10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
Form 10-Q
 
 
x
Quarterly report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2015

¨
Transition report pursuant Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     .
001-35542
(Commission File number)
 

(Exact name of registrant as specified in its charter)

 

Pennsylvania
 
27-2290659
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
1015 Penn Avenue
Suite 103
Wyomissing PA 19610
(Address of principal executive offices)
(610) 933-2000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
 
 
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 and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
 
¨
  
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
  
Smaller Reporting Company
 
¨
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 October 30, 2015, 26,882,383 shares of Voting Common Stock were issued and outstanding.
 




Table of Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
Table of Contents
 
 
 
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
 
Ex-31.1
 
 
 
 
 
Ex-31.2
 
 
 
 
 
Ex-32.1
 
 
 
 
 
Ex-32.2
 
 
 
 
 
Ex-101
 
 


2

Table of Contents


CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET — UNAUDITED
(amounts in thousands, except share and per share data)
 
September 30,
2015
 
December 31,
2014
ASSETS
 
 
 
Cash and due from banks
$
80,475

 
$
62,746

Interest-earning deposits
302,924

 
308,277

Cash and cash equivalents
383,399

 
371,023

Investment securities available for sale, at fair value
418,945

 
416,685

Loans held for sale (includes $1,680,010 and $1,335,668, respectively, at fair value)
1,730,002

 
1,435,459

Loans receivable
4,769,102

 
4,312,173

Allowance for loan losses
(33,823
)
 
(30,932
)
Total loans receivable, net of allowance for loan losses
4,735,279

 
4,281,241

FHLB, Federal Reserve Bank, and other restricted stock
63,514

 
82,002

Accrued interest receivable
16,512

 
15,205

FDIC loss sharing receivable
202

 
2,320

Bank premises and equipment, net
11,567

 
10,810

Bank-owned life insurance
156,909

 
138,676

Other real estate owned
8,433

 
15,371

Goodwill and other intangibles
3,654

 
3,664

Other assets
71,055

 
52,914

Total assets
$
7,599,471

 
$
6,825,370

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Demand, non-interest bearing
$
777,478

 
$
546,436

Interest-bearing
5,007,716

 
3,986,102

Total deposits
5,785,194

 
4,532,538

Federal funds purchased
50,000

 

FHLB advances
985,900

 
1,618,000

Other borrowings
88,250

 
88,250

Subordinated debt
110,000

 
110,000

Accrued interest payable and other liabilities
42,149

 
33,437

Total liabilities
7,061,493

 
6,382,225

Shareholders’ equity:
 
 
 
Preferred stock, par value $1.00 per share; liquidation preference $25.00 per share; 100,000,000 shares authorized, 2,300,000 and 0 shares issued and outstanding as of September 30, 2015 and December 31, 2014
55,569

 

Common stock, par value $1.00 per share; 200,000,000 shares authorized; 27,412,643 and 27,277,789 shares issued as of September 30, 2015 and December 31, 2014; 26,882,383 and 26,745,529 shares outstanding as of September 30, 2015 and December 31, 2014
27,413

 
27,278

Additional paid in capital
360,903

 
355,822

Retained earnings
107,731

 
68,421

Accumulated other comprehensive loss, net
(5,405
)
 
(122
)
Treasury stock, at cost (530,260 shares as of September 30, 2015 and 532,260 shares as of December 31, 2014)
(8,233
)
 
(8,254
)
Total shareholders’ equity
537,978

 
443,145

Total liabilities and shareholders’ equity
$
7,599,471

 
$
6,825,370

See accompanying notes to the unaudited consolidated financial statements.

3

Table of Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME — UNAUDITED
(amounts in thousands, except per share data)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Interest income:
 
 
 
 
 
 
 
Loans receivable
$
46,291

 
$
39,640

 
$
132,185

 
$
103,216

Loans held for sale
14,006

 
8,503

 
38,428

 
20,301

Investment securities
2,283

 
2,361

 
6,899

 
7,944

Other
1,156

 
794

 
4,625

 
1,805

Total interest income
63,736

 
51,298

 
182,137

 
133,266

Interest expense:
 
 
 
 
 
 
 
Deposits
9,022

 
6,179

 
24,693

 
17,321

Other borrowings
1,539

 
1,494

 
4,523

 
3,834

FHLB advances
1,556

 
1,711

 
5,044

 
3,348

Subordinated debt
1,685

 
1,700

 
5,055

 
1,826

Total interest expense
13,802

 
11,084

 
39,315

 
26,329

Net interest income
49,934

 
40,214

 
142,822

 
106,937

Provision for loan losses
2,094

 
5,035

 
14,393

 
12,288

Net interest income after provision for loan losses
47,840

 
35,179

 
128,429

 
94,649

Non-interest income:
 
 
 
 
 
 
 
Mortgage warehouse transactional fees
2,792

 
2,154

 
7,864

 
6,128

Bank-owned life insurance
1,177

 
976

 
3,407

 
2,646

Gain on sale of loans
1,131

 
695

 
3,189

 
1,266

Deposit fees
265

 
192

 
691

 
618

Mortgage loans and banking income
167

 
212

 
605

 
2,175

Gain (loss) on sale of investment securities
(16
)
 

 
(85
)
 
3,191

Other
655

 
873

 
2,626

 
3,298

Total non-interest income
6,171

 
5,102

 
18,297

 
19,322

Non-interest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
14,981

 
12,070

 
43,381

 
33,012

FDIC assessments, taxes, and regulatory fees
3,222

 
3,320

 
7,495

 
8,529

Professional services
2,673

 
1,671

 
7,378

 
5,834

Technology, communication and bank operations
2,422

 
2,297

 
7,791

 
6,767

Occupancy
2,169

 
2,119

 
6,469

 
6,061

Other real estate owned
1,722

 
603

 
2,026

 
1,845

Advertising and promotion
330

 
261

 
1,106

 
1,104

Loan workout
285

 
388

 
541

 
1,306

Other
2,503

 
1,950

 
7,245

 
6,592

Total non-interest expense
30,307

 
24,679

 
83,432

 
71,050

Income before income tax expense
23,704

 
15,602

 
63,294

 
42,921

Income tax expense
8,415

 
3,940

 
22,497

 
12,885

Net income
15,289

 
11,662

 
40,797

 
30,036

               Preferred stock dividend
980

 

 
1,487

 

               Net income available to common shareholders
$
14,309

 
$
11,662

 
$
39,310

 
$
30,036

Basic earnings per common share
$
0.53

 
$
0.44

 
$
1.47

 
$
1.12

Diluted earnings per common share
0.50

 
0.42

 
1.37

 
1.08


See accompanying notes to the unaudited consolidated financial statements.

4

Table of Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — UNAUDITED
(amounts in thousands)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
15,289

 
$
11,662

 
$
40,797

 
$
30,036

Unrealized gains (losses) on securities:
 
 
 
 
 
 
 
Unrealized holding gains (losses) on securities arising during the period
261

 
(1,886
)
 
(4,703
)
 
11,335

Income tax effect
(98
)
 
660

 
1,720

 
(3,967
)
Less: reclassification adjustment for (gains) losses on securities included in net income
16

 

 
85

 
(3,191
)
Income tax effect
(6
)
 

 
(32
)
 
1,117

Net unrealized gains (losses)
173

 
(1,226
)
 
(2,930
)
 
5,294

Unrealized gains (losses) on cash flow hedges:
 
 
 
 
 
 
 
Unrealized gains (losses) on cash flow hedges arising during the period
(2,341
)
 
661

 
(3,841
)
 
(296
)
Income tax effect
877

 
(235
)
 
1,488

 
100

Net unrealized gains (losses)
(1,464
)
 
426

 
(2,353
)
 
(196
)
Other comprehensive income (loss), net of tax
(1,291
)
 
(800
)
 
(5,283
)
 
5,098

Comprehensive income
$
13,998

 
$
10,862

 
$
35,514

 
$
35,134

 

See accompanying notes to the unaudited consolidated financial statements.

5

Table of Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY — UNAUDITED
(amounts in thousands, except shares outstanding data)
 
 
Nine Months Ended September 30, 2015
 
Preferred Stock
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
Shares of
Preferred
Stock
Outstanding
 
Preferred Stock
 
Shares of
Common
Stock
Outstanding
 
Common
Stock
 
Additional
Paid in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive Loss
 
Treasury
Stock
 
Total
Balance, January 1, 2015

 
$

 
26,745,529

 
$
27,278

 
$
355,822

 
$
68,421

 
$
(122
)
 
$
(8,254
)
 
$
443,145

Net income

 

 

 

 

 
40,797

 

 

 
40,797

Other comprehensive loss

 

 

 

 

 

 
(5,283
)
 

 
(5,283
)
Issuance of preferred stock, net of offering costs
2,300,000

 
55,569

 

 

 

 

 

 

 
55,569

Preferred stock dividend

 

 

 

 

 
(1,487
)
 

 

 
(1,487
)
Share-based compensation expense

 

 

 

 
3,541

 

 

 

 
3,541

Issuance of common stock under share-based compensation arrangements

 

 
136,854

 
135

 
1,540

 

 

 
21

 
1,696

Balance, September 30, 2015
2,300,000

 
$
55,569

 
26,882,383

 
$
27,413

 
$
360,903

 
$
107,731

 
$
(5,405
)
 
$
(8,233
)
 
$
537,978

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
 
Preferred Stock
 
Common 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, January 1, 2014

 
$

 
24,224,151

 
$
24,756

 
$
307,231

 
$
71,008

 
$
(8,118
)
 
$
(8,254
)
 
$
386,623

Net income

 

 

 

 

 
30,036

 

 

 
30,036

Other comprehensive income

 

 

 

 

 

 
5,098

 

 
5,098

Stock dividend

 

 
2,429,375

 
2,429

 
43,364

 
(45,799
)
 

 
 
 
(6
)
Share-based compensation expense

 

 

 

 
3,124

 

 

 

 
3,124

Issuance of common stock under share-based compensation arrangements

 

 
81,509

 
82

 
842

 

 

 

 
924

Balance, September 30, 2014

 
$

 
26,735,035

 
$
27,267

 
$
354,561

 
$
55,245

 
$
(3,020
)
 
$
(8,254
)
 
$
425,799

See accompanying notes to the unaudited consolidated financial statements.

6

Table of Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(amounts in thousands) 
 
Nine Months Ended
September 30,
 
2015
 
2014
Cash Flows from Operating Activities
 
 
 
Net income
$
40,797

 
$
30,036

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Provision for loan losses, net of change to FDIC receivable and clawback liability
14,393

 
12,288

Provision for depreciation and amortization
3,034

 
2,782

Share-based compensation
4,112

 
4,048

Deferred taxes
(7,580
)
 
117

Net amortization of investment securities premiums and discounts
623

 
574

Loss (gain) on sale of investment securities
85

 
(3,191
)
Gain on sale of mortgages and other loans
(3,135
)
 
(3,401
)
Origination of loans held for sale
(23,148,641
)
 
(12,298,823
)
Proceeds from the sale of loans held for sale
22,804,119

 
11,817,512

Increase in FDIC loss sharing receivable net of clawback liability
(530
)
 
(2,713
)
Amortization (accretion) of fair value discounts
(794
)
 
(231
)
Net loss on sales of other real estate owned
509

 
728

Valuation and other adjustments to other real estate owned, net of FDIC receivable
917

 
641

Earnings on investment in bank-owned life insurance
(3,407
)
 
(2,646
)
Increase in accrued interest receivable and other assets
(9,860
)
 
(8,874
)
Increase in accrued interest payable and other liabilities
5,087

 
5,550

Net Cash Used In Operating Activities
(300,271
)
 
(445,603
)
Cash Flows from Investing Activities
 
 
 
Proceeds from maturities, calls and principal repayments of securities available for sale
60,966

 
35,716

Proceeds from sales of investment securities available for sale
806

 
213,249

Purchases of investment securities available for sale
(69,358
)
 
(149,940
)
Net increase in loans
(606,168
)
 
(1,625,024
)
Purchase of loan portfolios

 
(308,242
)
Proceeds from sales of loans
192,275

 
109,913

Purchases of bank-owned life insurance
(15,000
)
 
(30,465
)
Net proceeds from (purchases of) FHLB, Federal Reserve Bank, and other restricted stock
18,488

 
(42,218
)
Reimbursements from the FDIC on loss sharing agreements
1,940

 
3,329

Purchases of bank premises and equipment
(2,439
)
 
(1,321
)
Proceeds from sales of other real estate owned
5,572

 
6,509

Net Cash Used In Investing Activities
(412,918
)
 
(1,788,494
)
Cash Flows from Financing Activities
 
 
 
Net increase in deposits
1,252,674

 
1,324,193

Net (decrease) increase in short-term borrowed funds from the FHLB
(657,100
)
 
610,000

Net increase in federal funds purchased
50,000

 

Proceeds from long-term FHLB borrowings
25,000

 
265,000

Net proceeds from issuance of long-term debt

 
133,142

Net proceeds from issuance of preferred stock
55,569

 

        Preferred stock dividends paid
(1,308
)
 

        Proceeds from issuance of common stock
730

 

Net Cash Provided by Financing Activities
725,565

 
2,332,335

Net Increase in Cash and Cash Equivalents
12,376

 
98,238

Cash and Cash Equivalents – Beginning
371,023

 
233,068

Cash and Cash Equivalents – Ending
$
383,399

 
$
331,306

 
 
 
 
 
(continued)

 
 
 
 
 
 
Supplementary Cash Flows Information
 
 
 
Interest paid
$
36,128

 
$
23,840

Income taxes paid
30,159

 
18,375

Non-cash items:
 
 
 
Transfer of loans to other real estate owned
$
3,198

 
$
13,368

Transfer of loans held for investment to held for sale

 
164,681

Transfer of loans held for sale to held for investment
30,365

 

See accompanying notes to the unaudited consolidated financial statements.

7

Table of Contents

CUSTOMERS BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
NOTE 1 — DESCRIPTION OF THE BUSINESS
Customers Bancorp, Inc. (the “Bancorp” or “Customers Bancorp”) is a bank holding company engaged in banking activities through its wholly owned subsidiary, Customers Bank (the “Bank”), collectively referred to as "Customers" herein. Customers Bancorp also has made certain equity investments through its wholly owned subsidiaries CB Green Ventures Pte Ltd. and CUBI India Ventures Pte Ltd.
The consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).
Customers Bancorp, Inc. and its wholly owned subsidiaries, Customers Bank and non-bank subsidiaries, serve residents and businesses in Southeastern Pennsylvania (Bucks, Berks, Chester, Philadelphia and Delaware Counties), Rye, New York (Westchester County), Hamilton, New Jersey (Mercer County), Boston, Massachusetts, Providence, Rhode Island, Portsmouth, New Hampshire, and Manhattan, New York.  The Bank has 14 branches and provides commercial banking products, primarily loans and deposits. Customers Bank provides loan products to customers through its loan production offices in Boston, Massachusetts, Providence, Rhode Island, Portsmouth, New Hampshire, Manhattan and Melville, New York and Philadelphia, Pennsylvania. The Bank also provides liquidity to residential mortgage originators nationwide through commercial loans to mortgage companies. Customers Bank is subject to regulation of the Pennsylvania Department of Banking and Securities and the Federal Reserve Bank and is periodically examined by those regulatory authorities.
NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation
The interim unaudited consolidated financial statements of Customers Bancorp, Inc. and subsidiaries have been prepared 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, 2014 consolidated balance sheet presented in this report has been derived from Customers Bancorp’s audited 2014 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 2014 consolidated financial statements of Customers Bancorp and subsidiaries included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 filed with the SEC on February 27, 2015. That Form 10-K describes Customers Bancorp’s significant accounting policies, which include its policies on Principles of Consolidation; Cash and Cash Equivalents; Restrictions on Cash and Amounts Due from Banks; Investment Securities; Loan Accounting Framework; Allowance for Loan Losses; Goodwill; Investments in FHLB, Federal Reserve Bank, and other restricted stock; Other Real Estate Owned; FDIC Loss Sharing Receivable; Bank Owned Life Insurance; Bank Premises and Equipment; Treasury Stock; Income Taxes; Share-Based Compensation; Derivative Instruments and Hedging; Comprehensive Income; Earnings per Share; Segment Information; and Accounting Changes. Certain prior period amounts have been reclassified to conform to current period presentation. Results for interim periods are not necessarily indicative of those that may be expected for the fiscal year.
Recently Issued Accounting Standards
In September 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update (“ASU”) 2015-16, Simplifying the Accounting for Measurement-Period Adjustments. To simplify the accounting for adjustments made to provisional amounts recognized in a business combination, the guidance in this ASU eliminates the requirement to retrospectively account for those adjustments and requires an entity to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The guidance in this ASU is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years and should be applied prospectively to adjustment to provisional amounts that occur after the effective date of this ASU. Customers does not expect this ASU to have a significant impact on its financial condition or results of operations.
In April 2015 and August 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs and ASU 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements-

8

Table of Contents

Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, respectively. The guidance in these ASUs is intended to simplify presentation of debt issuance costs, and requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. The guidance in these ASUs is effective for interim and annual periods beginning after December 15, 2015. Customers does not expect these ASUs to have a significant impact on its financial condition or results of operations.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis. The guidance in this ASU is intended to amend the update, which changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The amendments in this update affect the following areas:
1.
Limited partnerships and similar legal entities.
2.
Evaluating fees paid to a decision maker or a service provider as a variable interest.
3.
The effect of fee arrangements on the primary beneficiary determination.
4.
The effect of related parties on the primary beneficiary determination.
5.
Certain investment funds.
The guidance in this ASU is effective for annual and interim periods beginning after December 15, 2015. Customers does not expect this ASU to have a significant impact on its financial condition or results of operations.
In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20)Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. The guidance in this ASU was issued as part of the FASB's initiative to reduce complexity in accounting standards and eliminates from GAAP the concept of extraordinary items. The guidance in this update is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2015. Customers does not expect this ASU to have a significant impact on its financial condition or results of operations.
In November 2014, the FASB issued ASU 2014-16, Determining Whether the Host contract in a Hybrid Financial Instrument in the Form of a Share is More Akin to Debt or to Equity. The guidance in this ASU requires entities that issue or invest in a hybrid financial instrument to separate an embedded derivative feature from a host contract and account for the feature as a derivative. In the case of derivatives embedded in a hybrid financial instrument that is issued in the form of a share, that criterion requires evaluating whether the nature of the host contract is more akin to debt or to equity and whether the economic characteristics and risks of the embedded derivative feature are clearly and closely related to the host contract. If the host contract is akin to equity, then equity-like features (for example, a conversion option) are considered clearly and closely related to the host contract and, thus, would not be separated from the host contract. If the host contract is akin to debt, then equity-like features are not considered clearly and closely related to the host contract. In the latter case, an entity may be required to separate the equity-like embedded derivative feature from the debt host contract if certain other criteria in Subtopic 815-15 are met. Similarly, debt-like embedded derivative features may require separate accounting from an equity-like host contract. The guidance in this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Customers does not expect this ASU to have a significant impact on its financial condition or results of operations.
 
In August 2014, the FASB issued ASU 2014-14, Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. The guidance in this ASU affects creditors that hold government-guaranteed mortgage loans, including those guaranteed by the FHA and the VA. It requires that a mortgage loan be derecognized and a separate other receivable be recognized upon foreclosure if the following conditions are met:

1.
The loan has a government guarantee that is not separable from the loan before foreclosure.
2.
At the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim.
3.
At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed.

Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and
interest) expected to be recovered from the guarantor. The guidance in this ASU was effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The guidance may be applied using a prospective transition method in which a reporting entity applies the guidance to foreclosures that occur after the date of adoption, or a modified retrospective transition using a cumulative-effect adjustment (through a reclassification to a separate other receivable) as of the beginning of the annual period of adoption. Prior periods should not be adjusted. A

9

Table of Contents

reporting entity must apply the same method of transition as elected under ASU 2014-04. The adoption of this ASU in first quarter 2015 did not have a significant impact on Customers' financial condition or results of operations.

