 30, 2023
(amounts in thousands)	Carrying Amount		Estimated Fair Value		Quoted 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	$	3,155,224	$	3,155,224	$	3,155,224	$	—	$	—
Debt securities, available for sale	2,797,940		2,797,940		—		2,746,115		51,825
Debt securities, held to maturity	1,258,560		1,212,248		—		497,814		714,434
Loans held for sale	78,108		78,108		—		1,234		76,874
Total loans and leases receivable, net of allowance for credit losses on loans and leases	13,693,143		13,298,144		—		1,006,268		12,291,876
FHLB, Federal Reserve Bank, and other restricted stock	126,240		126,240		—		126,240		—
Derivatives	26,003		26,003		—		25,937		66
Liabilities:
Deposits	$	17,950,431	$	17,923,322	$	13,093,728	$	4,829,594	$	—
FHLB advances	2,046,142		2,029,664		—		2,029,664		—
Other borrowings	123,710		100,666		—		100,666		—
Subordinated debt	182,091		148,371		—		148,371		—
Derivatives	37,662		37,662		—		37,662		—

					Fair Value Measurements at December 31, 2022
(amounts in thousands)	Carrying Amount		Estimated Fair Value		Quoted 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	$	455,806	$	455,806	$	455,806	$	—	$	—
Debt securities, available for sale	2,961,015		2,961,015		—		2,887,749		73,266
Debt securities, held to maturity	840,259		793,813		—		437,680		356,133
Loans held for sale	328,312		328,312		—		322		327,990
Total loans and leases receivable, net of allowance for credit losses on loans and leases	15,335,435		14,890,823		—		1,323,312		13,567,511
FHLB, Federal Reserve Bank, and other restricted stock	74,196		74,196		—		74,196		—
Derivatives	44,435		44,435		—		44,380		55
Liabilities:
Deposits	$	18,156,953	$	18,127,338	$	13,907,087	$	4,220,251	$	—
FHLB advances	800,000		781,113		—		781,113		—
Other borrowings	123,580		108,081		—		108,081		—
Subordinated debt	181,952		168,441		—		168,441		—
Derivatives	42,106		42,106		—		42,106		—

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, 2023 and December 31, 2022 were as follows:

	June 30, 2023
	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:
Asset-backed securities	$	—	$	74,712	$	51,825	$	126,537
Agency-guaranteed residential collateralized mortgage obligations	—		125,308		—		125,308
Collateralized loan obligations	—		831,253		—		831,253
Commercial mortgage-backed securities	—		132,474		—		132,474
Corporate notes	—		579,751		—		579,751
Private label collateralized mortgage obligations	—		1,002,617		—		1,002,617
Derivatives	—		25,937		66		26,003
Loans held for sale – fair value option	—		1,234		—		1,234
Loans receivable, mortgage warehouse – fair value option	—		1,006,268		—		1,006,268
Total assets – recurring fair value measurements	$	—	$	3,779,554	$	51,891	$	3,831,445
Liabilities
Derivatives	$	—	$	37,662	$	—	$	37,662
Measured at Fair Value on a Nonrecurring Basis:
Assets
Collateral-dependent loans	$	—	$	—	$	2,375	$	2,375
Total assets – nonrecurring fair value measurements	$	—	$	—	$	2,375	$	2,375

	December 31, 2022
	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:
Asset-backed securities	$	—	$	87,276	$	73,266	$	160,542
Agency-guaranteed residential collateralized mortgage obligations	—		133,864		—		133,864
Collateralized loan obligations	—		872,738		—		872,738
Commercial mortgage-backed securities	—		136,357		—		136,357
Corporate notes	—		595,253		—		595,253
Private label collateralized mortgage obligations	—		1,062,261		—		1,062,261
Derivatives	—		44,380		55		44,435
Loans held for sale – fair value option	—		322		—		322
Loans receivable, mortgage warehouse – fair value option	—		1,323,312		—		1,323,312
Total assets – recurring fair value measurements	$	—	$	4,255,763	$	73,321	$	4,329,084
Liabilities
Derivatives	$	—	$	42,106	$	—	$	42,106
Measured at Fair Value on a Nonrecurring Basis:
Assets
Collateral-dependent loans	$	—	$	—	$	4,819	$	4,819
Total assets – nonrecurring fair value measurements	$	—	$	—	$	4,819	$	4,819

The changes in asset-backed securities (Level 3 assets) measured at fair value on a recurring basis for the three and six months ended June 30, 2023 and 2022 are summarized in the table below.

	Asset-backed securities
(amounts in thousands)	Three Months Ended June 30,
	2023		2022
Balance at April 1	$	63,376	$	121,853
Principal payments and premium amortization	(10,444)		(18,147)
Increase in allowance for credit losses	(773)		—
Decrease in allowance for credit losses	—		317
Change in fair value recognized in OCI	(334)		2,896
Balance at June 30	$	51,825	$	106,919

	Asset-backed securities
(amounts in thousands)	Six Months Ended June 30,
	2023		2022
Balance at January 1	$	73,266	$	142,885
Principal payments and premium amortization	(21,660)		(34,496)
Increase in allowance for credit losses	(1,046)		(411)
Decrease in allowance for credit losses	61		—
Change in fair value recognized in OCI	1,204		(1,059)
Balance at June 30	$	51,825	$	106,919

There were no transfers between levels during the three and six months ended June 30, 2023 and 2022.

The following tables summarize financial assets and financial liabilities measured at fair value as of June 30, 2023 and December 31, 2022 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.

	Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands)	Fair Value Estimate		Valuation Technique	Unobservable Input	Range  (Weighted Average)
June 30, 2023
Asset-backed securities	$	51,825	Discounted cash flow	Discount rate Annualized loss rate Constant prepayment rate	9% - 10% (10%) 3% - 6% (5%) 15% - 28% (25%)

	Quantitative Information about Level 3 Fair Value Measurements
(dollars in thousands)	Fair Value Estimate		Valuation Technique	Unobservable Input	Range  (Weighted Average)
December 31, 2022
Asset-backed securities	$	73,266	Discounted cash flow	Discount rate Annualized loss rate Constant prepayment rate	9% - 9% (9%) 4% - 5% (5%) 19% - 25% (23%)