On August 8, 2024, the Federal Reserve Bank of Philadelphia disclosed that it had entered into a Written Agreement with Customers Bancorp, Inc. of West Reading PA (NYSE: CUBI)("Customers") and its wholly owned subsidiary, Customers Bank ("the bank"), regarding deficiencies in compliance policies and practices (including Board oversight) connected to its digital asset strategy, including an operating platform to allow for tokenized payments for customers. The weaknesses identified by the Federal Reserve appear widespread and encompass both BSA/AML requirements (Regulation H of the Board of Governors) and regulations issued by the Office of Foreign Assets Control of the U.S. Treasury Department.

As an indication of the nature of weaknesses identified by the Federal Reserve, KBRA notes the requirement for Customers to engage an independent third party to conduct a review of potentially suspicious transaction activity related to high-risk clients to ensure proper reporting from March 1, 2023, to August 31, 2023, a period of substantial client activity due partly to the turmoil at competing digital asset focused banks.

While the nature and magnitude of deficiencies identified by the Federal Reserve, as detailed in the Written Agreement, reflect adversely on Customers' enterprise risk management and compliance policies and procedures, after discussions with management, KBRA understands that corrective actions in certain areas had been initiated prior to the effective date of the Written Agreement. In addition, Customers hired a new Chief Compliance and AML Officer which was announced on August 9, 2024, and plans to hire additional human resources in these areas in the near-term. It is also KBRA’s understanding from discussions with management that the Federal Reserve’s Written Agreement cited no violations of law and has not issued any monetary fines. KBRA recognizes, as a mitigant to the nature of the Written Agreement, management’s multi-year effort to strengthen bank and consolidated risk-based regulatory capital ratios to levels that are currently above rated peers.

Considering the timeline required for various corrective actions, as detailed in the Written Agreement, KBRA plans to continue its ongoing dialogue with management in respect to these matters in an effort to measure its progress in resolving the deficiencies cited in the Written Agreement

About KBRA

KBRA is a full-service credit rating agency registered in the U.S., the EU, and the UK, and is designated to provide structured finance ratings in Canada. KBRA’s ratings can be used by investors for regulatory capital purposes in multiple jurisdictions.

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