In August 2014, the FASB issued ASU 2014-13, Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity. The guidance in this ASU applies to a reporting entity that is required to consolidate a collateralized financing entity under the Variable Interest Entities guidance when: (1) the reporting entity measures all of the financial assets and the financial liabilities of that consolidated collateralized financing entity at fair value in the consolidated financial statements based on other Codification Topics; and (2) the changes in the fair values of those financial assets and financial liabilities are reflected in earnings. The guidance in this ASU is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted as of the beginning of an annual period. Customers does not expect this ASU to have a significant impact on its financial condition or results of operations.
In June 2014, the FASB issued ASU 2014-12, Compensation-Stock Compensation. The guidance in this ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period is treated as a performance condition. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite period, the remaining unrecognized cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period. The guidance in this ASU is effective for annual and interim periods beginning after December 15, 2015. Customers does not expect this ASU to have a significant impact on its financial condition or results of operations.
In June 2014, the FASB issued ASU 2014-11, Transfers and Servicing. The amendments in this update require that repurchase-to-maturity transactions be accounted for as secured borrowings consistent with the accounting for other repurchase agreements. In addition, the amendments require separate accounting for a transfer of a financial asset executed contemporaneously with a repurchase agreement with the same counterparty (a repurchase financing), which will result in secured borrowing accounting for the repurchase agreement. The amendments require an entity to disclose information about transfers accounted for as sales in transactions that are economically similar to repurchase agreements, in which the transferor retains substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. In addition the amendments require disclosure of the types of collateral pledged in repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions and the tenor of those transactions. The guidance in this ASU was effective in the second quarter 2015. The adoption of this ASU did not have a significant impact on Customers financial condition or results of operations.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers.  This ASU establishes a comprehensive revenue recognition standard for virtually all industries in U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate and construction industries. The revenue standard’s core principal is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) identify the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, (v) recognize revenue when (or as) the entity satisfies the performance obligation. Three basic transition methods are available - full retrospective, retrospective with certain practical expedients, and a cumulative effect approach. Under the cumulative effect alternative, an entity would apply the new revenue standard only to contracts that are incomplete under legacy U.S. GAAP at the date of initial application and recognize the cumulative effect of the new standard as an adjustment to the opening balance of retained earnings. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The guidance in this ASU is now effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Customers does not expect this ASU to have a significant impact on its financial condition or results of operations.
In January 2014, the FASB issued ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, a consensus of the FASB Emerging Issues Task Force. The guidance in this ASU clarifies that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of

10

Table of Contents

residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The ASU also requires additional related interim and annual disclosures. The guidance in this ASU was effective in first quarter 2015. The adoption of this ASU did not have a significant impact on Customers' financial condition or results of operations.

In January 2014, the FASB issued ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects, a consensus of the FASB Emerging Issues Task Force. This ASU provides guidance on accounting for investments by a reporting entity in flow-through limited liability entities that manage or invest in affordable housing projects that qualify for the low-income housing tax credit. The guidance in this ASU was effective for annual periods and interim reporting periods beginning after December 15, 2014. The adoption of this ASU in first quarter 2015 did not have a significant impact on Customers' financial condition or results of operations.

NOTE 3 — CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) BY COMPONENT (1)
The following tables present the changes in accumulated other comprehensive income (loss) by component for the three and nine months ended September 30, 2015 and 2014.
 
Three Months Ended September 30, 2015
 
 
 
Available-for-sale Securities
 
 
 
 
(amounts in thousands)
Unrealized Gains (Losses)
Foreign Currency Items
Total Unrealized Gains (Losses)
 
Unrealized  
Loss on
Cash Flow  Hedge
 
Total
Beginning balance - July 1, 2015
$
(1,825
)
$
(136
)
$
(1,961
)
 
$
(2,153
)
 
$
(4,114
)
Other comprehensive income (loss) before reclassifications
598

(435
)
163

 
(1,464
)
 
(1,301
)
Amounts reclassified from accumulated other comprehensive loss to net income (3)
10


10

 

 
10

Net current-period other comprehensive income (loss)
608

(435
)
173

 
(1,464
)
 
(1,291
)
Ending balance - September 30, 2015
$
(1,217
)
$
(571
)
$
(1,788
)
 
$
(3,617
)
 
$
(5,405
)
 
Nine Months Ended September 30, 2015
 
 
 
Available-for-sale Securities
 
 
 
 
(amounts in thousands)
Unrealized Gains (Losses)
Foreign Currency Items
Total Unrealized Gains (Losses)
 
Unrealized  
Loss on
Cash Flow  Hedge
 
Total
Beginning balance - January 1, 2015
$
1,156

$
(14
)
$
1,142

 
$
(1,264
)
 
$
(122
)
Other comprehensive (loss) before reclassifications
(2,426
)
(557
)
(2,983
)
 
(2,353
)
 
(5,336
)
Amounts reclassified from accumulated other comprehensive loss to net income (3)
53


53

 

 
53

Net current-period other comprehensive (loss)
(2,373
)
(557
)
(2,930
)
 
(2,353
)
 
(5,283
)
Ending balance - September 30, 2015
$
(1,217
)
$
(571
)
$
(1,788
)
 
$
(3,617
)
 
$
(5,405
)

11

Table of Contents

 
Three Months Ended September 30, 2014
(amounts in thousands)
Unrealized Losses on
Available-for-sale
Securities (2)
 
Unrealized Gain (Loss)
on
Cash Flow Hedge
 
Total
Beginning balance - July 1, 2014
$
(1,598
)
 
$
(622
)
 
$
(2,220
)
Other comprehensive income (loss) before reclassifications
(1,226
)
 
426

 
(800
)
Amounts reclassified from accumulated other comprehensive loss to net income (3)

 

 

Net current-period other comprehensive income (loss)
(1,226
)
 
426

 
(800
)
Ending balance - September 30, 2014
$
(2,824
)
 
$
(196
)
 
$
(3,020
)
 
Nine Months Ended September 30, 2014
(amounts in thousands)
Unrealized Gains
(Losses) on
Available-for-sale
Securities (2)
 
Unrealized Loss
on
Cash Flow Hedge
 
Total
Beginning balance - January 1, 2014
$
(8,118
)
 
$

 
$
(8,118
)
Other comprehensive income (loss) before reclassifications
7,368

 
(196
)
 
7,172

Amounts reclassified from accumulated other comprehensive loss to net income (3)
(2,074
)
 

 
(2,074
)
Net current-period other comprehensive income (loss)
5,294

 
(196
)
 
5,098

Ending balance - September 30, 2014
$
(2,824
)
 
$
(196
)
 
$
(3,020
)

(1)
All amounts are net of tax. Amounts in parentheses indicate reductions to accumulated other comprehensive income.
(2)
Includes immaterial gains or losses on foreign currency items for the three and nine months ended September 30, 2014.
(3)
Reclassification amounts are reported as gain or loss on sale of investment securities on the Consolidated Statements of Income.

NOTE 4 — EARNINGS PER SHARE
The following are the components and results of Customers' earnings per common share calculation for the periods presented.
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
(amounts in thousands, except share and per share data)
 
 
 
 
 
 
 
Net income available to common shareholders
$
14,309

 
$
11,662

 
$
39,310

 
$
30,036

Weighted-average number of common shares outstanding - basic
26,872,787

 
26,730,347

 
26,830,341

 
26,713,953

Share-based compensation plans
1,538,436

 
1,001,966

 
1,453,378

 
949,584

Warrants
329,906

 
252,527

 
315,276

 
252,043

Weighted-average number of common shares - diluted
28,741,129

 
27,984,840

 
28,598,995

 
27,915,580

Basic earnings per common share
$
0.53

 
$
0.44

 
$
1.47

 
$
1.12

Diluted earnings per common share
$
0.50

 
$
0.42

 
$
1.37

 
$
1.08

The following is a summary of 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 to do so would have been anti-dilutive for the periods presented.

12

Table of Contents

 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
Anti-dilutive securities:
 
 
 
 
 
 
 
Share-based compensation awards
607,678

 
116,370

 
608,778

 
116,420

Warrants
52,242

 
118,745

 
52,242

 
118,745

Total anti-dilutive securities
659,920

 
235,115

 
661,020

 
235,165

NOTE 5 — INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities as of September 30, 2015 and December 31, 2014 are summarized in the tables below:
 
September 30, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
(amounts in thousands)
 
 
 
 
 
 
 
Available for Sale:
 
 
 
 
 
 
 
Mortgage-backed securities (1)
$
364,292

 
$
3,327

 
$
(1,859
)
 
$
365,760

Corporate notes
35,000

 
451

 
(129
)
 
35,322

Equity securities (2)
22,514

 

 
(4,651
)
 
17,863

 
$
421,806

 
$
3,778

 
$
(6,639
)
 
$
418,945

(1)
Comprised of mortgage-backed securities issued by government-sponsored agencies, including FHLMC, FNMA, and GNMA.
(2)
Comprised primarily of equity securities in a foreign entity.
 
December 31, 2014
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
(amounts in thousands)
 
 
 
 
 
 
 
Available for Sale:
 
 
 
 
 
 
 
Mortgage-backed securities (1)
$
376,854

 
$
2,805

 
$
(2,348
)
 
$
377,311

Corporate notes
15,000

 
104

 

 
15,104

Equity securities (2)
23,074

 
1,197

 
(1
)
 
24,270

 
$
414,928

 
$
4,106

 
$
(2,349
)
 
$
416,685

(1)
Comprised primarily of mortgage-backed securities issued by government-sponsored agencies, including FHLMC, FNMA, and GNMA.
(2)
Comprised primarily of equity securities in a foreign entity.

The following table presents proceeds from the sale of available-for-sale investment securities and gross gains and gross losses realized on those sales for the three and nine months ended September 30, 2015 and 2014:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
(amounts in thousands)
 
 
 
 
 
 
 
Proceeds from sale of available-for-sale securities
$
314

 
$

 
$
806

 
$
213,249

Gross gains
$

 

 
$

 
$
3,191

Gross losses
(16
)
 

 
(85
)
 

Net gains (losses)
$
(16
)
 
$

 
$
(85
)
 
$
3,191

These gains and losses were determined using the specific identification method and were reported as gains/(losses) on sale of investment securities included in non-interest income.

13

Table of Contents

The following table presents available-for-sale debt securities by stated maturity. Debt securities backed by mortgages 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:
 
September 30, 2015
 
Amortized
Cost
 
Fair
Value
(amounts in thousands)
 
 
 
Due in one year or less
$

 
$

Due after one year through five years

 

Due after five years through ten years
28,000

 
28,403

Due after ten years
7,000

 
6,919

Mortgage-backed securities
364,292

 
365,760

Total debt securities
$
399,292

 
$
401,082

Customers' investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2015 and December 31, 2014 were as follows:
 
September 30, 2015
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
(amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
Available for Sale:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities (1)
$

 
$

 
$
67,264

 
$
(1,859
)
 
$
67,264

 
$
(1,859
)
Corporate notes
8,871

 
(129
)
 

 

 
8,871

 
(129
)
Equity securities (2)
17,857

 
(4,650
)
 
6

 
(1
)
 
17,863

 
(4,651
)
Total
$
26,728

 
$
(4,779
)
 
$
67,270

 
$
(1,860
)
 
$
93,998

 
$
(6,639
)
 
December 31, 2014
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
(amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
Available for Sale:
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities (3)
$
60,388

 
$
(81
)
 
$
80,426

 
$
(2,267
)
 
140,814

 
$
(2,348
)
Equity securities (2)

 

 
5

 
(1
)
 
5

 
(1
)
Total
$
60,388

 
$
(81
)
 
$
80,431

 
$
(2,268
)
 
$
140,819

 
$
(2,349
)
(1)
Comprised of mortgage-backed securities issued by government-sponsored agencies, including FHLMC, FNMA, and GNMA at September 30, 2015.
(2)
Comprised primarily of equity securities in a foreign entity.
(3)
Comprised primarily of mortgage-backed securities issued by government-sponsored agencies, including FHLMC, FNMA, and GNMA at December 31, 2014.
At September 30, 2015, there were four available-for-sale investment securities in the less-than-twelve-month category and sixteen available-for-sale investment securities in the twelve-month-or-more category. The unrealized losses on the mortgage-backed securities are guaranteed by government-sponsored entities and primarily relate to changes in market interest rates. All amounts are expected to be recovered when market prices recover or at maturity. The unrealized losses on the equity securities reflect decreases in market price and adverse changes in foreign currency exchange rates. Customers evaluated the financial condition and capital strength of the issuer of these securities and concluded that the decline in fair value was temporary and would recover by way of increases in market price or positive changes in foreign currency exchange rates. Customers intends to hold these securities for the foreseeable future and does not intend to sell the securities before the price recovers. Customers considers it more likely than not that it will not be required to sell the securities. Accordingly, Customers has concluded that the securities are not other-than-temporarily impaired as of September 30, 2015.

14

Table of Contents

At September 30, 2015 and December 31, 2014, Customers Bank had pledged investment securities aggregating $318.1 million and $376.9 million fair value, respectively, as collateral against its borrowings primarily with the FHLB and an unused line of credit with another financial institution. These counterparties do not have the ability to sell or repledge these securities.
NOTE 6 – LOANS HELD FOR SALE
The composition of loans held for sale as of September 30, 2015 and December 31, 2014 was as follows:
 
September 30, 2015
 
December 31, 2014
(amounts in thousands)
 
 
 
Commercial loans:
 
 
 
Mortgage warehouse loans at fair value
$
1,677,995

 
$
1,332,019

Multi-family loans at lower of cost or fair value
49,992

 
99,791

Commercial loans held for sale
1,727,987

 
1,431,810

Consumer loans:
 
 
 
Residential mortgage loans at fair value
2,015

 
3,649

Loans held for sale
$
1,730,002

 
$
1,435,459


Effective September 30, 2015, Customers Bank transferred $30.4 million of multi-family loans from held for sale to loans receivable (held for investment) because the Bank no longer has the intent to sell these loans. Customers Bank transferred these loans at their carrying value, which was lower than the estimated fair value at the time of transfer.


15

Table of Contents

NOTE 7 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
The following table presents loans receivable as of September 30, 2015 and December 31, 2014:
 
September 30, 2015
 
December 31, 2014
(amounts in thousands)
 
 Commercial:
 
 
 
 Multi-family
$
2,405,400

 
$
2,206,403

 Commercial and industrial (including owner occupied commercial real estate)
967,958

 
777,220

 Commercial real estate non-owner occupied
912,971

 
827,940

 Construction
89,616

 
44,642

 Total commercial loans
4,375,945

 
3,856,205

 Consumer:
 
 
 
 Residential real estate
260,967

 
285,003

 Manufactured housing
116,742

 
126,731

 Other
1,076

 
1,541

 Total consumer loans
378,785

 
413,275

                         Total loans receivable not covered under FDIC loss sharing agreements
4,754,730

 
4,269,480

 
 
 
 
 Commercial:
 
 
 
 Multi-family

 
2,002

 Commercial and industrial (including owner occupied commercial real estate)

 
8,449

 Commercial real estate non-owner occupied

 
11,370

 Construction

 
5,076

 Total commercial loans

 
26,897

 Consumer:
 
 
 
 Residential real estate
11,181

 
12,392

 Other
2,668

 
2,892

 Total consumer loans
13,849

 
15,284

                        Total loans receivable covered under FDIC loss sharing agreements (1)
13,849

 
42,181

Total loans receivable
4,768,579

 
4,311,661

Deferred costs and unamortized premiums, net
523

 
512

 Allowance for loan losses
(33,823
)
 
(30,932
)
 Loans receivable, net of allowance for loan losses
$
4,735,279

 
$
4,281,241

(1)
Loans that were acquired in two FDIC-assisted transactions and are covered under loss sharing agreements with the FDIC are referred to as covered loans throughout these financial statements. The period to submit losses under the FDIC loss sharing agreements for non-single family loans expired in third quarter 2015. The period to submit losses under the FDIC loss sharing agreements for single family loans expires in third quarter 2017.

16

Table of Contents

Non-Covered Loans
The following tables summarize non-covered loans by loan type and performance status as of September 30, 2015 and December 31, 2014:
 
September 30, 2015
 
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 (3)
 
Total
Loans (4)
(amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Multi-family
$

 
$

 
$

 
$

 
$
2,401,727

 
$
3,673

 
$
2,405,400

Commercial and industrial

 

 

 
6,381

 
675,939

 
1,620

 
683,940

Commercial real estate - owner occupied
191

 

 
191

 
1,851

 
268,206

 
13,770

 
284,018

Commercial real estate - non-owner occupied
1,047

 

 
1,047

 
4,478

 
894,449

 
12,997

 
912,971

Construction

 

 

 

 
89,382

 
234

 
89,616

Residential real estate
512

 

 
512

 
1,232

 
251,090

 
8,133

 
260,967

Manufactured housing (5)
3,196

 
3,036

 
6,232

 
2,653

 
104,399

 
3,458

 
116,742

Other consumer

 

 

 

 
861

 
215

 
1,076

Total
$
4,946

 
$
3,036

 
$
7,982

 
$
16,595

 
$
4,686,053

 
$
44,100

 
$
4,754,730




December 31, 2014
 
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 (3)
 
Total
Loans (4)
(amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Multi-family
$

 
$

 
$

 
$

 
$
2,203,686

 
$
2,717

 
$
2,206,403

Commercial and industrial
366

 

 
366

 
2,257

 
542,667

 
2,102

 
547,392

Commercial real estate - owner occupied

 

 

 
2,342

 
211,453

 
16,033

 
229,828

Commercial real estate - non-owner occupied

 

 

 
1,108

 
816,114

 
10,718

 
827,940

Construction

 

 

 

 
44,483

 
159

 
44,642

Residential real estate
1,226

 

 
1,226

 
849

 
273,565

 
9,363

 
285,003

Manufactured housing (5)
6,324

 
4,388

 
10,712

 
931

 
111,072

 
4,016

 
126,731

Other consumer

 

 

 

 
1,333

 
208

 
1,541

Total
$
7,916

 
$
4,388

 
$
12,304

 
$
7,487

 
$
4,204,373

 
$
45,316

 
$
4,269,480

 
(1)
Includes past due loans that are accruing interest because collection is considered probable.
(2)
Loans where next payment due is less than 30 days from the report date.
(3)
Purchased-credit-impaired loans aggregated into a pool are accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, and the past due status of the pools, or that of the individual loans within the pools, is not meaningful. Because of the credit impaired nature of the loans, the loans are recorded at a discount reflecting estimated future cash flows and the Bank recognizes interest income on each pool of loans reflecting the estimated yield and passage of time. Such loans are considered to be performing. Purchased-credit-impaired loans that are not in pools accrete interest when the timing and amount of their expected cash flows are reasonably estimable, and are reported as performing loans.
(4)
Amounts exclude deferred costs and fees, unamortized premiums and discounts, and the allowance for loan losses.
(5)
Manufactured housing loans purchased in 2010 are subject to cash reserves held at the Bank that are used to fund past-due payments when the loan becomes 90 days or more delinquent. Subsequent purchases are subject to varying provisions in the event of borrowers’ delinquencies.

17

Table of Contents

Covered Loans
The following tables summarize covered loans by loan type and performance status as of September 30, 2015 and December 31, 2014:
 
September 30, 2015
 
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 (3)
 
Total
Loans (4)
(amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
$

 
$

 
$

 
$
1,046

 
$
9,533

 
$
602

 
$
11,181

Other consumer
80

 

 
80

 
141

 
2,423

 
24

 
2,668

Total
$
80

 
$

 
$
80

 
$
1,187

 
$
11,956

 
$
626

 
$
13,849




December 31, 2014
 
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 (3)
 
Total
Loans (4)
(amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
518

 
$

 
$
518

 
$
256

 
$
578

 
$
1,191

 
$
2,543

Commercial real estate owner occupied

 

 

 
172

 
5,734

 

 
5,906

Commercial real estate non-owner occupied

 

 

 
352

 
5,932

 
5,086

 
11,370

Construction

 

 

 
2,325

 

 
2,751

 
5,076

Multi-family

 

 

 

 
373

 
1,629

 
2,002

Residential real estate

 

 

 
1,006

 
10,782

 
604

 
12,392

Other consumer
147

 

 
147

 
135

 
2,570

 
40

 
2,892

Total
$
665

 
$

 
$
665

 
$
4,246

 
$
25,969

 
$
11,301

 
$
42,181

 
(1)
Includes past due loans that are accruing interest because collection is considered probable.
(2)
Loans where next payment due is less than 30 days from the report date.
(3)
Purchased-credit-impaired loans aggregated into a pool are accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, and the past due status of the pools, or that of the individual loans within the pools, is not meaningful. Because of the credit impaired nature of the loans, the loans are recorded at a discount reflecting estimated future cash flows and the Bank recognizes interest income on each pool of loans reflecting the estimated yield and passage of time. Such loans are considered to be performing. Purchased-credit-impaired loans that are not in pools accrete interest when the timing and amount of their expected cash flows are reasonably estimable, and are reported as performing loans.
(4)
Amounts exclude deferred costs and fees, unamortized premiums and discounts, and the allowance for loan losses.
Allowance for Loan Losses and the FDIC Loss Sharing Receivable and Clawback Liability
Losses incurred on covered loans are eligible for partial reimbursement by the FDIC. Subsequent to the purchase date, the expected cash flows on the covered loans are subject to evaluation. Decreases in the present value of expected cash flows on the covered loans are recognized by increasing the allowance for loan losses with a related charge to the provision for loan losses. At the same time, the FDIC indemnification asset is increased reflecting an estimated future collection from the FDIC, which is recorded as a reduction to the provision for loan losses. If the expected cash flows on the covered loans increase such that a previously recorded impairment can be reversed, the Bank records a reduction in the allowance for loan losses (with a related credit to the provision for loan losses) accompanied by a reduction in the FDIC receivable balance (with a related charge to the provision for loan losses). Increases in expected cash flows on covered loans and decreases in expected cash flows of the FDIC loss sharing receivable, when there are no previously recorded impairments, are considered together and recognized over the remaining life of the loans as interest income. Decreases in the valuations of other real estate owned covered by the loss sharing agreements are recorded net of the estimated FDIC receivable as an increase to other real estate owned expense (a component of non-interest expense). The FDIC loss sharing receivable balance will be reduced through a charge to the provision for loan losses, with no offsetting reduction to the allowance for loan losses, as the period to submit

18

Table of Contents

losses under the FDIC loss sharing arrangements approaches expiration and the estimated losses in the covered loans have not yet emerged or been realized in a final disposition event. The period to submit losses under the FDIC loss sharing arrangements for non-single family loans expired in third quarter 2015. The period to submit losses under the FDIC loss sharing arrangements for single family loans expires in third quarter 2017. The final maturity of the FDIC loss sharing arrangements occurs in third quarter 2020.

As part of the FDIC loss sharing arrangements, the Bank also assumed a liability to be paid within 45 days subsequent to the maturity or termination of the loss sharing arrangements that is contingent upon actual losses incurred over the life of the arrangements relative to expected losses and the consideration paid upon acquisition of the failed institutions ("the Clawback Liability”). Due to cash received on the covered assets in excess of the original cash to be received expectations of the FDIC, the Bank anticipates that it will be required to pay the FDIC at the end of its loss sharing arrangements. As of September 30, 2015, a clawback liability of $2.3 million has been recorded. To the extent actual losses on the covered assets are less than estimated losses, the clawback liability will increase. To the extent actual losses on the covered assets are more than the estimated losses, the clawback liability will decrease.

As of September 30, 2015, the Bank expected to collect $2.5 million from the FDIC for estimated losses and reimbursement of external costs, such as legal fees, real estate taxes and appraisal expenses, and estimated the clawback liability due to the FDIC in 2020 at $2.3 million. The net amount of $0.2 million is presented as the "FDIC loss sharing receivable" in the accompanying consolidated balance sheet.
The following table presents changes in the allowance for loan losses and the FDIC loss sharing receivable, including the effect of the estimated clawback liability for the three months and nine months ended September 30, 2015 and 2014.

 
Allowance for Loan Losses
 
Three Months Ended September 30,
(amounts in thousands)
2015
 
2014
Beginning balance
$
37,491

 
$
28,186

Provision for loan losses (1)
1,989

 
3,222

Charge-offs
(5,932
)
 
(792
)
Recoveries
275

 
467

Ending balance
$
33,823

 
$
31,083


19

Table of Contents

 
FDIC Loss Sharing Receivable/
Clawback Liability
 
Three Months Ended September 30,
(amounts in thousands)
2015
 
2014
Beginning balance
$
(1,455
)
 
$
8,919

Decreased estimated cash flows from covered loans (2)
(105
)
 
(1,813
)
Increased estimated cash flows from covered OREO (a)
3,138

 

Other activity, net (b)
61

 
741

Cash receipts from FDIC
(1,437
)
 
(1,852
)
Ending balance
$
202

 
$
5,995

 
 
 
 
(1) Provision for loan losses
$
1,989

 
$
3,222

(2) Effect attributable to FDIC loss share arrangements
105

 
1,813

Net amount reported as provision for loan losses
$
2,094

 
$
5,035


(a) Recorded as a reduction to Other Real Estate Owned expense (a component of non-interest expense).
(b) Includes external costs, such as legal fees, real estate taxes, and appraisal expenses, which qualify for reimbursement under loss sharing arrangements.

 
Allowance for Loan Losses
 
Nine Months Ended September 30,
(amounts in thousands)
2015
 
2014
Beginning balance
$
30,932

 
$
23,998

Provision for loan losses (1)
10,548

 
8,853

Charge-offs
(8,880
)
 
(2,733
)
Recoveries
1,223

 
965

Ending balance
$
33,823

 
$
31,083


 
FDIC Loss Sharing Receivable/
Clawback Liability
 
Nine Months Ended September 30,
(amounts in thousands)
2015
 
2014
Beginning balance
$
2,320

 
$
10,046

Decreased estimated cash flows from covered loans (2)
(3,845
)
 
(3,435
)
Increased estimated cash flows from covered OREO (a)
3,138

 

Other activity, net (b)
529

 
2,713

Cash receipts from FDIC
(1,940
)
 
(3,329
)
Ending balance
$
202

 
$
5,995

 
 
 
 
(1) Provision for loan losses
$
10,548

 
$
8,853

(2) Effect attributable to FDIC loss share arrangements
3,845

 
3,435

Net amount reported as provision for loan losses
$
14,393

 
$
12,288


(a) Recorded as a reduction to Other Real Estate Owned expense (a component of non-interest expense).
(b) Includes external costs, such as legal fees, real estate taxes, and appraisal expenses, which qualify for reimbursement under loss sharing arrangements.


20

Table of Contents

Loans Individually Evaluated for Impairment — Covered and Non-Covered
The following tables present the recorded investment (net of charge-offs), unpaid principal balance, and related allowance by loan type for loans that are individually evaluated for impairment as of September 30, 2015 and December 31, 2014 and the average recorded investment and interest income recognized for the three and nine months ended September 30, 2015 and 2014. Purchased-credit-impaired loans are considered to be performing and are not included in the tables below.
 
September 30, 2015
 
Three Months Ended September 30, 2015
 
Nine Months Ended
September 30, 2015
 
Recorded
Investment
Net of
Charge offs
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
(amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
Multi-family
$
405

 
$
405

 
$

 
$
203

 
$
5

 
$
101

 
$
5

Commercial and industrial
7,872

 
7,872

 

 
7,597

 
102

 
9,179

 
500

Commercial real estate owner occupied
7,474

 
7,474

 

 
6,416

 
44

 
7,597

 
229

Commercial real estate non-owner occupied
8,536

 
8,536

 

 
7,803

 
137

 
6,937

 
514

Construction

 

 

 
335

 

 
1,330

 

Other consumer
48

 
48

 

 
49

 
1

 
35

 
1

Residential real estate
1,644

 
1,644

 

 
1,624

 

 
1,535

 

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
10,385

 
16,550

 
4,581

 
12,640

 
26

 
8,420

 
332

Commercial real estate owner occupied
12

 
12

 
2

 
13

 
66

 
200

 
66

Commercial real estate non-owner occupied
568

 
568

 
129

 
664

 
4

 
821

 
9

Construction

 

 

 

 

 

 

Other consumer
93

 
93

 
38

 
93

 

 
88

 

Residential real estate
403

 
403

 
92

 
474

 
1

 
419

 
1

Total
$
37,440

 
$
43,605

 
$
4,842

 
$
37,911

 
$
386

 
$
36,662

 
$
1,657

 

21

Table of Contents

 
December 31, 2014
 
Three Months Ended September 30, 2014
 
Nine Months Ended
September 30, 2014
 
Recorded
Investment
Net of
Charge offs
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
(amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
With no related allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
$
14,600

 
$
16,122

 
$

 
$
15,377

 
$
216

 
$
13,690

 
$
520

Commercial real estate owner occupied
12,599

 
12,744

 

 
11,818

 
163

 
10,774

 
360

Commercial real estate non-owner occupied
5,602

 
5,602

 

 
8,999

 
125

 
8,204

 
274

Construction
2,325

 
2,325

 

 
2,325

 

 
2,438

 

Other consumer
21

 
21

 

 
52

 

 
27

 

Residential real estate
1,455

 
3,697

 

 
1,924

 

 
2,157

 
19

With an allowance recorded:
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial and industrial
1,923

 
1,923

 
857

 
1,888

 
11

 
1,770

 
26

Commercial real estate owner occupied
750

 
750

 
95

 
1,202

 
2

 
1,268

 
3

Commercial real estate non-owner occupied
571

 
571

 
170

 
916

 
1

 
966

 
2

Construction

 

 

 
1,548

 

 
1,449

 

Other consumer
114

 
114

 
32

 
84

 

 
74

 
1

Residential real estate
365

 
365

 
188

 
296

 

 
273

 
1

Total
$
40,325

 
$
44,234

 
$
1,342

 
$
46,429

 
$
518

 
$
43,090

 
$
1,206

Troubled Debt Restructurings
At September 30, 2015 and December 31, 2014, there were $10.5 million and $5.0 million, respectively, in loans reported as troubled debt restructurings (“TDRs”). TDRs are reported as impaired loans in the calendar year of their restructuring and are evaluated to determine whether they should be placed on non-accrual status. In subsequent years, a TDR may be returned to accrual status if it satisfies a minimum six-month performance requirement; however, it will remain classified as impaired. Generally, the Bank requires sustained performance for nine months before returning a TDR to accrual status.
Modification of purchased-credit-impaired loans that are accounted for within loan pools in accordance with the accounting standards for purchased-credit-impaired loans do not result in the removal of these loans from the pool even if modifications would otherwise be considered a TDR. Accordingly, as each pool is accounted for as a single asset with a single composite interest rate and an aggregate expectation of cash flows, modifications of loans within such pools are not considered TDRs.

22

Table of Contents

The following is an analysis of loans modified in a troubled debt restructuring by type of concession for the three and nine months ended September 30, 2015 and 2014. There were no modifications that involved forgiveness of debt.
 
TDRs in Compliance with Their Modified Terms and Accruing Interest
 
TDRs in Compliance with Their Modified Terms and Not Accruing Interest
 
Total
(amounts in thousands)
 
 
 
 
 
Three Months Ended September 30, 2015
 
 
 
 
 
Extended under forbearance
$

 
$
183

 
$
183

Interest-rate reductions
437

 
268

 
705

Total
$
437

 
$
451

 
$
888

Nine Months Ended September 30, 2015
 
 
 
 
 
Extended under forbearance
$

 
$
183

 
$
183

Interest-rate reductions
3,189

 
2,558

 
5,747

Total
$
3,189

 
$
2,741

 
$
5,930

Three Months Ended September 30, 2014
 
 
 
 
 
Extended under forbearance
$
81

 
$

 
$
81

Interest-rate reductions

 
168

 
168

Total
$
81

 
$
168

 
$
249

Nine Months Ended September 30, 2014
 
 
 
 
 
Extended under forbearance
$
448

 
$

 
$
448

Interest-rate reductions
47

 
471

 
518

Total
$
495

 
$
471

 
$
966

The following table provides, by loan type, the number of loans modified in troubled debt restructurings and the related recorded investment during the three and nine months ended September 30, 2015 and 2014.
 
TDRs in Compliance with Their Modified Terms and Accruing Interest
 
TDRs in Compliance with Their Modified Terms and Not Accruing Interest
 
Number of Loans
 
Recorded Investment
 
Number of Loans
 
Recorded Investment
(amounts in thousands)
 
 
 
 
 
 
 
Three Months Ended September 30, 2015
 
 
 
 
 
 
 
Commercial and industrial

 
$

 
1

 
$
183

Manufactured housing
14

 
431

 
6

 
268

Residential real estate
1

 
6

 

 

Total
15

 
$
437

 
7

 
$
451

Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
Commercial and industrial

 
$

 
2

 
$
527

Commercial real estate non-owner occupied

 

 
1

 
209

Manufactured housing
90

 
2,988

 
37

 
2,005

Residential real estate
2

 
201

 

 

Total
92

 
$
3,189

 
40

 
$
2,741

Three Months Ended September 30, 2014
 
 
 
 
 
 
 
Manufactured housing

 
$

 
2

 
$
168

Other consumer
2

 
81

 

 

Total
2

 
$
81

 
2

 
$
168

Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
Manufactured housing
1

 
$
47

 
7

 
$
471

Other consumer
9

 
448

 

 

Total
10

 
$
495

 
7

 
$
471


23

Table of Contents

At September 30, 2015 and December 31, 2014, there were no commitments to lend additional funds to debtors whose terms have been modified in TDRs.
For the three and nine months ended September 30, 2015, the recorded investment of loans determined to be TDRs was $0.9 million and $5.9 million, respectively, both before and after restructuring. During the three month period ended September 30, 2015, six manufactured housing TDR loans defaulted with a recorded investment of $0.3 million, and one commercial and industrial TDR loan defaulted with a recorded investment of $0.2 million. During the nine month period ended September 30, 2015, thirty-seven manufactured housing TDR loans defaulted with a recorded investment of $2.0 million, two commercial and industrial TDR loans defaulted with a recorded investment of $0.5 million, one commercial real estate non-owner-occupied TDR loan defaulted with a recorded investment of $0.2 million.

Loans modified in troubled debt restructurings are evaluated for impairment. The nature and extent of impairment of TDRs, including those which have experienced a subsequent default, is considered in the determination of an appropriate level of allowance for loan losses. There was one specific allowance resulting from TDR modifications during the three months ended September 30, 2015, totaling $0.1 million for one commercial and industrial loan. There were three specific allowances resulting from TDR modifications during the nine months ended September 30, 2015, totaling $0.2 million for two commercial and industrial loans, and $0.1 million for one commercial real estate non-owner-occupied loan. There were no specific allowances resulting from TDR modifications during the three and nine months ended September 30, 2014.
Credit Quality Indicators
Multi-family, commercial and industrial, owner occupied commercial real estate, non-owner occupied commercial real estate, residential real estate, construction, and mortgage warehouse 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. Mortgage warehouse loans are assigned a risk rating at the facility level and are primarily based on the underlying collateral pledged to support the loan. Consumer and manufactured housing loans are evaluated based on the payment activity of the loan and individual loans are not assigned an internal risk rating unless delinquent.
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 residential real estate classes, and for purposes of analyzing historical loss rates used in the determination of the allowance for loan losses for the respective portfolio class, the Bank utilizes the following categories of risk ratings: pass/satisfactory (includes risk rating 1 through 6), special mention, substandard, doubtful, and loss. The risk rating categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter. Pass/satisfactory ratings, which are assigned to those borrowers who do not have identified potential or well-defined weaknesses and for whom there is a high likelihood of orderly repayment, are updated periodically based on the size 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.

The risk rating grades are defined as follows:
“1” – Pass/Excellent
Loans rated 1 represent a credit extension of the highest quality. The borrower’s historic (at least five years) cash flows manifest extremely large and stable margins of coverage. Balance sheets are conservative, well capitalized, and liquid. After considering debt service for proposed and existing debt, projected cash flows continue to be strong and provide ample coverage. The borrower typically reflects broad geographic and product diversification and has access to alternative financial markets.
“2” – Pass/Superior
Loans rated 2 are those for which the borrower has a strong financial condition, balance sheet, operations, cash flow, debt capacity and coverage with ratios better than industry norms. The borrowers of these loans exhibit a limited leverage position, are virtually immune to local economies in stable growing industries, and management is well respected and the company has ready access to public markets.

24

Table of Contents

“3” – Pass/Strong
Loans rated 3 are those loans for which the borrower has above average financial condition and flexibility; more than satisfactory debt service coverage, balance sheet and operating ratios are consistent with or better than industry peers, have little industry risk, move in diversified markets and are experienced and competent in their industry. These borrowers’ access to capital markets is limited mostly to private sources, often secured, but the borrower typically has access to a wide range of refinancing alternatives.
“4” – Pass/Good
Loans rated 4 have a sound primary and secondary source of repayment. The borrower may have access to alternative sources of financing, but sources are not as widely available as they are to a higher grade borrower. These loans carry a normal level of risk, with very low loss exposure. The borrower has the ability to perform according to the terms of the credit facility. The margins of cash flow coverage are satisfactory but vulnerable to more rapid deterioration than the higher quality loans.
“5” – Satisfactory
Loans rated 5 are extended to borrowers who are determined to be a reasonable credit risk and demonstrate the ability to repay the debt from normal business operations. Risk factors may include reliability of margins and cash flows, liquidity, dependence on a single product or industry, cyclical trends, depth of management, or limited access to alternative financing sources. The borrower’s historical financial information may indicate erratic performance, but current trends are positive and the quality of financial information is adequate, but is not as detailed and sophisticated as information found on higher grade loans. If adverse circumstances arise, the impact on the borrower may be significant.
“6” – Satisfactory/Bankable with Care
Loans rated 6 are those for which the borrower has higher than normal credit risk; however, cash flow and asset values are generally intact. These borrowers may exhibit declining financial characteristics, with increasing leverage and decreasing liquidity and may have limited resources and access to financial alternatives. Signs of weakness in these borrowers may include delinquent taxes, trade slowness and eroding profit margins.
“7” – Special Mention
Loans rated Special Mention are credit facilities that may have potential developing weaknesses and deserve extra attention from the account manager and other management personnel. In the event that potential weaknesses are not corrected or mitigated, deterioration in the ability of the borrower to repay the debt in the future may occur. This grade is not assigned to loans that bear certain peculiar risks normally associated with the type of financing involved, unless circumstances have caused the risk to increase to a level higher than would have been acceptable when the credit was originally approved. Loans where significant actual, not potential, weaknesses or problems are clearly evident are graded in the category below.
“8” – Substandard
Loans are classified Substandard when the loans are inadequately protected by the current sound worth and payment capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the company will sustain some loss if the weaknesses are not corrected.
“9” – Doubtful
The Bank assigns a doubtful rating to loans that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans.
“10” – Loss

25

Table of Contents

The Bank assigns a loss rating to loans considered uncollectible and of such little value that their continuance as an active asset is not warranted. Amounts classified as loss are immediately charged off.
Risk ratings are not established for home equity loans, consumer loans, and installment loans, mainly because these portfolios consist of a larger number of homogeneous loans with smaller balances. Instead, these portfolios are evaluated for risk mainly based 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 the non-covered loan portfolio as of September 30, 2015 and December 31, 2014:
 
September 30, 2015
 
Multi-family
 
Commercial
and
Industrial
 
Commercial
Real Estate Owner Occupied
 
Commercial Real Estate Non-Owner Occupied
 
Construction
 
Residential
Real Estate
 
Manufactured
Housing
 
Other Consumer
 
Total
(amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass/Satisfactory
$
2,403,599

 
$
665,484

 
$
270,857

 
$
903,357

 
$
89,616

 
$
259,299

 
$

 
$

 
$
4,592,212

Special Mention
405

 
11,822

 
9,007

 
4,626

 

 

 

 

 
25,860

Substandard
1,396

 
6,634

 
4,154

 
4,988

 

 
1,668

 

 

 
18,840

Performing (1)

 

 

 

 

 

 
107,857

 
1,076

 
108,933

Non-performing (2)

 

 

 

 

 

 
8,885

 

 
8,885

Total
$
2,405,400

 
$
683,940

 
$
284,018

 
$
912,971

 
$
89,616

 
$
260,967

 
$
116,742

 
$
1,076

 
$
4,754,730

 
December 31, 2014
 
Multi-family
 
Commercial
and
Industrial
 
Commercial
Real Estate Owner Occupied
 
Commercial Real Estate Non-Owner Occupied
 
Construction
 
Residential
Real Estate
 
Manufactured
Housing
 
Other Consumer
 
Total
(amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pass/Satisfactory
$
2,206,403

 
$
530,468

 
$
212,326

 
$
824,279

 
$
44,642

 
$
283,240

 
$

 
$

 
$
4,101,358

Special Mention

 
14,565

 
12,352

 
2,322

 

 
243

 

 

 
29,482

Substandard

 
2,359

 
5,150

 
1,339

 

 
1,520

 

 

 
10,368

Performing (1)

 

 

 

 

 

 
115,088

 
1,541

 
116,629

Non-performing (2)

 

 

 

 

 

 
11,643

 

 
11,643

Total
$
2,206,403

 
$
547,392

 
$
229,828

 
$
827,940

 
$
44,642

 
$
285,003

 
$
126,731

 
$
1,541

 
$
4,269,480


(1)
Includes consumer and other installment loans not subject to risk ratings.
(2)
Includes loans that are past due and still accruing interest and loans on nonaccrual status.

The following tables present the credit ratings of the covered loan portfolio as of September 30, 2015 and December 31, 2014:
 
September 30, 2015
 
Commercial
and
Industrial
 
Commercial
Real Estate Owner Occupied
 
Commercial Real Estate Non-Owner Occupied
 
Construction
 
Multi-family
 
Residential
Real Estate
 
Other Consumer
 
Total
(amounts in thousands)
Pass/Satisfactory
$

 
$

 
$

 
$

 
$

 
$
9,733

 
$

 
$
9,733

Special Mention

 

 

 

 

 

 

 

Substandard

 

 

 

 

 
1,448

 

 
1,448

Performing (1)

 

 

 

 

 

 
2,447

 
2,447

Non-performing (2)

 

 

 

 

 

 
221

 
221

Total
$

 
$


$

 
$

 
$

 
$
11,181

 
$
2,668

 
$
13,849


26

Table of Contents

 
December 31, 2014
 
Commercial
and
Industrial
 
Commercial
Real Estate Owner Occupied
 
Commercial Real Estate Non-Owner Occupied
 
Construction
 
Multi-family
 
Residential
Real Estate
 
Other Consumer
 
Total
(amounts in thousands)
Pass/Satisfactory
$
1,322

 
$
5,030

 
$
4,959

 
$

 
$
373

 
$
10,985

 
$

 
$
22,669

Special Mention

 
704

 
4,372

 

 

 

 

 
5,076

Substandard
1,221

 
172

 
2,039

 
5,076

 
1,629

 
1,407

 

 
11,544

Performing (1)

 

 

 

 

 

 
2,610

 
2,610

Non-performing (2)

 

 

 

 

 

 
282

 
282

Total
$
2,543

 
$
5,906


$
11,370

 
$
5,076

 
$
2,002

 
$
12,392

 
$
2,892

 
$
42,181


(1)
Includes consumer and other installment loans not subject to risk ratings.
(2)
Includes loans that are past due and still accruing interest and loans on nonaccrual status.


As of September 30, 2015, the Bank had $2.2 million of residential real estate held in other real estate owned. As of September 30, 2015, the Bank had not initiated foreclosure proceedings on any loans secured by residential real estate.
Allowance for loan losses
During second quarter 2015, the Bank refined its methodology for estimating the general allowance for loan losses. Previously, the general allowance for the portion of the loan portfolio originated after December 31, 2009 ("Post 2009 loan portfolio") was based generally on qualitative factors due to insufficient historical loss data on the portfolio. During second quarter 2015, the Bank began using objectively verifiable industry and peer loss data to estimate probable incurred losses as of the balance sheet date for the Post 2009 loan portfolio until sufficient internal loss history is available. The same methodology was also adopted for the portion of the loan portfolio originated on or before December 31, 2009 ("Legacy loan portfolio") that had no loss history over the past two years.
The changes in the allowance for loan losses for the three and nine months ended September 30, 2015 and 2014 and the loans and allowance for loan losses by loan class based on impairment evaluation method are as follows. The amounts presented for the provision for loan losses below do not include the effect of changes to estimated benefits resulting from the FDIC loss share arrangements for the covered loans.

27

Table of Contents

Three Months Ended September 30, 2015
Multi-family
 
Commercial and Industrial
 
Commercial Real Estate Owner Occupied
 
Commercial
Real Estate Non-Owner Occupied
 
Construction
 
Residential
Real Estate
 
Manufactured
Housing
 
Other Consumer
 
Total
(amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance, July 1, 2015
$
8,734

 
$
14,062

 
$
3,651

 
$
6,310

 
$
844

 
$
3,455

 
$
316

 
$
119

 
$
37,491

Charge-offs

 
(5,559
)
 
(35
)
 
(82
)
 

 
(256
)
 

 

 
(5,932
)
Recoveries

 
248

 
13

 

 
8

 

 

 
6

 
275

Provision for loan losses
472

 
1,678

 
(370
)
 
(109
)
 
258

 
(5
)
 
70

 
(5
)
 
1,989

Ending Balance, September 30, 2015
$
9,206

 
$
10,429

 
$
3,259

 
$
6,119

 
$
1,110

 
$
3,194

 
$
386

 
$
120

 
$
33,823

Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance, January 1, 2015
$
8,493

 
$
4,784

 
$
4,336

 
$
9,198

 
$
1,047

 
$
2,698

 
$
262

 
$
114

 
$
30,932

Charge-offs

 
(6,793
)
 
(378
)
 
(327
)
 
(1,064
)
 
(282
)
 

 
(36
)
 
(8,880
)
Recoveries

 
351

 
14

 

 
195

 
572

 

 
91

 
1,223

Provision for loan losses
713

 
12,087

 
(713
)
 
(2,752
)
 
932

 
206

 
124

 
(49
)
 
10,548

Ending Balance, September 30, 2015
$
9,206

 
$
10,429

 
$
3,259

 
$
6,119

 
$
1,110

 
$
3,194

 
$
386

 
$
120

 
$
33,823

Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
405

 
$
18,257

 
$
7,486

 
$
9,104

 
$

 
$
2,047

 
$

 
$
141

 
$
37,440

Collectively evaluated for impairment
2,401,322

 
664,063

 
262,762

 
890,870

 
89,382

 
261,366

 
113,284

 
3,364

 
4,686,413

Loans acquired with credit deterioration
3,673

 
1,620

 
13,770

 
12,997

 
234

 
8,735

 
3,458

 
239

 
44,726

 
$
2,405,400

 
$
683,940

 
$
284,018

 
$
912,971

 
$
89,616

 
$
272,148

 
$
116,742

 
$
3,744

 
$
4,768,579

Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$

 
$
4,581

 
$
2

 
$
129

 
$

 
$
92

 
$

 
$
38

 
$
4,842

Collectively evaluated for impairment
9,206

 
5,625

 
1,167

 
3,700

 
1,106

 
2,010

 
97

 
28

 
22,939

Loans acquired with credit deterioration

 
223

 
2,090

 
2,290

 
4

 
1,092

 
289

 
54

 
6,042

Ending Balance, September 30, 2015
$
9,206

 
$
10,429

 
$
3,259

 
$
6,119

 
$
1,110

 
$
3,194

 
$
386

 
$
120

 
$
33,823


28

Table of Contents

Three Months Ended September 30, 2014
Multi-family
 
Commercial and Industrial
 
Commercial Real Estate Owner Occupied
 
Commercial
Real Estate Non-Owner Occupied
 
Construction
 
Residential
Real Estate
 
Manufactured
Housing
 
Other Consumer
 
Total
(amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance, July 1, 2014
$
7,205

 
$
3,341

 
$
2,826

 
$
10,060

 
$
2,187

 
$
2,028

 
$
401

 
$
138

 
$
28,186

Charge-offs

 
(91
)
 
(64
)
 
(214
)
 
(284
)
 
(139
)
 

 


 
(792
)
Recoveries

 
67

 
85

 
284

 
4

 
23

 

 
4

 
467

Provision for loan losses
767

 
1,187

 
301

 
1,069

 
(208
)
 
217

 
(80
)
 
(31
)
 
3,222

Ending Balance, September 30, 2014
$
7,972

 
$
4,504

 
$
3,148

 
$
11,199

 
$
1,699

 
$
2,129

 
$
321

 
$
111

 
$
31,083

Nine Months Ended September 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Beginning Balance, January 1, 2014
$
4,227

 
$
2,674

 
$
2,517

 
$
8,961

 
$
2,385

 
$
2,490

 
$
614

 
$
130

 
$
23,998

Charge-offs

 
(536
)
 
(318
)
 
(1,120
)
 
(284
)
 
(442
)
 

 
(33
)
 
(2,733
)
Recoveries

 
292

 
91

 
304

 
7

 
265

 

 
6

 
965

Provision for loan losses
3,745

 
2,074

 
858

 
3,054

 
(409
)
 
(184
)
 
(293
)
 
8

 
8,853

Ending Balance, September 30, 2014
$
7,972

 
$
4,504

 
$
3,148

 
$
11,199

 
$
1,699

 
$
2,129

 
$
321

 
$
111

 
$
31,083

As of December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$

 
$
16,523

 
$
13,349

 
$
6,173

 
$
2,325

 
$
1,820

 
$

 
$
135

 
$
40,325

Collectively evaluated for impairment
2,204,059

 
530,119

 
206,352

 
817,333

 
44,483

 
285,608

 
122,715

 
4,050

 
4,214,719

Loans acquired with credit deterioration
4,346

 
3,293

 
16,033

 
15,804

 
2,910

 
9,967

 
4,016

 
248

 
56,617

 
$
2,208,405

 
$
549,935

 
$
235,734

 
$
839,310

 
$
49,718

 
$
297,395

 
$
126,731

 
$
4,433

 
$
4,311,661

Allowance for loan losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$

 
$
856

 
$
96

 
$
170

 
$

 
$
188

 
$

 
$
32

 
$
1,342

Collectively evaluated for impairment
8,493

 
3,766

 
1,756

 
6,580

 
424

 
1,436

 
92

 
28

 
22,575

Loans acquired with credit deterioration

 
162

 
2,484

 
2,448

 
623

 
1,074

 
170

 
54

 
7,015

Ending Balance, December 31, 2014
$
8,493

 
$
4,784

 
$
4,336

 
$
9,198

 
$
1,047

 
$
2,698

 
$
262

 
$
114

 
$
30,932

The non-covered manufactured housing portfolio was purchased in August 2010. A portion of the purchase price may be used to reimburse the Bank under the specified terms in the purchase agreement for defaults of the underlying borrower and other specified items. At September 30, 2015 and December 31, 2014, funds available for reimbursement, if necessary, were $1.2 million and $3.0 million, respectively. Each quarter, these funds are evaluated to determine if they would be sufficient to absorb the probable incurred losses within the manufactured housing portfolio.
The changes in accretable yield related to purchased-credit-impaired loans for the three and nine months ended September 30, 2015 and 2014 were as follows:
 
Three Months Ended September 30,
 
2015
 
2014
(amounts in thousands)
 
 
 
Accretable yield balance, beginning of period
$
14,302

 
$
19,691

Accretion to interest income
(551
)
 
(839
)
Reclassification from nonaccretable difference and disposals, net
10

 
(378
)
Accretable yield balance, end of period
$
13,761

 
$
18,474

 
 
 
 

29

Table of Contents

 
Nine Months Ended September 30,
 
2015
 
2014
(amounts in thousands)
 
 
 
Accretable yield balance, beginning of period
$
17,606

 
$
22,557

Accretion to interest income
(1,790
)
 
(2,462
)
Reclassification from nonaccretable difference and disposals, net
(2,055
)
 
(1,621
)
Accretable yield balance, end of period
$
13,761

 
$
18,474

 
 
 
 

NOTE 8 - SHAREHOLDERS’ EQUITY

On May 18, 2015, Customers Bancorp issued 2,300,000 shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C, par value $1.00 per share, with a liquidation preference of $25.00 per share.

Customers Bancorp will pay dividends on the Series C Preferred Stock only when, as, and if declared by the board of directors or a duly authorized committee of the board and to the extent that it has lawfully available funds to pay dividends. Dividends on the Series C Preferred Stock will accrue and be payable quarterly in arrears, on the 15th day of March, June, September, and December of each year, commencing on September 15, 2015, at a fixed rate per annum equal to 7.00% from the original issue date to, but excluding, June 15, 2020, and thereafter at a floating rate per annum equal to three-month LIBOR on the related dividend determination date plus a spread of 5.30% per annum.

Dividends on the Series C Preferred Stock will not be cumulative. If Customers Bancorp's board of directors or a duly authorized committee of the board does not declare a dividend on the Series C Preferred Stock in respect of a dividend period, then no dividend shall be deemed to have accrued for such dividend period, be payable on the applicable dividend payment date, or be cumulative, and Customers Bancorp will have no obligation to pay any dividend for that dividend period, whether or not the board of directors or a duly authorized committee of the board declares a dividend on the Series C Preferred Stock for any future dividend period.

The Series C Preferred Stock has no stated maturity, is not subject to any mandatory redemption, sinking fund or other similar provisions and will remain outstanding unless redeemed at Customers Bancorp's option. Customers Bancorp may redeem the Series C Preferred Stock at its option, at a redemption price equal to $25.00 per share, plus any declared and unpaid dividends (without regard to any undeclared dividends), (i) in whole or in part, from time to time, on any dividend payment date on or after June 15, 2020 or (ii) in whole but not in part, within 90 days following the occurrence of a regulatory capital treatment event. Any redemption of the Series C Preferred Stock is subject to prior approval of the Board of Governors of the Federal Reserve System. The Series C Preferred Stock qualifies as Tier 1 capital under regulatory capital guidelines.

Except in limited circumstances, the Series C Preferred Stock does not have any voting rights.

On August 24, 2015, Customers Bancorp's board of directors declared a cash dividend on its Series C Preferred Stock of $0.56875 per share. The dividend was paid on September 15, 2015 to shareholders of record on August 31, 2015.
NOTE 9 — SHARE-BASED COMPENSATION
During the nine months ended September 30, 2015, options to purchase an aggregate of 596,995 shares of Customers Bancorp voting common stock were granted to certain officers and team members. The exercise price for the options granted is equal to the closing price of Customers Bancorp's voting common stock on the date of grant. The options are subject to a five-year cliff vesting and expire after ten years. In addition to the five-year service requirement, one of the following conditions must be met in order for the options to become exercisable:
Total shareholder returns over the five-year vesting period must be a minimum of 50%, or
Customers Bancorp must have achieved a compound annual growth rate in diluted EPS of at least 10% over the five-year vesting period.

30

Table of Contents

Customers evaluated the likelihood that at least one of these conditions would be met over the requisite service period and determined that it was more likely than not that one of the conditions would be satisfied (based upon historical performance). Accordingly, the grant-date fair value of these awards is being recognized as expense over the five-year vesting period. The fair value of the options was estimated using the Black-Scholes option pricing model.
The following table presents the weighted-average assumptions used and the resulting weighted-average fair value of each option granted.
 
 
September 30, 2015
Weighted-average risk-free interest rate
 
1.90
%
Expected dividend yield
 
0.00
%
Weighted-average expected volatility
 
21.18
%
Weighted-average expected life (in years)
 
7

Weighted-average fair value of each option granted
 
$
6.42

Stock Options
The following table summarizes stock option activity for the nine months ended September 30, 2015.
 
Number
of Options
 
Weighted-
average
Exercise
Price
 
Weighted-
average
Remaining
Contractual
Term in Years
 
Aggregate
Intrinsic
Value
(amounts in thousands, except Weighted-average exercise price)
 
 
 
 
 
 
 
Outstanding at January 1, 2015
3,168,067

 
$
12.61

 
 
 
 
Granted
596,995

 
23.36

 
 
 
 
Exercised
(31,168
)
 
10.53

 
 
 
$
455

Forfeited
(2,200
)
 
17.65

 
 
 
 
Outstanding at September 30, 2015
3,731,694

 
$
14.34

 
7.03
 
$
42,392

Exercisable at September 30, 2015
607,118

 
$
8.97

 
4.51
 
$
10,165


Cash received from the exercise of options during the nine months ended September 30, 2015 was $0.3 million with a related tax benefit of $0.2 million.
Restricted Stock Units
There were 158,581 restricted stock units granted during the nine months ended September 30, 2015. Of the aggregate restricted stock units granted, 84,392 were granted under the Bonus Recognition and Retention Program and are subject to five-year cliff vesting. The remaining units were granted under the Bancorp's Restated and Amended 2004 Incentive Equity and Deferred Compensation Plan and are subject to either a three-year waterfall vesting with one third of the amount vesting annually or a three-year cliff vesting. The following table summarizes restricted stock unit activity for the nine months ended September 30, 2015.
 
Restricted
Stock Units
 
Weighted-
average Grant-
date Fair Value
Outstanding and unvested at January 1, 2015
788,971

 
$
13.00

Granted
158,581

 
19.67

Vested
(65,166
)
 
12.01

Forfeited
(8,214
)
 
17.23

Outstanding and unvested at September 30, 2015
874,172

 
$
14.24


31

Table of Contents

Total share-based compensation expense for the three months ended September 30, 2015 and 2014 was $1.2 million and $1.1 million, respectively. Total share-based compensation expense for the nine months ended September 30, 2015 and 2014 was $3.6 million and $3.1 million, respectively.
Customers Bancorp has a policy that permits its directors to elect to receive shares of voting common stock in lieu of their cash retainers. During the nine months ended September 30, 2015, Customers Bancorp issued 21,993 shares of voting common stock with a fair value of $0.6 million to directors as compensation for their services during the first nine months of 2015. The fair values were determined based on the opening price of the common stock on the day the shares were issued.
NOTE 10 — REGULATORY MATTERS
The Bank and the Bancorp are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the minimum capital requirements can result in certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bancorp’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank and Bancorp must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items, as calculated under the regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Bank and Bancorp to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets (as defined in the regulations). At September 30, 2015 and December 31, 2014, the Bank and Bancorp met all capital adequacy requirements to which they were subject.
The Dodd-Frank Act required the FRB to establish minimum consolidated capital requirements for bank holding companies that are as stringent as those required for insured depositary subsidiaries. In 2013, the federal banking agencies approved rules that implemented the Dodd-Frank requirements and certain other regulatory capital reforms effective January 1, 2015, that (i) introduced a new capital ratio pursuant to the prompt corrective action provisions, the common equity tier 1 capital to risk rated assets ratio, (ii) increased the adequately capitalized and well capitalized thresholds for the Tier 1 risk based capital ratios to 6% and 8%, respectively, (iii) changed the treatment of certain capital components for determining Tier 1 and Tier 2 capital, and (iv) changed the risk weighting of certain assets and off balance sheet items in determining risk weighted assets.
To be categorized as well capitalized, an institution must maintain minimum common equity Tier 1, total risk based, Tier 1 risk based and Tier 1 leveraged ratios as set forth in the following table:

32

Table of Contents

 
Actual
 
For Capital Adequacy
Purposes
 
To Be Well Capitalized
Under
Prompt Corrective Action
Provisions
(amounts in thousands)
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
As of September 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
Common equity Tier 1 (to risk weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Customers Bancorp, Inc.
$
481,277

 
8.24
%
 
$
262,811

 
4.5
%
 
N/A

 
N/A

Customers Bank
$
549,276

 
9.45
%
 
$
261,566

 
4.5
%
 
$
377,818

 
6.5
%
Total capital (to risk weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Customers Bancorp, Inc.
$
667,532

 
11.43
%
 
$
467,219

 
8.0
%
 
N/A

 
N/A

Customers Bank
$
693,099

 
11.92
%
 
$
465,007

 
8.0
%
 
$
581,259

 
10.0
%
Tier 1 capital (to risk weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Customers Bancorp, Inc.
$
536,846

 
9.19
%
 
$
350,414

 
6.0
%
 
N/A

 
N/A

Customers Bank
$
549,276

 
9.45
%
 
$
348,755

 
6.0
%
 
$
465,007

 
8.0
%
Tier 1 capital (to average assets)
 
 
 
 
 
 
 
 
 
 
 
Customers Bancorp, Inc.
$
536,846

 
7.27
%
 
$
295,328

 
4.0
%
 
N/A

 
N/A

Customers Bank
$
549,276

 
7.46
%
 
$
294,713

 
4.0
%
 
$
368,392

 
5.0
%
As of December 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Customers Bancorp, Inc.
$
578,644

 
11.09
%
 
$
417,473

 
8.0
%
 
N/A

 
N/A

Customers Bank
$
621,894

 
11.98
%
 
$
415,141

 
8.0
%
 
$
518,926

 
10.0
%
Tier 1 capital (to risk weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Customers Bancorp, Inc.
$
437,712

 
8.39
%
 
$
208,737

 
4.0
%
 
N/A

 
N/A

Customers Bank
$
480,963

 
9.27
%
 
$
207,570

 
4.0
%
 
$
311,356

 
6.0
%
Tier 1 capital (to average assets)
 
 
 
 
 
 
 
 
 
 
 
Customers Bancorp, Inc.
$
437,712

 
6.69
%
 
$
261,622

 
4.0
%
 
N/A

 
N/A

Customers Bank
$
480,963

 
7.39
%
 
$
260,462

 
4.0
%
 
$
325,577

 
5.0
%

The new risk-based capital rules adopted effective January 1, 2015 require that banks and holding companies maintain a "capital conservation buffer" of 250 basis points in excess of the "minimum capital ratio." The minimum capital ratio is equal to the prompt corrective action adequately capitalized threshold ratio. The capital conservation buffer will be phased in over four years beginning on January 1, 2016, with a maximum buffer of 0.625% of risk weighted assets for 2016, 1.25% for 2017, 1.875% for 2018, and 2.5% for 2019 and thereafter. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses 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. FASB 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. However, many of these instruments lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction. For fair value disclosure purposes, Customers utilized certain fair value measurement criteria under the FASB ASC 820, Fair Value Measurements and Disclosures, as explained below.
In accordance with ASC 820, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for Customers' various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

33

Table of Contents

The fair value guidance provides a consistent definition of fair value, focusing on an exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value is a reasonable point within the range that is most representative of fair value under current market conditions.
The fair value guidance also establishes a fair value hierarchy and describes the following three levels used to classify fair value measurements.
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).
A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.
The following methods and assumptions were used to estimate the fair values of Customers' financial instruments as of September 30, 2015 and December 31, 2014:
Cash and cash equivalents:
The carrying amounts reported on the balance sheet for cash and cash equivalents approximate those assets’ fair values. These assets are included as Level 1 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Investment securities:
The fair values of investment securities available for sale are determined by obtaining quoted market prices on nationally recognized and foreign securities exchanges (Level 1), matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices, or externally developed models that use unobservable inputs due to limited or no market activity of the instrument (Level 3). These assets are included as Level 1, 2, or 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
The carrying amount of FHLB, Federal Reserve Bank, and other restricted stock approximates fair value, and considers the limited marketability of such securities. These assets are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Loans held for sale - Residential mortgage loans:
The Bank generally estimates the fair values of residential mortgage loans held for sale based on commitments on hand from investors within the secondary market for loans with similar characteristics. These assets are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Loans held for sale - Mortgage warehouse loans:
The fair value of mortgage warehouse loans is the amount of cash initially advanced to fund the mortgage, plus accrued interest and fees, as specified in the respective agreements. The loan is used by mortgage companies as short-term bridge financing between the funding of mortgage loans and the finalization of the sale of the loans to an investor. Changes in fair value are not expected to be recognized since at inception of the transaction the underlying loans have already been sold to an approved investor. Additionally, the interest rate is variable, and the transaction is short-term, with an average life of 19 days from purchase to sale. These assets are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.



34

Table of Contents

Loans held for sale – Multi-family loans:
The fair values of multi-family loans held for sale are estimated using pricing indications from letters of intent with third-party investors, recent sale transactions within the secondary markets for loans with similar characteristics, or non-binding indicative bids from brokers. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Loans receivable, net of allowance for loan losses:
The fair values of loans held for investment are estimated using discounted cash flows, using market rates at the balance sheet date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Impaired loans:
Impaired loans are those that are accounted for under ASC 450, Contingencies, in which the Bank has measured impairment generally based on the fair value of the loan’s collateral. Fair value is generally determined based upon independent third-party appraisals of the properties that collateralize the loans, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Other real estate owned:
The fair value of OREO is determined using appraisals, which may be discounted based on management’s review and changes in market conditions. All appraisals must be performed in accordance with the Uniform Standards of Professional Appraisal Practice. Appraisals are certified to the Bank and performed by appraisers on the Bank’s approved list of appraisers. Evaluations are completed by a person independent of management. The content of the appraisal depends on the complexity of the property. Appraisals are completed on a “retail value” and an “as is value”. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Deposit liabilities:
The fair values disclosed for interest and non-interest checking, passbook savings and money market deposit accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). These liabilities are included as Level 1 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities on time deposits. These liabilities are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Federal funds purchased:
For these short-term instruments, the carrying amount is considered a reasonable estimate of fair value. These liabilities are included as Level 1 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Borrowings:
Borrowings consist of long-term and short-term FHLB advances, five-year senior unsecured notes, and subordinated debt. For the short-term borrowings, the carrying amount is considered a reasonable estimate of fair value and is included as Level 1. Fair values of long-term FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms and remaining maturity. The prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party. Fair values of privately placed subordinated and senior unsecured debt are estimated by a third-party financial adviser using discounted cash flow analysis, based on market rates currently offered on such debt with similar credit-risk characteristics, terms and remaining maturity. These liabilities are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements. The $63 million senior unsecured notes issued during third quarter 2013 are traded on The New York Stock Exchange, and their price can be obtained daily. This fair value measurement is classified as Level 1.

35

Table of Contents

Derivatives (Assets and Liabilities):
The fair values of interest rate swaps and credit derivatives are determined using models that incorporate readily observable market data into a market standard methodology. This methodology nets the discounted future fixed cash receipts and the discounted expected variable cash payments. The discounted variable cash payments are based on expectations of future interest rates derived from observable market interest rate curves. In addition, fair value is adjusted for the effect of nonperformance risk by incorporating credit valuation adjustments for the Bank and its counterparties. These assets and liabilities are included as Level 2 fair values, based upon the lowest level of input that is significant to the fair value measurements.
The fair values of the residential mortgage loan commitments are derived from the estimated fair values that can be generated when the underlying mortgage loan is sold in the secondary market. The Bank uses commitments on hand from third party investors to estimate an exit price, and adjusts for the probability of the commitment being exercised based on the Bank’s internal experience (i.e., pull-through rate). These assets and liabilities are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.
Off-balance-sheet financial instruments:

The fair values of unused commitments to lend and standby letters of credit are considered to be the same as their contractual amounts.
The following information should not be interpreted as an estimate of Customers' fair value in its entirety since 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 Customer’s disclosures and those of other companies may not be meaningful.

36

Table of Contents

The estimated fair values of Customers' financial instruments were as follows at September 30, 2015 and December 31, 2014.
 
 
 
 
 
Fair Value Measurements at September 30, 2015
 
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)
(amounts in thousands)
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
383,399

 
$
383,399

 
$
383,399

 
$

 
$

Investment securities, available for sale
418,945

 
418,945

 
17,863

 
401,082

 

Loans held for sale
1,730,002

 
1,730,501

 

 
1,680,010

 
50,491

Loans receivable, net of allowance for loan losses
4,735,279

 
4,737,189

 

 

 
4,737,189

FHLB, Federal Reserve Bank and other restricted stock
63,514

 
63,514

 

 
63,514

 

Derivatives
10,938

 
10,938

 

 
10,868

 
70

Liabilities:
 
 
 
 
 
 
 
 
 
Deposits
$
5,785,194

 
$
5,799,266

 
$
3,497,023

 
$
2,302,243

 
$

Federal funds purchased
50,000

 
50,000

 
50,000

 

 

FHLB advances
985,900

 
988,859

 
715,900

 
272,959

 

Other borrowings
88,250

 
93,222

 
68,285

 
24,937

 

Subordinated debt
110,000

 
111,100

 

 
111,100

 

Derivatives
16,951

 
16,951

 

 
16,951

 


 
 
 
 
 
Fair Value Measurements at December 31, 2014
 
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)
(amounts in thousands)
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
371,023

 
$
371,023

 
$
371,023

 
$

 
$

Investment securities, available for sale
416,685

 
416,685

 
24,270

 
392,415

 

Loans held for sale
1,435,459

 
1,436,460

 

 
1,335,668

 
100,792

Loans receivable, net of allowance for loan losses
4,281,241

 
4,285,537

 

 

 
4,285,537

FHLB, Federal Reserve Bank and other stock
82,002

 
82,002

 

 
82,002

 

Derivatives
7,552

 
7,552

 

 
7,509

 
43

Liabilities:
 
 
 
 
 
 
 
 
 
Deposits
$
4,532,538

 
$
4,540,507

 
$
2,820,875

 
$
1,719,632

 
$

FHLB advances
1,618,000

 
1,619,858

 
1,298,000

 
321,858

 

Other borrowings
88,250

 
92,069

 
66,944

 
25,125

 

Subordinated debt
110,000

 
111,925

 

 
111,925

 

Derivatives
9,716

 
9,716

 

 
9,716

 


37

Table of Contents

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 September 30, 2015 and December 31, 2014 were as follows:
 
September 30, 2015
 
Fair Value Measurements at the End of the Reporting Period Using
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Total
(amounts in thousands)
 
 
 
 
 
 
 
Measured at Fair Value on a Recurring Basis:
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Mortgage-backed securities
$

 
$
365,760

 
$

 
$
365,760

Corporate notes

 
35,322

 

 
35,322

Equity securities
17,863

 

 

 
17,863

Derivatives (1)

 
10,868

 
70

 
10,938

Loans held for sale – fair value option

 
1,680,010

 

 
1,680,010

Total assets - recurring fair value measurements
$
17,863

 
$
2,091,960

 
$
70

 
$
2,109,893

Liabilities
 
 
 
 
 
 
 
Derivatives (2)
$

 
$
16,951

 
$

 
$
16,951

Measured at Fair Value on a Nonrecurring Basis:
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Impaired loans, net of specific reserves of $4,842
$

 
$

 
$
6,619

 
$
6,619

Other real estate owned

 

 
2,975

 
2,975

Total assets - nonrecurring fair value measurements
$

 
$

 
$
9,594

 
$
9,594

 
December 31, 2014
 
Fair Value Measurements at the End of the Reporting Period Using
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Total
(amounts in thousands)
 
 
 
 
 
 
 
Measured at Fair Value on a Recurring Basis:
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Mortgage-backed securities
$

 
$
377,311

 
$

 
$
377,311

Corporate notes

 
15,104

 

 
15,104

Equity securities
24,270

 

 

 
24,270

Derivatives (1)

 
7,509

 
43

 
$
7,552

Loans held for sale – fair value option

 
1,335,668

 

 
1,335,668

Total assets - recurring fair value measurements
$
24,270

 
$
1,735,592

 
$
43

 
$
1,759,905

Liabilities
 
 
 
 
 
 
 
Derivatives (2)

 
$
9,716

 

 
$
9,716

Measured at Fair Value on a Nonrecurring Basis:
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Impaired loans, net of specific reserves of $1,342
$

 
$

 
$
2,380

 
$
2,380

Other real estate owned

 

 
9,149

 
9,149

Total assets - nonrecurring fair value measurements
$

 
$

 
$
11,529

 
$
11,529

(1)
Included in Other Assets
(2)
Included in Other Liabilities

38

Table of Contents

The changes in Level 3 assets measured at fair value on a recurring basis for the three and nine months ended September 30, 2015 and 2014 are summarized as follows.
 
Three Months Ended September 30,
 
2015
 
2014
 
Residential Mortgage Loan Commitments
(amounts in thousands)
 
 
 
Balance at July 1
$
71

 
$
54

Issuances
70

 
35

Settlements
(71
)
 
(54
)
Balance at September 30
$
70

 
$
35


 
Nine Months Ended September 30,
 
2015
 
2014
 
Residential Mortgage Loan Commitments
(amounts in thousands)
 
 
 
Balance at January 1
$
43

 
$
240

Issuances
228

 
192

Settlements
(201
)
 
(397
)
Balance at September 30
$
70

 
$
35


Customers' policy is to recognize transfers between fair value levels when events or circumstances warrant transfers. There were no transfers between levels during the three and nine months ended September 30, 2015 and 2014.
The following table summarizes financial assets and financial liabilities measured at fair value as of September 30, 2015 and December 31, 2014 on a recurring and nonrecurring basis for which Customers utilized Level 3 inputs to measure fair value.
 
 
Quantitative Information about Level 3 Fair Value Measurements
September 30, 2015
Fair Value
Estimate
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted
Average) (3)
(amounts in thousands)
 
 
 
 
 
 
 
Impaired loans
$
6,619

 
Collateral appraisal (1)
 
Liquidation expenses (2)
 
(8)%
Other real estate owned
2,975

 
Collateral appraisal (1)
 
Liquidation expenses (2)
 
(8)%
Residential mortgage loan commitments
70

 
Adjusted market bid
 
Pull-through rate
 
92%
 
 
Quantitative Information about Level 3 Fair Value Measurements
December 31, 2014
Fair Value
Estimate
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted
Average) (3)
(amounts in thousands)
 
 
 
 
 
 
 
Impaired loans
$
2,380

 
Collateral appraisal (1)
 
Liquidation expenses (2)
 
(8)%
Other real estate owned
9,149

 
Collateral appraisal (1)
 
Liquidation expenses (2)
 
(8)%
Residential mortgage loan commitments
43

 
Adjusted market bid
 
Pull-through rate
 
80%
(1)
Obtained from approved independent appraisers. Appraisals are current and in compliance with credit policy. The Bank does not generally discount appraisals.
(2)
Fair value is adjusted for estimated costs to sell.
(3)
Presented as a percentage of the value determined by appraisal.


39

Table of Contents

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 value 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 fixed-rate borrowings. Customers also has interest-rate derivatives resulting from a service provided to certain qualifying customers, and therefore, they are not used to manage Customers' interest-rate risk in assets or liabilities. Customers manages a matched book with respect to its derivative instruments used in this customer service in order to minimize its net risk exposure resulting from such transactions.
Cash Flow Hedges of Interest Rate Risk
Customers' objectives in using interest-rate derivatives are to add stability to interest expense and to manage exposure to interest-rate movements. To accomplish this objective, Customers 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 effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During the three and nine months ended September 30, 2015 and 2014, such derivatives were used to hedge the variable cash flows associated with a forecasted issuance of debt. The ineffective portion of the change in fair value of the derivatives is to be recognized directly in earnings. During the three and nine months ended September 30, 2015 and 2014, Customers did not record any hedge ineffectiveness.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on Customers' variable-rate debt. Customers expects to reclassify $1.3 million from accumulated other comprehensive income to interest expense during the next 12 months.
Customers is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of 24 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).
At September 30, 2015 and December 31, 2014, Customers had one outstanding interest rate derivative with a notional amount of $150.0 million that was designated as a cash flow hedge of interest rate risk. The hedge expires in April 2019.
Derivatives Not Designated as Hedging Instruments
Customers executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies (typically the loan customers will swap a floating-rate loan to a fixed-rate loan). The customer interest rate swaps are simultaneously offset by interest rate swaps that Customers executes with a third party in order to minimize interest rate risk exposure resulting from such transactions. Because the interest rate swaps associated with this program do not meet the hedge accounting requirements, changes in the fair value of both the customer swaps and the offsetting third-party market swaps are recognized directly in earnings. At September 30, 2015, Customers had 52 interest rate swaps with an aggregate notional amount of $394.3 million related to this program. At December 31, 2014, Customers had 44 interest rate swaps with an aggregate notional amount of $251.9 million related to this program.
Customers enters into residential mortgage loan commitments in connection with its 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 September 30, 2015 and December 31, 2014, Customers had an outstanding notional balance of residential mortgage loan commitments of $4.3 million and $3.8 million, respectively.
Customers also purchased credit derivatives to hedge the performance risk associated with one of its counterparties. These derivatives are not designated as hedging instruments and are reported at fair value, with changes in fair value reported directly

40

Table of Contents

in earnings. At September 30, 2015 and December 31, 2014, Customers had an outstanding notional balance of credit derivatives of $19.4 million and $13.4 million, respectively.
Fair Value of Derivative Instruments on the Balance Sheet
The following table presents the fair value of Customers' derivative financial instruments as well as their classification on the balance sheet as of September 30, 2015 and December 31, 2014.
 
 
September 30, 2015
 
Derivative Assets
 
Derivative Liabilities
 
Balance Sheet
Location
 
Fair Value
 
Balance Sheet
Location
 
Fair Value
(amounts in thousands)
 
 
 
 
 
 
 
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
Interest rate swaps
Other assets
 
$

 
Other liabilities
 
$
5,786

Total
 
 
$

 
 
 
$
5,786

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Interest rate swaps
Other assets
 
$
10,676

 
Other liabilities
 
$
11,165

Credit contracts
Other assets
 
192

 
Other liabilities
 

Residential mortgage loan commitments
Other assets
 
70

 
Other liabilities
 

Total
 
 
$
10,938

 
 
 
$
11,165

 
 
December 31, 2014
 
 
Derivative Assets
 
Derivative Liabilities
 
 
Balance Sheet
 
 
 
Balance Sheet
 
 
 
 
Location
 
Fair Value
 
Location
 
Fair Value
(amounts in thousands)
 
 
 
 
 
 
 
 
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
     Interest rate swaps
 
Other assets
 
$

 
Other liabilities
 
$
1,945

          Total
 
 
 
$

 
 
 
$
1,945

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
     Interest rate swaps
 
Other assets
 
$
7,332

 
Other liabilities
 
$
7,771

     Credit contracts
 
Other assets
 
177

 
Other liabilities
 

     Residential mortgage loan commitments
 
Other assets
 
43

 
Other liabilities
 

          Total
 
 
 
$
7,552

 
 
 
$
7,771


Effect of Derivative Instruments on Comprehensive Income
The following tables present the effect of Customers' derivative financial instruments on comprehensive income for the three and nine months ended September 30, 2015 and 2014.
 
Three Months Ended September 30, 2015
 
Income Statement Location
 
Amount of Income  (Loss)
Recognized in Earnings
(amounts in thousands)
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
Interest rate swaps
Other non-interest income
 
$
192

Credit contracts
Other non-interest income
 
51

Residential mortgage loan commitments
Mortgage loan and banking income                
 
(1
)
Total
 
 
$
242



41

Table of Contents

 
Three Months Ended September 30, 2014
 
Income Statement Location
 
Amount of Income (Loss)
Recognized in Earnings
(amounts in thousands)
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
Interest rate swaps
Other non-interest income                
 
$
47

Credit contracts
Other non-interest income
 
(4
)
Residential mortgage loan commitments
Mortgage loan and banking income                
 
(19
)
Total
 
 
$
24


 
Nine Months Ended September 30, 2015
 
Income Statement Location
 
Amount of Income (Loss)
Recognized in Earnings
(amounts in thousands)
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
Interest rate swaps
Other non-interest income                
 
$
902

Credit contracts
Other non-interest income
 
15

Residential mortgage loan commitments
Mortgage loan and banking income                
 
27

Total
 
 
$
944


 
Nine Months Ended September 30, 2014
 
Income Statement Location
 
Amount of Income (Loss)
Recognized in Earnings
(amounts in thousands)
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
Interest rate swaps
Other non-interest income                
 
$
686

Credit contracts
Other non-interest income
 
(139
)
Residential mortgage loan commitments
Mortgage loan and banking income                
 
(205
)
Total
 
 
$
342


 
Three Months Ended September 30, 2015
 
Amount of Loss
Recognized in OCI on
Derivatives (Effective Portion) (1)
 
Location of Gain (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
 
Amount of Gain (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
(amounts in thousands)
 
 
 
 
 
Derivatives in cash flow hedging relationships:
 
 
 
 
 
Interest rate swaps
$
(1,464
)
 
Interest expense
 
$


 
Three Months Ended September 30, 2014
 
Amount of Gain
Recognized in OCI on
Derivatives (Effective Portion) (1)
 
Location of Gain (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
 
Amount of Gain (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
(amounts in thousands)
 
 
 
 
 
Derivatives in cash flow hedging relationships:
 
 
 
 
 
Interest rate swaps
$
426

 
Interest expense
 
$





42

Table of Contents

 
Nine Months Ended September 30, 2015
 
Amount of Loss
Recognized in OCI on
Derivatives (Effective Portion) (1)
 
Location of Gain (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
 
Amount of Gain (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
(amounts in thousands)
 
 
 
 
 
Derivatives in cash flow hedging relationships:
 
 
 
 
 
Interest rate swaps
$
(2,353
)
 
Interest expense
 
$


 
Nine Months Ended September 30, 2014
 
Amount of Loss
Recognized in OCI on
Derivatives (Effective Portion) (1)
 
Location of Gain (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
 
Amount of Gain (Loss)
Reclassified from
Accumulated OCI into
Income (Effective Portion)
(amounts in thousands)
 
 
 
 
 
Derivatives in cash flow hedging relationships:
 
 
 
 
 
Interest rate swaps
$
(196
)
 
Interest expense
 
$

(1)
Net of taxes
Credit-risk-related Contingent Features
By entering into derivative contracts, Customers is exposed to credit risk. The credit risk associated with derivatives executed with customers is the same as that involved in extending the related loans and is subject to the same standard credit policies. To mitigate the credit-risk exposure to major derivative dealer counterparties, Customers only enters into agreements with those counterparties that maintain credit ratings of high quality.
Agreements with major derivative dealer counterparties contain provisions whereby default on any of Customers' indebtedness would be considered a default on its derivative obligations. Customers also has entered into agreements that contain provisions under which the counterparty could require Customers to settle its obligations if Customers fails to maintain its status as a well/adequately-capitalized institution. As of September 30, 2015, 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 $17.3 million. In addition, Customers has minimum collateral posting thresholds with certain of these counterparties and at September 30, 2015 had posted $17.2 million of cash as collateral. Customers records cash posted as collateral as a reduction in the outstanding balance of cash and cash equivalents and an increase in the balance of other assets.
Disclosures about Offsetting Assets and Liabilities
The following tables present derivative instruments that are subject to enforceable master netting arrangements. Customers' interest rate swaps with institutional counterparties are subject to master netting arrangements and are included in the table below. Interest rate swaps with commercial banking customers and residential mortgage loan commitments are not subject to master netting arrangements and are excluded from the table below. Customers has not made a policy election to offset its derivative positions.

43

Table of Contents

Offsetting of Financial Assets and Derivative Assets
At September 30, 2015
 
Gross
Amount of
Recognized
Assets
 
Gross
Amounts
Offset in the
Consolidated
Balance
Sheet
 
Net
Amounts of
Assets
Presented
in the
Consolidated
Balance
Sheet
 
Gross Amounts
Not Offset in the
Consolidated
Balance Sheet
 
Net
Amount
 
Financial
Instruments
 
Cash
Collateral
Received
 
(amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
Description
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap derivatives with institutional counterparties
$

 
$

 
$

 
$

 
$

 
$

Offsetting of Financial Liabilities and Derivative Liabilities
At September 30, 2015
 
Gross
Amount of
Recognized
Liabilities
 
Gross
Amounts
Offset in the
Consolidated
Balance
Sheet
 
Net
Amounts of
Liabilities
Presented
in the
Consolidated
Balance
Sheet
 
Gross Amounts
Not Offset in the
Consolidated
Balance Sheet
 
 
 
Financial
Instruments
 
Cash
Collateral
Pledged
 
Net
Amount
(amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
Description
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap derivatives with institutional counterparties
$
16,951

 
$

 
$
16,951

 
$

 
$
16,951

 
$

Offsetting of Financial Assets and Derivative Assets
At December 31, 2014
 
Gross
Amount of
Recognized
Assets
 
Gross
Amounts
Offset in the
Consolidated
Balance
Sheet
 
Net
Amounts of
Assets
Presented
in the
Consolidated
Balance
Sheet
 
Gross Amounts
Not Offset in the
Consolidated
Balance Sheet
 
Net
Amount
 
Financial
Instruments
 
Cash
Collateral
Received
 
(amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
Description
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap derivatives with institutional counterparties
$
192

 
$

 
$
192

 
$
192

 
$

 
$

Offsetting of Financial Liabilities and Derivative Liabilities
At December 31, 2014
 
Gross
Amount of
Recognized
Liabilities
 
Gross
Amounts
Offset in the
Consolidated
Balance
Sheet
 
Net
Amounts of
Liabilities
Presented
in the
Consolidated
Balance
Sheet
 
Gross Amounts
Not Offset in the
Consolidated
Balance Sheet
 
Net
Amount
 
Financial
Instruments
 
Cash
Collateral
Pledged
 
(amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
Description
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap derivatives with institutional counterparties
$
9,703

 
$

 
$
9,703

 
$
192

 
$
9,511

 
$


44

Table of Contents

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 Customers may contain certain forward-looking information within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. These statements relate to future events or future predictions, including events or predictions relating to future financial performance, and are generally identifiable by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “plan,” “intend,” “anticipates,” “strategies” or the negative thereof or comparable terminology, or by discussion of strategy that involve risks and uncertainties. These forward-looking statements are only predictions and estimates regarding future events and circumstances and involve known and unknown risks, uncertainties and other factors, including the risks described under “Risk Factors” that may cause actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. This information is based on various assumptions that may not prove to be correct. These forward-looking statements are subject to significant uncertainties and contingencies, many of which are beyond the control of Customers. Although the expectations reflected in the forward-looking statements are currently believed to be reasonable, future results, levels of activity, performance or achievements cannot be guaranteed. Accordingly, there can be no assurance that actual results will meet expectations or will not be materially lower than the results contemplated in this report and attachments hereto. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report or, in the case of documents referred to, the dates of those documents. Customers undertakes no obligation to release publicly or otherwise provide any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events, 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, a financial holding company, and its wholly owned subsidiaries, including Customers Bank. 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 nine months ended September 30, 2015. 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' Annual Report on Form 10-K for the fiscal year ended December 31, 2014 (“2014 Form 10-K”).
Critical Accounting Policies
We have adopted various accounting policies that govern the application of accounting principles generally accepted in the United States of America and that are consistent with general practices within the banking industry in the preparation of our financial statements. Our significant accounting policies are described in “NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION” to our audited financial statements included in our 2014 Form 10-K and updated in this report on Form 10-Q for the quarterly period ended September 30, 2015.
Certain accounting policies involve significant judgments and assumptions by Customers that have a material impact on the carrying value of certain assets and liabilities. We consider 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 our assets and liabilities and our results of operations.
Third Quarter Events of Note
Customers Bancorp continued its strong financial performance through third quarter 2015. Financial results for third quarter 2015 included earnings of $14.3 million, a record high, or $0.50 per diluted share. Customers continued its planned strategy to moderate its balance sheet growth, with total assets of $7.6 billion largely unchanged at September 30, 2015 compared to June 30, 2015. Total loans, including loans held for sale, also remained relatively flat at $6.5 billion, with increases in multi-family loans of $136 million, commercial and industrial loans (including owner occupied commercial real estate) of $48 million, and non-owner occupied real estate loans of $17 million, offset by a seasonal decrease in loans to mortgage companies of $266 million.
Asset quality remained strong and capital ratios exceeded levels established for “well-capitalized” banks and bank holding companies at September 30, 2015. The return on average common equity was 11.83% for third quarter 2015, and the return on

45

Table of Contents

average assets was 0.82%. During third quarter 2015, Customers sold approximately $36 million of multi-family loans in market based transactions which resulted in a gain on sale of approximately $0.4 million.

Results of Operations
Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014
Net income available to common shareholders increased $2.6 million, or 22.7%, to $14.3 million for the three months ended September 30, 2015, compared to $11.7 million for the three months ended September 30, 2014. The increased net income available to common shareholders resulted from an increase in net interest income of $9.7 million, largely reflecting the loan portfolio growth of the past year, a reduction in provision expense of $2.9 million, an increase in non-interest income of $1.1 million, offset in part by an increase in non-interest expense of $5.6 million, an increase in income tax expense of $4.5 million, and the accrual of preferred stock dividends of $1.0 million.
Net interest income increased $9.7 million, or 24.2%, for the three months ended September 30, 2015 to $49.9 million, compared to $40.2 million for the three months ended September 30, 2014. This increase resulted principally from higher average loan balances (loans and loans held for sale) of $1.4 billion and increased prepayment fees received on multi-family loans and dividends on FHLB stock.
The provision for loan losses decreased $2.9 million to $2.1 million for the three months ended September 30, 2015, compared to $5.0 million for the same period in 2014. The third quarter 2015 provision for loan losses of $2.1 million includes a $1.2 million provision for net growth in the held-for-investment loan portfolio (predominately multi-family loans) and a net provision of approximately $0.9 million primarily for estimated credit quality deterioration identified with loans considered impaired as of September 30, 2015.
Non-interest income increased $1.1 million during the three months ended September 30, 2015 to $6.2 million, compared to $5.1 million for the three months ended September 30, 2014. This increase resulted primarily from increased mortgage warehouse transactional fees of $0.6 million as a result of higher processing volume and a $0.4 million gain realized from the sale of multi-family loans.
Non-interest expense increased $5.6 million during the three months ended September 30, 2015 to $30.3 million, compared to $24.7 million during the three months ended September 30, 2014 primarily resulting from the loan portfolio growth over the past year, requiring increased staffing for loan origination and administrative support, higher occupancy expense, and technology fees (up $3.1 million), increased other real estate owned ("OREO") expense principally due to the non-guaranteed portion of losses recognized on OREO write-downs during third quarter 2015 (up $1.1 million), and increased professional services related to fees paid for the FHLB letter of credit used to collateralize municipal deposits and consulting fees paid for loan reviews, legal services, and outsourcing of certain accounting and internal audit work (up $1.0 million).
Income tax expense increased $4.5 million in the three months ended September 30, 2015 to $8.4 million, compared to $3.9 million in the same period of 2014. The increase in income tax expense was driven primarily from increased taxable income of $8.1 million in third quarter 2015 and an adjustment recorded in third quarter 2014 that reduced income tax expense as a result of a return to provision and deferred tax analysis performed during that period.
Preferred stock dividends increased $1.0 million in third quarter 2015 due to the accrual of dividends on Customers' Series C Preferred Stock issued on May 18, 2015.





46

Table of Contents

Net Interest Income
Net interest income (the difference between the interest earned on loans, investments and interest-earning deposits with banks, and interest paid on deposits, borrowed funds and subordinated debt) is the primary source of Customers' earnings. 
The following table summarizes Customers' net interest income and related spread and margin for the periods indicated.
 
Three Months Ended September 30,
 
2015
 
2014
 
Average
Balance
 
Interest
Income or
Expense
 
Average
Yield or
Cost (%)
 
Average
Balance
 
Interest
Income or
Expense
 
Average
Yield or
Cost
(amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest earning deposits
$
312,286

 
$
202

 
0.26
%
 
$
244,013

 
$
154

 
0.25
%
Investment securities (A)
377,157

 
2,283

 
2.42

 
421,213

 
2,361

 
2.24

Loans held for sale
1,720,863

 
14,006

 
3.23

 
1,014,068

 
8,503

 
3.33

Loans (B)
4,648,986

 
46,291

 
3.95

 
3,977,407

 
39,640

 
3.96

Other interest-earning assets
67,299

 
954

 
5.62

 
83,313

 
640

 
3.05

Total interest earning assets
7,126,591

 
63,736

 
3.55
%
 
5,740,014

 
51,298

 
3.55
%
Non-interest earning assets
260,659

 
 
 
 
 
238,223

 
 
 
 
Total assets
$
7,387,250

 
 
 
 
 
$
5,978,237

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest checking
$
135,539

 
177

 
0.52
%
 
$
58,734

 
94

 
0.63
%
Money market deposit accounts
2,490,617

 
3,166

 
0.50

 
1,741,007

 
2,599

 
0.59

Other savings
35,089

 
23

 
0.26

 
42,117

 
43

 
0.40

Certificates of deposit
2,277,072

 
5,656

 
0.99

 
1,426,644

 
3,443

 
0.96

Total interest bearing deposits
4,938,317

 
9,022

 
0.72

 
3,268,502

 
6,179

 
0.75

Borrowings
1,218,242

 
4,780

 
1.56

 
1,674,576

 
4,905

 
1.17

Total interest-bearing liabilities
6,156,559

 
13,802

 
0.89

 
4,943,078

 
11,084

 
0.89

Non-interest-bearing deposits
675,455

 
 
 
 
 
596,497

 
 
 
 
Total deposits & borrowings
6,832,014

 
 
 
0.80

 
5,539,575

 
 
 
0.79

Other non-interest bearing liabilities
19,998

 
 
 
 
 
16,596

 
 
 
 
Total liabilities
6,852,012

 
 
 
 
 
5,556,171

 
 
 
 
Shareholders’ Equity
535,238

 
 
 
 
 
422,066

 
 
 
 
Total liabilities and shareholders’ equity
$
7,387,250

 
 
 
 
 
$
5,978,237

 
 
 
 
Net interest earnings
 
 
49,934

 
 
 
 
 
40,214

 
 
Tax-equivalent adjustment (C)
 
 
105

 
 
 
 
 
104

 
 
Net interest earnings
 
 
$
50,039

 
 
 
 
 
$
40,318

 
 
Interest spread
 
 
 
 
2.75
%
 
 
 
 
 
2.75
%
Net interest margin
 
 
 
 
2.78
%
 
 
 
 
 
2.78
%
Net interest margin tax equivalent (C)
 
 
 
 
2.79
%
 
 
 
 
 
2.79
%
 
(A)
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.
(B)
Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees.
(C)
Full tax-equivalent basis, using a 35% statutory tax rate to approximate interest income as a taxable asset.

47

Table of Contents

The following table presents the dollar amount of changes in interest income and interest expense for the major categories of interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.
 
Three Months Ended September 30,
 
2015 vs. 2014
 
Increase (Decrease) due
to Change in
 
 
 
Rate
 
Volume
 
Total
(amounts in thousands)
 
 
 
 
 
Interest income:
 
 
 
 
 
Interest earning deposits
$
4

 
$
44

 
$
48

Investment securities
182

 
(260
)
 
(78
)
Loans held for sale
(259
)
 
5,762

 
5,503

Loans
(39
)
 
6,690

 
6,651

Other interest-earning assets
456

 
(142
)
 
314

Total interest income
344

 
12,094

 
12,438

Interest expense:
 
 
 
 
 
Interest checking
(20
)
 
103

 
83

Money market deposit accounts
(428
)
 
995

 
567

Savings
(14
)
 
(6
)
 
(20
)
Certificates of deposit
102

 
2,111

 
2,213

Total interest bearing deposits
(360
)
 
3,203

 
2,843

Borrowings
1,418

 
(1,543
)
 
(125
)
Total interest expense
1,058

 
1,660

 
2,718

Net interest income
$
(714
)
 
$
10,434

 
$
9,720

Net interest income for the three months ended September 30, 2015 was $49.9 million, an increase of $9.7 million, or 24.2%, when compared to net interest income of $40.2 million for the three months ended September 30, 2014. This net increase was primarily the result of an increase of $706.8 million in the average balance of "Loans held for sale" driven by increased lending activity to mortgage companies during 2015 and an increase of $671.6 million in the average balance of "Loans." Within “Loans,” changes in the following categories primarily were responsible for the net increase in loan volume:
 
$272.9 million increase in the average balance of multi-family loans; and
$419.3 million increase in the average balance of other commercial loans, including owner occupied commercial real estate loans.
The increases in loan volume were the result of focused efforts by Customers' lending teams to execute an organic growth strategy.
Interest expense on total interest-bearing deposits increased $2.8 million in third quarter 2015 compared to third quarter 2014. This increase resulted from increased deposit volume as average interest-bearing deposits increased $1.7 billion for the three months ended September 30, 2015 compared to average interest-bearing deposits for the three months ended September 30, 2014, and the average rate on interest-bearing deposits decreased 3 basis points for the third quarter 2015.
Interest expense on borrowings decreased $0.1 million as deposit growth reduced the need for borrowings. Average borrowings for the three months ended September 30, 2015 decreased by $456.3 million when compared to average borrowings for the three months ended September 30, 2014. The 39 basis point increase in the related average rate was due to a lower mix of lower-rate overnight borrowings due to deposit growth reducing the need for short-term borrowings.


48

Table of Contents

Customers’ net interest margin (tax equivalent) was unchanged at 2.79% for the three months ended September 30, 2015 and September 30, 2014. The flat net interest margin resulted from a 6 basis point reduction in portfolio yields offset by increases in prepayment fees on multi-family loans and FHLB dividends of $1.3 million, or approximately 6 basis points.

Provision for Loan Losses
The Bank has established an allowance for loan losses through a provision for loan losses charged as an expense on the consolidated statements of income. The loan portfolio is reviewed quarterly to assess and measure both the performance of the portfolio and the adequacy of the allowance for loan losses. At September 30, 2015, approximately $13.8 million, or 0.2%, of the loan portfolio including loans held for sale, was covered under loss sharing agreements with the FDIC. Decreases in the estimated cash flows on the loans covered by the loss share agreements greater than the original estimated value are recorded as an increase to the provision for loan losses, and a corresponding receivable due from the FDIC is recorded as a reduction to the provision for loan losses for the portion anticipated to be recovered under the loss sharing agreements. Conversely, if the estimated cash flows on the covered loans increase, all or a portion of the previously recorded provision for loan losses will be reversed, and the corresponding receivable due from the FDIC will be written down as an increase to the provision for loan losses. Decreases in the valuations of other real estate owned covered by the loss sharing agreements are recorded net of the estimated FDIC receivable resulting from the valuation allowance as an increase to other real estate owned expense (a component of non-interest expense). The FDIC loss sharing receivable balance will be reduced through a charge to the provision for loan losses, with no offsetting reduction to the allowance for loan losses, as the period to submit losses under the FDIC loss sharing agreements approaches expiration and the estimated losses on the covered loans have not yet emerged or been realized in a final disposition event. The period to submit losses under the FDIC loss sharing agreements for commercial loans expired in third quarter 2015 and no significant write-downs of the indemnification asset were required. The period to submit losses under the FDIC loss sharing agreements for single family loans expires in third quarter 2017. The final maturity of the FDIC loss sharing agreements occurs in third quarter 2020.

As part of the FDIC loss sharing agreements, the Bank also assumed a liability to be paid within 45 days subsequent to the maturity or termination of the loss sharing agreements that is contingent upon actual losses incurred over the life of the agreements relative to expected losses and the consideration paid upon acquisition of the failed institutions ("the Clawback Liability”). Due to receipt of cash payments on the covered assets in excess of expectations, the Bank anticipates that it will be required to pay the FDIC at the end of its loss sharing agreements. As of September 30, 2015, a clawback liability of $2.3 million has been recorded. To the extent actual losses on the covered assets are less than estimated losses, the clawback liability will increase. To the extent actual losses on the covered assets are more than the estimated losses, the clawback liability will decrease. The clawback liability is contractually due to be paid to the FDIC subsequent to expiration of the agreements in 2020.
The provision for loan losses decreased by $2.9 million to $2.1 million for the three months ended September 30, 2015, compared to $5.0 million for the same period in 2014. The third quarter 2015 provision for loan losses of $2.1 million includes a $1.2 million provision for net growth in the held-for-investment loan portfolio (predominately multi-family loans) and a net provision of approximately $0.9 million primarily for estimated credit quality deterioration identified with loans considered impaired as of September 30, 2015.
For more information about our provision and allowance for loan losses 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 months ended September 30, 2015 and 2014.

49

Table of Contents

 
Three Months Ended September 30,
 
2015
 
2014
(amounts in thousands)
 
 
 
Mortgage warehouse transactional fees
$
2,792

 
$
2,154

Bank-owned life insurance
1,177

 
976

Gain on sale of loans
1,131

 
695

Deposit fees
265

 
192

Mortgage loans and banking income
167

 
212

Gain (loss) on sale of investment securities
(16
)
 

Other
655

 
873

Total non-interest income
$
6,171

 
$
5,102

Non-interest income increased $1.1 million during the three months ended September 30, 2015 to $6.2 million, compared to $5.1 million for the three months ended September 30, 2014. The increase in third quarter 2015 was primarily attributable to an increase of $0.6 million in mortgage warehouse transactional fees as a result of higher processing volume and a $0.4 million gain realized from the sale of multi-family loans.
Non-Interest Expense
The table below presents the components of non-interest expense for the three months ended September 30, 2015 and 2014.
 
Three Months Ended September 30,
 
2015
 
2014
(amounts in thousands)
 
 
 
Salaries and employee benefits
$
14,981

 
$
12,070

FDIC assessments, taxes, and regulatory fees
3,222

 
3,320

Professional services
2,673

 
1,671

Technology, communication and bank operations
2,422

 
2,297

Occupancy
2,169

 
2,119

Other real estate owned
1,722

 
603

Advertising and promotion
330

 
261

Loan workout
285

 
388

Other
2,503

 
1,950

Total non-interest expense
$
30,307

 
$
24,679

Non-interest expense was $30.3 million for the three months ended September 30, 2015, an increase of $5.6 million from non-interest expense of $24.7 million for the three months ended September 30, 2014.
Salaries and employee benefits, which represent the largest component of non-interest expense, increased $2.9 million, or 24.1%, to $15.0 million for the three months ended September 30, 2015. The primary reason for this increase was an increase in the number of employees to 484 full-time equivalents at September 30, 2015 from 400 full-time equivalents at September 30, 2014. This was directly related to the need for additional employees to support our organic growth. More specifically, the increased headcount was needed to support the growing multi-family, commercial real estate and commercial and industrial loan portfolios and the increased deposits.
Professional services expense increased by $1.0 million, or 60.0%, to $2.7 million for the three months ended September 30, 2015 from $1.7 million for the three months ended September 30, 2014. This increase was primarily attributable to increased professional services related to fees paid for the FHLB letter of credit used to collateralize municipal deposits and consulting fees paid for loan reviews, legal services, and outsourcing of certain accounting and internal audit work.
Other real estate owned expense increased by $1.1 million, or 185.6%, to $1.7 million for the three months ended September 30, 2015 from $0.6 million for the three months ended September 30, 2014. This increase was primarily attributable to the non-guaranteed portion of losses recognized on real estate owned resulting from valuation adjustments.

50

Table of Contents

Other expense increased by $0.6 million, or 28.4% to $2.5 million for the three months ended September 30, 2015 from $2.0 million for the three months ended September 30, 2014. Customers' experienced higher levels of miscellaneous expenses resulting from the organic growth experienced over the past year, increased staffing, and other activities associated with business development.
Income Taxes
Income tax expense increased $4.5 million in the three months ended September 30, 2015 to $8.4 million, compared to $3.9 million in the same period of 2014. The increase in income tax expense was driven primarily from increased taxable income of $8.1 million in third quarter 2015 and an adjustment recorded in third quarter 2014 that reduced income tax expense by $1.5 million as a result of a return to provision and deferred tax analysis performed during that period.
Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014
Net income available to common shareholders increased $9.3 million, or 30.9%, to $39.3 million for the nine months ended September 30, 2015, compared to $30.0 million for the nine months ended September 30, 2014. The increased net income available to common shareholders resulted from an increase in net interest income of $35.9 million, largely reflecting the loan portfolio growth of the past year, offset in part by an increase in the provision for loan losses of $2.1 million, a decrease in non-interest income of $1.0 million, an increase in non-interest expense of $12.4 million, an increase in income tax expense of $9.6 million, and the accrual of preferred stock dividends of $1.5 million.
Net interest income increased $35.9 million, or 33.6%, for the nine months ended September 30, 2015 to $142.8 million, compared to $106.9 million for the nine months ended September 30, 2014. This increase resulted principally from an increase in average loan balances (loans and loans held for sale) of $1.8 billion offset in part by a slightly more narrow (8 basis points)net interest margin.
The provision for loan losses increased by $2.1 million to $14.4 million for the nine months ended September 30, 2015, compared to $12.3 million for the same period in 2014. The provision for loan losses of $14.4 million includes $3.4 million for growth and change in mix of the held for investment loan portfolio, $9.7 million for decreased valuation estimates on property collateralizing impaired loans, including $6.0 million of reserves set aside for an isolated case of fraudulent activity in second quarter 2015, and $3.8 million predominantly for increases in amounts estimated to be paid to the FDIC related to the assisted transactions completed in 2010 for the clawback liability and reimbursement to the FDIC of collections of previously charged-off loans, offset in part by a $2.4 million provision release primarily resulting from the Bank's low level of historical losses on loans originated after 2009 and updating the estimated loss ratios to reflect actual industry performance rather than qualitative estimates.
Non-interest income decreased $1.0 million during the nine months ended September 30, 2015 to $18.3 million, compared to $19.3 million for the nine months ended September 30, 2014. The decrease in the nine months ended September 30, 2015 was primarily attributable to gains realized from sales of investment securities of $3.2 million and higher mortgage loan and banking income of $1.6 million related to the gain on sale of residential mortgage loans during the nine months ended September 30, 2014, partially offset by increased mortgage warehouse transactional fees of $1.7 million and increased gains realized from sales of multi-family and SBA loans of $1.9 million during the nine months ended September 30, 2015.
Non-interest expense increased $12.4 million during the nine months ended September 30, 2015 to $83.4 million, compared to $71.1 million during the nine months ended September 30, 2014 primarily as a result of the $1.8 billion growth in average loan balances (loans and loans held for sale) during the period, requiring increased staffing for loan origination and administrative support of approximately $10.4 million, increased occupancy, technology and professional services expenses of $3.0 million, and higher levels of other operating expenses of $0.7 million resulting from the organic growth, increased staffing, and other activities associated with business development. These increases were offset in part by a $1.0 million decrease in FDIC assessments, taxes, and regulatory fees primarily due to an adjustment that reduced the Pennsylvania shares tax expense by $2.3 million during second quarter 2015 and a decrease of $0.8 million in loan workout as workout costs are decreasing driven by declining problem loans and recoveries of past expenses.
Income tax expense increased $9.6 million in the nine months ended September 30, 2015 to $22.5 million, compared to $12.9 million in the same period of 2014. The increase in income tax expense was driven primarily from increased taxable income of $20.4 million in the first nine months of 2015 and an adjustment recorded in third quarter 2014 that reduced income tax expense by $1.5 million as a result of a return to provision and deferred tax analysis performed during that period.
Preferred stock dividends increased $1.5 million in the nine months ended September 30, 2015 due to the new requirements to pay dividends on Customers' Series C Preferred Stock, issued on May 18, 2015.

51

Table of Contents

Net Interest Income
Net interest income (the difference between the interest earned on loans, investments and interest-earning deposits with banks, and interest paid on deposits, borrowed funds and subordinated debt) is the primary source of Customers' earnings. 
The following table summarizes Customers' net interest income and related spread and margin for the periods indicated.
 
Nine Months Ended September 30,
 
2015
 
2014
 
Average
Balance
 
Interest
Income or
Expense
 
Average
Yield or
Cost (%)
 
Average
Balance
 
Interest
Income or
Expense
 
Average
Yield or
Cost
(amounts in thousands)
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest earning deposits
$
295,485

 
$
566

 
0.26
%
 
$
214,215

 
$
403

 
0.25
%
Investment securities (A)
389,253

 
6,899

 
2.36

 
461,708

 
7,944

 
2.29

Loans held for sale
1,594,942

 
38,428

 
3.22

 
787,509

 
20,301

 
3.45

Loans (B)
4,472,704

 
132,185

 
3.95

 
3,458,930

 
103,216

 
3.99

Other interest-earning assets
73,368

 
4,059

 
7.40

 
61,961

 
1,402

 
3.03

Total interest earning assets
6,825,752

 
182,137

 
3.57
%
 
4,984,323

 
133,266

 
3.57
%
Non-interest earning assets
268,799

 
 
 
 
 
220,389

 
 
 
 
Total assets
$
7,094,551

 
 
 
 
 
$
5,204,712

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest checking
$
119,472

 
495

 
0.55
%
 
$
58,479

 
240

 
0.55
%
Money market deposit accounts
2,336,667

 
9,244

 
0.53

 
1,594,472

 
7,315

 
0.61

Other savings
35,462

 
87

 
0.33

 
41,920

 
133

 
0.42

Certificates of deposit
1,997,640

 
14,867

 
0.99

 
1,333,594

 
9,633

 
0.97

Total interest bearing deposits
4,489,241

 
24,693

 
0.74

 
3,028,465

 
17,321

 
0.76

Borrowings
1,399,478

 
14,622

 
1.40

 
1,136,675

 
9,008

 
1.06

Total interest-bearing liabilities
5,888,719

 
39,315

 
0.89

 
4,165,140

 
26,329

 
0.84

Non-interest-bearing deposits
684,466

 
 
 
 
 
615,956

 
 
 
 
Total deposits & borrowings
6,573,185

 
 
 
0.80

 
4,781,096

 
 
 
0.74

Other non-interest bearing liabilities
26,025

 
 
 
 
 
14,963

 
 
 
 
Total liabilities
6,599,210

 
 
 
 
 
4,796,059

 
 
 
 
Shareholders’ Equity
495,341

 
 
 
 
 
408,653

 
 
 
 
Total liabilities and shareholders’ equity
$
7,094,551

 
 
 
 
 
$
5,204,712

 
 
 
 
Net interest earnings
 
 
142,822

 
 
 
 
 
106,937

 
 
Tax-equivalent adjustment (C)
 
 
337

 
 
 
 
 
290

 
 
Net interest earnings
 
 
$
143,159

 
 
 
 
 
$
107,227

 
 
Interest spread
 
 
 
 
2.77
%
 
 
 
 
 
2.84
%
Net interest margin
 
 
 
 
2.80
%
 
 
 
 
 
2.87
%
Net interest margin tax equivalent (C)
 
 
 
 
2.80
%
 
 
 
 
 
2.88
%
 
(A)
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.
(B)
Includes non-accrual loans, the effect of which is to reduce the yield earned on loans, and deferred loan fees.
(C)
Full tax-equivalent basis, using a 35% statutory tax rate to approximate interest income as a taxable asset.

52

Table of Contents

The following table presents the dollar amount of changes in interest income and interest expense for the major categories of interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume which cannot be segregated have been allocated proportionately to the change due to volume and the change due to rate.
 
 
Nine Months Ended September 30,
 
2015 vs. 2014
 
Increase (Decrease) due
to Change in
 
 
 
Rate
 
Volume
 
Total
(amounts in thousands)
 
 
 
 
 
Interest income:
 
 
 
 
 
Interest earning deposits
$
8

 
$
155

 
$
163

Investment securities
232

 
(1,277
)
 
(1,045
)
Loans held for sale
(1,411
)
 
19,538

 
18,127

Loans
(991
)
 
29,960

 
28,969

Other interest-earning assets
2,356

 
301

 
2,657

Total interest income
194

 
48,677

 
48,871

Interest expense:
 
 
 
 
 
Interest checking
3

 
252

 
255

Money market deposit accounts
(1,115
)
 
3,044

 
1,929

Savings
(27
)
 
(19
)
 
(46
)
Certificates of deposit
300

 
4,934

 
5,234

Total interest bearing deposits
(839
)
 
8,211

 
7,372

Borrowings
3,255

 
2,359

 
5,614

Total interest expense
2,416

 
10,570

 
12,986

Net interest income
$
(2,222
)
 
$
38,107

 
$
35,885

Net interest income for the nine months ended September 30, 2015 was $142.8 million, an increase of $35.9 million, or 33.6%, when compared to net interest income of $106.9 million for the nine months ended September 30, 2014. This net increase was primarily the result of an increase of $807.4 million in the average balance of "Loans held for sale" driven by increased lending activity to mortgage companies during 2015 and an increase of $1.0 billion in the average balance of "Loans." Within “Loans,” changes in the following categories primarily were responsible for the net increase in loan volume:
 
$557.0 million increase in the average balance of multi-family loans; and
$527.0 million increase in the average balance of other commercial loans including owner occupied commercial real estate loans.
These particular increases in loan volume were the result of concentrated efforts by the Bank's lending teams to execute an organic growth strategy.
Interest expense on total interest-bearing deposits increased $7.4 million for the first nine months of 2015 compared to the first nine months of 2014. This increase primarily resulted from increased deposit volume as average interest-bearing deposits for the nine months ended September 30, 2015 increased by $1.5 billion when compared to average interest-bearing deposits for the nine months ended September 30, 2014, offset in part by a decrease in the average rate on interest-bearing deposits of 2 basis points for the first nine months of 2015.
Borrowings also had a significant effect on net interest income due to increased volume as well as a 34 basis-point increase in the average rate primarily due to the issuance in June 2014 of $110.0 million of subordinated debt bearing an interest rate of 6.125% and $25.0 million of senior debt with an interest rate of 4.625%. In addition, there was an increase in average FHLB borrowings of $162.6 million accompanied by a 40 basis-point increase in the related average rate.

53

Table of Contents

Customers’ net interest margin (tax equivalent) decreased 8 basis points to 2.80% for the nine months months ended September 30, 2015 when compared to the net interest margin (tax equivalent) of 2.88% for the same period in 2014. The decrease was primarily due to higher volumes on the lower-yielding mortgage warehouse held-for-sale portfolio and debt issuances of $110.0 million and $25.0 million in June 2014. Increased prepayment fees and dividends received from the FHLB during the first nine months of 2015 of $4.0 million partially offset the decrease.

Provision for Loan Losses
The Bank has established an allowance for loan losses through a provision for loan losses charged as an expense on the consolidated statements of income. The loan portfolio is reviewed quarterly to evaluate the outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses. At September 30, 2015, approximately $13.8 million, or 0.2% of the loan portfolio including loans held for sale, was covered under loss sharing agreements with the FDIC. Decreases in the estimated cash flows on the loans covered by the loss share agreements greater than the original estimated value are recorded as an increase to the provision for loan losses, and a corresponding receivable due from the FDIC is recorded as a reduction to the provision for loan losses for the portion anticipated to be recovered under the loss sharing agreements. Conversely, if the estimated cash flows on the covered loans increase, all or a portion of the previously recorded provision for loan losses will be reversed, and the corresponding receivable due from the FDIC will be written down as an increase to the provision for loan losses. Decreases in the valuations of other real estate owned covered by the loss sharing agreements are recorded net of the estimated FDIC receivable resulting from the valuation increase as an increase to other real estate owned expense (a component of non-interest expense). The FDIC loss sharing receivable balance will be reduced through a charge to the provision for loan losses, with no offsetting reduction to the allowance for loan losses, as the period to submit losses under the FDIC loss sharing agreements approaches expiration and the estimated losses on the covered loans have not yet emerged or been realized in a final disposition event. The period to submit losses under the FDIC loss sharing agreements for commercial loans expired in third quarter 2015 and no significant write-downs of the indemnification asset were required. The period to submit losses under the FDIC loss sharing agreements for single family loans expires in third quarter 2017. The final maturity of the FDIC loss sharing agreements occurs in third quarter 2020.

As part of the FDIC loss sharing agreements, the Bank also assumed a clawback liability to be paid within 45 days subsequent to the maturity or termination of the loss sharing agreements that is contingent upon actual losses incurred over the life of the agreements relative to expected losses and the consideration paid upon acquisition of the failed institutions. Due to continued cash payments on the covered assets in excess of expectations, the Bank anticipates that it will be required to pay the FDIC at the end of its loss sharing agreements. As of September 30, 2015, a clawback liability of $2.3 million has been recorded. To the extent actual losses on the covered assets are less than estimated losses, the clawback liability will increase. To the extent actual losses on the covered assets are more than the estimated losses, the clawback liability will decrease.
The provision for loan losses increased by $2.1 million to $14.4 million for the nine months ended September 30, 2015, compared to a provision of $12.3 million for the same period in 2014. The provision for loan losses of $14.4 million includes $3.4 million for growth and change in mix of the held for investment loan portfolio, $9.7 million for decreased valuation estimates on property collateralizing impaired loans, including $6.0 million of reserves set aside for an isolated case of fraudulent activity in second quarter 2015, and $3.8 million predominantly for increases in amounts estimated to be paid to the FDIC related to the assisted transactions completed in 2010 for the clawback liability and reimbursement to the FDIC of collections of previously charged-off loans, offset in part by a $2.4 million provision release primarily resulting from the Bank's low level of historical losses on loans originated after 2009 and updating the estimated loss ratios to reflect actual industry performance rather than qualitative estimates.
For more information about our provision and allowance for loan losses and our loss experience, see “Credit Risk” and “Asset Quality” herein.

54

Table of Contents

Non-Interest Income
The table below presents the components of non-interest income for the nine months ended September 30, 2015 and 2014.
 
Nine Months Ended September 30,
 
2015
 
2014
(amounts in thousands)
 
 
 
Mortgage warehouse transactional fees
$
7,864

 
$
6,128

Bank-owned life insurance
3,407

 
2,646

Gain on sale of loans
3,189

 
1,266

Deposit fees
691

 
618

Mortgage loans and banking income
605

 
2,175

Gain (loss) on sale of investment securities
(85
)
 
3,191

Other
2,626

 
3,298

Total non-interest income
$
18,297

 
$
19,322

Non-interest income decreased $1.0 million during the nine months ended September 30, 2015 to $18.3 million, compared to $19.3 million for the nine months ended September 30, 2014. The decrease was primarily attributable to gains realized from the sale of investment securities in the first nine months of 2014 of $3.2 million, higher mortgage loan and banking income of $1.6 million related to the gain on sale of mortgage loans during the first nine months of 2014 and increased other income of $0.7 million primarily due to management advisory fees recognized in the first nine months of 2014 in conjunction with an equity investment in a foreign entity. These decreases were partially offset by increased mortgage warehouse transactional fees of $1.7 million driven by higher volumes of mortgage warehouse transactions, increased gains realized from sales of multi-family and SBA loans of $1.9 million, and increased income from bank-owned life insurance of $0.8 million resulting from additional investments during the first nine months of 2015.
Non-Interest Expense
The table below presents the components of non-interest expense for the nine months ended September 30, 2015 and 2014.
 
Nine Months Ended September 30,
 
2015
 
2014
(amounts in thousands)
 
 
 
Salaries and employee benefits
$
43,381

 
$
33,012

FDIC assessments, taxes, and regulatory fees
7,495

 
8,529

Professional services
7,378

 
5,834

Technology, communication and bank operations
7,791

 
6,767

Occupancy
6,469

 
6,061

Other real estate owned
2,026

 
1,845

Advertising and promotion
1,106

 
1,104

Loan workout
541

 
1,306

Other
7,245

 
6,592

Total non-interest expense
$
83,432

 
$
71,050

Non-interest expense was $83.4 million for the nine months ended September 30, 2015, an increase of $12.4 million from non-interest expense of $71.1 million for the nine months ended September 30, 2014.
Salaries and employee benefits, which represent the largest component of non-interest expense, increased $10.4 million, or 31.4%, to $43.4 million for the nine months ended September 30, 2015. The primary reason for this increase was an increase in the number of employees to 484 full-time equivalents at September 30, 2015 from 400 full-time equivalents at September 30, 2014. This was directly related to the need for additional employees to support our organic growth. More specifically, the increased headcount was needed to support the growing multi-family, commercial real estate and commercial and industrial loan portfolios and the increased deposits.

55

Table of Contents

FDIC assessments, taxes, and regulatory fees decreased by $1.0 million, or 12.1%, to $7.5 million for the nine months ended September 30, 2015 from $8.5 million for the nine months ended September 30, 2014. The primary reason for this decrease was due to an adjustment that reduced the Pennsylvania shares tax expense by $2.3 million recorded in second quarter 2015 offset in part by increased deposit premiums and other regulatory and filing fees.     
Professional services expense increased by $1.5 million, or 26.5%, to $7.4 million for the nine months ended September 30, 2015 from $5.8 million for the nine months ended September 30, 2014. This increase was primarily attributable to costs incurred for BankMobile, increased professional services related to fees paid for the FHLB letter of credit used to collateralize municipal deposits, and other professional service expenses driven by the organic growth of the Bank.
Technology, communication and bank operations increased by $1.0 million, or 15.1%, to $7.8 million for the nine months ended September 30, 2015 from $6.8 million for the nine months ended September 30, 2014. This increase was primarily attributable to costs incurred for BankMobile and other technology related expenses driven by the organic growth of the Bank.
Occupancy expense increased by $0.4 million, or 6.7%, to $6.5 million for the nine months ended September 30, 2015 from $6.1 million for the nine months ended September 30, 2014. This increase was driven by increased business activity in existing and new markets which required additional team members and facilities.
Other real estate owned expense increased by $0.2 million, or 9.8%, to $2.0 million for the nine months ended September 30, 2015 from $1.8 million for the nine months ended September 30, 2014. The increase was primarily attributable to the non-guaranteed portion of losses recognized on real estate owned valuation adjustments, offset in part by reduced holding expenses and losses realized from the sale of other real estate owned in the first nine month of 2015.
Loan workout expense decreased by $0.8 million, or 58.6%, to $0.5 million for the nine months ended September 30, 2015 from $1.3 million for the nine months ended September 30, 2014. The decrease was attributable to lower workout costs driven by reduced levels of non-performing loans and recoveries of prior expenses incurred on two resolved loans during the nine months ended September 30, 2015.
Other expense increased by $0.7 million, or 9.9%, to $7.2 million for the nine months ended September 30, 2015 from $6.6 million for the nine months ended September 30, 2014. Customers' experienced higher levels of miscellaneous expenses resulting from the organic growth experienced over the past year, increased staffing, and other activities associated with business development.
Income Taxes
Income tax expense increased $9.6 million in the nine months ended September 30, 2015 to $22.5 million, compared to $12.9 million in the same period of 2014. The increase in the income tax expense was driven primarily from increased taxable income of $20.4 million in the first nine months of 2015 and an adjustment recorded in third quarter 2014 that reduced income tax expense by $1.5 million as a result of a return to provision and deferred tax analysis performed during that period.

Financial Condition
General
Total assets were $7.6 billion at September 30, 2015. This represented a $0.8 billion, or 11.3%, increase from total assets of $6.8 billion at December 31, 2014. The major change in Customers' financial position occurred as the result of organic growth in our loan portfolio, which increased by $0.8 billion, or 13.1%, to $6.5 billion at September 30, 2015. The main driver was the growth of commercial loans held for investment, which increased $0.5 billion, or 12.7%, to $4.4 billion at September 30, 2015 compared to $3.9 billion at December 31, 2014. Mortgage warehouse loans increased $0.3 billion (up to $1.7 billion at September 30, 2015 compared to $1.3 billion at December 31, 2014) as a result of higher levels of refinance activity and seasonal increases in home buying activity.
Total liabilities were $7.1 billion at September 30, 2015. This represented a $0.7 billion, or 10.6%, increase from $6.4 billion at December 31, 2014. The increase in total liabilities resulted from increased deposits at September 30, 2015 compared to December 31, 2014. Total deposits increased by $1.3 billion, or 27.6%, to $5.8 billion at September 30, 2015 from $4.5 billion at December 31, 2014. Deposits are obtained primarily from within the Bank’s geographic service area and through wholesale and broker networks. Broker networks provide low-cost funding alternatives to retail deposits and increase the diversity of the

56

Table of Contents

Bank’s sources of funds. The increase in bank deposits was largely due to growth in municipal certificates of deposit of $0.5 billion, money market deposit accounts of $0.4 billion, and non-interest bearing deposits of $0.2 billion.
The following table sets forth certain key condensed balance sheet data:
 
September 30,
2015
 
December 31,
2014
(amounts in thousands)
 
 
 
Cash and cash equivalents
$
383,399

 
$
371,023

Investment securities, available for sale
418,945

 
416,685

Loans held for sale (includes $1,680,010 and $1,335,668, respectively, at fair value)
1,730,002

 
1,435,459

Loans receivable
4,769,102

 
4,312,173

Allowance for loan losses
(33,823
)
 
(30,932
)
Total assets
7,599,471

 
6,825,370

Total deposits
5,785,194

 
4,532,538

Federal funds purchased
50,000

 

FHLB advances
985,900

 
1,618,000

Other borrowings
88,250

 
88,250

Subordinated debt
110,000

 
110,000

Total liabilities
7,061,493

 
6,382,225

Total shareholders’ equity
537,978

 
443,145

Total liabilities and shareholders’ equity
7,599,471

 
6,825,370

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. These balances totaled $80.5 million at September 30, 2015. This represents a $17.7 million increase from $62.7 million at December 31, 2014. These balances vary from day to day, primarily due to variations in customers’ deposits with the Bank. Interest-earning deposits consist of cash deposited at other banks, primarily the Federal Reserve Bank of Philadelphia. Interest-earning deposits were $302.9 million and $308.3 million at September 30, 2015 and December 31, 2014, respectively.
Investment Securities
The investment securities portfolio is an important source of interest income and liquidity. At September 30, 2015, investments consisted of mortgage-backed securities guaranteed by an agency of the United States government, corporate notes and marketable equity securities. In addition to generating revenue, the investment portfolio is maintained to manage interest-rate risk, provide liquidity and collateral for borrowings, and diversify the credit risk of interest-earning assets. The portfolio is structured to maximize net interest income, given changes in the economic environment, liquidity position, and balance sheet mix.
At September 30, 2015, investment securities were $418.9 million compared to $416.7 million at December 31, 2014. The increase was primarily the net result of purchases of $69.4 million offset by maturities, sales and principal repayments of $61.8 million and declines in fair values of $4.6 million during the nine months ended September 30, 2015.
Loans
Existing lending relationships are primarily with small businesses and individual consumers primarily in Bucks, Berks, Chester, Montgomery, Delaware, and Philadelphia Counties, Pennsylvania; Camden and Mercer Counties, New Jersey; and Westchester County and New York City, New York; and the New England area. The portfolio of loans to mortgage banking companies is nation-wide. The loan portfolio consists primarily of loans to support mortgage banking companies’ funding needs, multi-family, commercial and industrial, including owner occupied commercial real estate, non-owner occupied commercial real estate, and construction loans. The Bank continues to focus on small business loans to grow its commercial lending efforts, establish a specialty lending business, and expand its consumer lending products, as outlined below:

57

Table of Contents

Commercial Lending
The Bank’s commercial lending is divided into four groups: Business Banking, Small Business Banking, Multi-family, and Commercial Real Estate. This grouping is designed to allow for greater resource deployment, higher standards of risk management, strong asset quality, lower interest rate risk and higher productivity levels.
The commercial lending group focuses on companies with annual revenues ranging from $1.0 million to $50.0 million, which typically have credit requirements between $0.5 million and $10.0 million.
The small-business banking platform originates loans, including Small Business Administration ("SBA") loans, through the branch network sales force and a team of dedicated small business 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 the Bank’s sales force, ensuring that it has small business experts in place providing appropriate financial solutions to the small business owners in its communities. A division approach focuses on industries that offer high asset quality and are deposit rich to drive profitability.
In 2009, the Bank launched its lending to mortgage banking businesses products, which primarily provides financing to mortgage bankers for residential mortgage originations from loan closing until sale in the secondary market. Many providers of liquidity in this segment exited the business in 2009 during a period of excessive market turmoil. The Bank saw an opportunity to provide liquidity to this business segment at attractive spreads. There was also the opportunity to attract escrow deposits and to generate fee income in this business.
The goal of the lending to mortgage banking businesses lending group is to provide liquidity to mortgage companies. These loans are primarily used by mortgage companies to fund their pipelines from closing of individual mortgage loans until their sale into the secondary market. The residential loans are taken as collateral for the Bank’s loans. As of September 30, 2015, loans in the warehouse lending portfolio totaled $1.7 billion and are designated as held for sale.
The goal of the Bank’s multi-family lending group is to build a portfolio of high-quality multi-family loans within the Bank’s covered markets, while cross selling other products and services. This product primarily targets refinancing existing loans with other banks using conservative underwriting and provides purchase money for new acquisitions by borrowers. The primary collateral for these loans is a first lien mortgage on the multi-family property, plus an assignment of all leases related to such property. As of September 30, 2015, the Bank had multi-family loans of $2.5 billion outstanding, making up approximately 37.8% of the Bank’s total loan portfolio, compared to $2.3 billion, or approximately 40.2% of the total loan portfolio at December 31, 2014.
As of September 30, 2015, the Bank had $6.1 billion in commercial loans outstanding, totaling approximately 93.9% of its total loan portfolio, which includes loans held for sale, compared to $5.3 billion, composing approximately 92.5% at December 31, 2014.
Consumer Lending
The Bank provides home equity and residential mortgage loans to customers. Underwriting standards for home equity lending are conservative and lending is offered to solidify customer relationships and grow relationship revenues in the long term. This lending is important in the Bank’s efforts to grow total relationship revenues for its consumer households. As of September 30, 2015, the Bank had $394.6 million in consumer loans outstanding, or 6.1%, of the Bank’s total loan portfolio, which includes loans held for sale. The Bank plans to expand its product offerings in real estate secured consumer lending.
The Bank has launched a community outreach program in Philadelphia to finance homeownership in urban communities. As part of this program, the Bank is offering an “Affordable Mortgage Product”. This community outreach program is penetrating the underserved population, especially in low-and moderate income neighborhoods. As part of this commitment, a loan production office was opened in Progress Plaza, 1501 North Broad Street, Philadelphia, PA. The program includes homebuyer seminars that prepare potential homebuyers for homeownership by teaching money management and budgeting skills, including the financial responsibilities that come with having a mortgage and owning a home. The “Affordable Mortgage Product” is offered throughout the Bank’s assessment areas.

58

Table of Contents


The composition of loans held for sale as of September 30, 2015 and December 31, 2014 was as follows:
 
September 30,
 
December 31,
 
2015
 
2014
(amounts in thousands)
 
Commercial loans:
 
 
 
Mortgage warehouse loans at fair value
$
1,677,995

 
$
1,332,019

Multi-family loans at lower of cost or fair value
49,992

 
99,791

Total commercial loans held for sale
1,727,987

 
1,431,810

Consumer loans:
 
 
 
Residential mortgage loans at fair value
2,015

 
3,649

Loans held for sale
$
1,730,002

 
$
1,435,459



59

Table of Contents

Loans receivable (excluding loans held for sale), net of the allowance for loan losses, increased by $454.0 million to $4.7 billion at September 30, 2015 from $4.3 billion at December 31, 2014. Loans receivable as of September 30, 2015 and December 31, 2014 consisted of the following:
 
September 30,
 
December 31,
 
2015
 
2014
(amounts in thousands)
 
 Commercial:
 
 
 
 Multi-family
$
2,405,400

 
$
2,206,403

 Commercial and industrial (including owner occupied commercial real estate)
967,958

 
777,220

 Commercial real estate non-owner occupied
912,971

 
827,940

 Construction
89,616

 
44,642

 Total commercial loans
4,375,945

 
3,856,205

 Consumer:
 
 
 
 Residential real estate
260,967

 
285,003

 Manufactured housing
116,742

 
126,731

 Other
1,076

 
1,541

 Total consumer loans
378,785

 
413,275

                         Total loans receivable not covered under FDIC loss sharing agreements
4,754,730

 
4,269,480

 
 
 
 
 Commercial:
 
 
 
 Multi-family

 
2,002

 Commercial and industrial (including owner occupied commercial real estate)

 
8,449

 Commercial real estate non-owner occupied

 
11,370

 Construction

 
5,076

 Total commercial loans

 
26,897

 Consumer:
 
 
 
 Residential real estate
11,181

 
12,392

 Other
2,668

 
2,892

 Total consumer loans
13,849

 
15,284

                        Total loans receivable covered under FDIC loss sharing agreements (1)
13,849

 
42,181

Total loans receivable
4,768,579

 
4,311,661

Deferred costs and unamortized premiums, net
523

 
512

 Allowance for loan losses
(33,823
)
 
(30,932
)
 Loans receivable, net of allowance for loan losses
$
4,735,279

 
$
4,281,241

(1)
Loans that were acquired in two FDIC assisted transactions and are covered under loss sharing arrangements with the FDIC are referred to as “covered loans” throughout this Management’s Discussion and Analysis. The period to submit losses under the FDIC loss sharing arrangements for non-single family loans expired in third quarter 2015. The period to submit losses under the FDIC loss sharing arrangements for single family loans expires in third quarter 2017.

Credit Risk
Customers manages credit risk by maintaining diversification in its loan portfolio, establishing and enforcing prudent underwriting standards, diligent collection efforts and continuous and periodic loan classification reviews. Management also considers the effect of credit risk on financial performance by maintaining an adequate allowance for loan losses. Credit losses are charged when they are identified, and provisions are added, to the allowance for loan losses when and as appropriate. The adequacy of the allowance for loan losses to absorb incurred losses estimated to exist as of the last day of the reporting period is evaluated at least quarterly.
The provision for loan losses was $2.1 million and $5.0 million for the three months ended September 30, 2015 and 2014, respectively. The provision for loan losses was $14.4 million and $12.3 million for the nine months ended September 30, 2015

60

Table of Contents

and 2014, respectively. The allowance for loan losses maintained for loans receivable (excludes loans held for sale) was $33.8 million, or 0.71% of non-covered loans receivable at September 30, 2015, $30.9 million, or 0.72% of non-covered loans receivable at December 31, 2014, and $31.1 million, or 0.76% of non-covered loans receivable at September 30, 2014. The coverage ratio decreased from December 31, 2014 primarily due to continued growth of the multi-family and commercial real estate portfolios, which have lower reserving factors based on continued sustained performance and historical payment experience than commercial loans. Net charge-offs were $7.7 million for the nine months ended September 30, 2015, an increase of $5.9 million compared to the same period in 2014. The increase in net charge offs was driven by the identification of a fraudulent loan that was specifically reserved for in second quarter 2015 and partially charged off during third quarter 2015 (of the $6.0 million specific reserve recorded in second quarter 2015, $5.3 million was charged off in third quarter 2015). The Bank had approximately $13.8 million in loans that were covered under loss share arrangements with the FDIC as of September 30, 2015 compared to $42.2 million as of December 31, 2014 and $44.5 million as of September 30, 2014. The decrease in covered loans as of September 30, 2015 was primarily driven by the expiration of the period to submit losses under the FDIC loss sharing agreements for commercial loans in third quarter 2015. and the classification of such loans as "non-covered". The Bank continues to consider the covered loans in estimating the allowance for loan losses and considers recovery of estimated credit losses from the FDIC in the FDIC indemnification asset.
The chart below depicts changes in the Bank’s allowance for loan losses for the periods indicated. The amounts presented for the provision for loan losses below do not include the effect of changes to estimated benefits resulting from the FDIC loss share arrangements for the covered loans.
Analysis of the Allowance for Loan Losses
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
(amounts in thousands)
 
 
 
 
 
 
 
Balance at the beginning of the period
$
37,491

 
$
28,186

 
$
30,932

 
$
23,998

Loan charge-offs
 
 
 
 
 
 
 
Commercial and industrial
5,559

 
91

 
6,793

 
536

Commercial real estate owner occupied
35

 
64

 
378

 
318

Commercial real estate non-owner occupied
82

 
214

 
327

 
1,120

Construction
0

 
284

 
1,064

 
284

Residential real estate
256

 
139

 
282

 
442

Other consumer

 

 
36

 
33

Total Charge-offs
5,932

 
792

 
8,880

 
2,733

Loan recoveries
 
 
 
 
 
 
 
Commercial and industrial
248

 
67

 
351

 
292

Commercial real estate owner occupied
13

 
85

 
14

 
91

Commercial real estate non-owner occupied

 
284

 

 
304

Construction
8

 
4

 
195

 
7

Residential real estate

 
23

 
572

 
265

Other consumer
6

 
4

 
91

 
6

Total Recoveries
275

 
467

 
1,223

 
965

Total net charge-offs
5,657

 
325

 
7,657

 
1,768

Provision for loan losses
1,989

 
3,222

 
10,548

 
8,853

Balance at the end of the period
$
33,823


$
31,083

 
$
33,823

 
$
31,083

The allowance for loan losses is based on a periodic evaluation of the loan portfolio and is maintained at a level that management considers adequate to absorb incurred losses. All commercial loans are assigned credit risk ratings, based upon an assessment of the borrower, the structure of the transaction and the available collateral and/or guarantees. All loans are monitored regularly by the responsible officer, and the risk ratings are adjusted when considered appropriate. The risk assessment allows management to identify problem loans in a timely manner. 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 the appropriate level of allowance for loan losses.  During second quarter 2015, the Bank refined its methodology for

61

Table of Contents

estimating the general allowance for loan losses. Previously, the general allowance for the portion of the loan portfolio originated after 2009 was based generally on qualitative factors due to insufficient historical loss data on the portfolio. During second quarter 2015, the Bank began using objectively verifiable industry and peer loss data to estimate probable incurred losses as of the balance sheet date for loans originated after 2009 until sufficient internal loss history is available. The same methodology was also adopted for the portion of the loan portfolio originated prior to 2009 that had no loss history over the past two years. See “Asset Quality” for further discussion of the allowance for loan losses.
The Bank's methodology includes an evaluation of loss potential from individual problem credits (potentially impaired loans), as well as a general reserve for the portfolio considering anticipated specific and general economic factors that may positively or adversely affect collectability. This assessment includes a review of changes in the composition and volume of the loan portfolio, overall portfolio quality and past loss experience, review of specific problem loans, current economic conditions that may affect borrowers’ ability to repay, and other factors that may warrant consideration in estimating the reserve. In addition, the Bank's internal auditors, loan review, and various regulatory agencies periodically review the adequacy of the allowance for loan losses as an integral part of their work responsibilities or examination process. The Bank may be asked to recognize additions or reductions to the allowance for loan losses based on their judgments of information available at the time of their examination.
Nearly 80% of the Bank’s multi-family, commercial real estate, commercial and residential construction, consumer residential and commercial and industrial loan types have real estate as collateral (collectively, “the real estate portfolio”). The Bank’s lien position on the real estate collateral will vary on a loan-by-loan basis and will change as a result of changes in the value of the collateral. Current appraisals providing current value estimates of the property are received when the Bank’s credit group determines that the facts and circumstances have significantly changed since the date of the last appraisal, including that real estate values may have deteriorated. The credit committee and loan officers review loans that are fifteen or more days delinquent and all non-accrual loans on a periodic basis. In addition, loans where the loan officers have identified a “borrower of interest” are discussed to determine if additional analysis is necessary to apply the risk rating criteria properly. The risk ratings for the real estate loan portfolio are determined based upon the current information available, including but not limited to discussions with the borrower, updated financial information, economic conditions within the geographic area and other factors that may affect the ability and willingness of the borrower to service the loan in accordance with its contractual terms. On a quarterly basis, if necessary, the collateral values or discounted cash flow models are used to determine the estimated fair value of the underlying collateral for the estimation of specific reserves for impaired loans. Appraisals used within this evaluation process do not typically age more than one year before a new appraisal is obtained.  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 determine the fair value of the underlying collateral.
These evaluations, are inherently subjective as they require material estimates, including, among other estimates, the amounts and timing of expected future cash flows on impaired loans, estimated losses in the loan portfolio, and general amounts for historical loss experience, economic conditions, uncertainties in estimating losses and inherent risks in the various credit portfolios, all of which may be susceptible to significant change. Pursuant to ASC 450 Contingencies and ASC 310-40 Troubled Debt Restructurings by Creditors, impaired loans, consisting of non-accrual and restructured loans, are considered in the methodology for determining the allowance for loan losses.  Impaired loans are generally evaluated based on the expected future cash flows or the fair value of the underlying collateral (less estimated costs to sell) if principal repayment is expected to come from the sale or operation of such collateral.
Asset Quality
Customers divides its loan portfolio into two categories to analyze and understand loan activity and performance: loans that were originated and loans that were acquired. Customers further divides originated loans into two categories: those originated prior to the current underwriting standards in 2009 (“Total Legacy Loans”) and those originated subject to those standards post 2009 (“Total Originated Loans”), and purchased loans into two categories: those purchased credit impaired and those not acquired credit impaired. Management believes that this additional information provides for a better understanding of the risk in the portfolio and the various types of reserves that are available to absorb loan losses that may arise in future periods. Credit losses from originated loans are absorbed by the allowance for loan losses. Credit losses from acquired loans are absorbed by the allowance for loan losses and cash reserves, as described below. The schedule below includes both loans held for sale and loans held for investment (loans receivable).
 

62

Table of Contents

Asset Quality at September 30, 2015
 
Loan Type
Total Loans
 
Current
 
30-90
Days
 
Greater
than 90
Days
and
Accruing
 
Non-
accrual/
NPL (a)
 
OREO
(b)
 
NPA
(a)+(b)
 
NPL
to
Loan
Type
(%)
 
NPA
to
Loans +
OREO
(%)
(amounts in thousands)
 
 
 
Legacy Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Legacy
$
43,218

 
$
41,353

 
$
123

 
$

 
$
1,742

 
$
2,811

 
$
4,553

 
4.03
%
 
9.89
%
TDRs
1,960

 
1,163

 

 

 
797

 

 
797

 
40.66
%
 
40.66
%
Total Legacy Loans
45,178

 
42,516

 
123

 

 
2,539

 
2,811

 
5,350

 
5.62
%
 
11.15
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 


Multi-Family
2,399,387

 
2,399,387

 

 

 

 

 

 
%
 
%
Commercial & Industrial (1)
844,814

 
838,531

 

 

 
6,283

 
151

 
6,434

 
0.74
%
 
0.76
%
Commercial Real Estate Non-Owner Occupied
860,225

 
855,231

 
1,047

 

 
3,947

 

 
3,947

 
0.46
%
 
0.46
%
Residential
109,730

 
109,722

 

 

 
8

 

 
8

 
0.01
%
 
0.01
%
Construction
89,382

 
89,382

 

 

 

 

 

 
%
 
%
Other consumer
152

 
152

 

 

 

 

 

 
%
 
%
TDRs
540

 
540

 

 

 

 

 

 
%
 
%
Total Originated Loans
4,304,230

 
4,292,945

 
1,047

 

 
10,238

 
151

 
10,389

 
0.24
%
 
0.24
%
Acquired Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 


Covered
12,701

 
11,434

 
80

 

 
1,187

 
516

 
1,703

 
9.35
%
 
12.88
%
Non-covered
353,749

 
346,152

 
3,561

 
2,814

 
1,222

 
4,955

 
6,177

 
0.35
%
 
1.72
%
TDRs Covered
522

 
522

 

 

 

 

 

 
%
 
%
TDRs Non-Covered
7,473

 
4,440

 
215

 
222

 
2,596

 

 
2,596

 
34.74
%
 
34.74
%
Total Acquired Loans
374,445

 
362,548

 
3,856

 
3,036

 
5,005

 
5,471

 
10,476

 
1.34
%
 
2.76
%
Acquired PCI Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 


 


Covered
626

 
225

 

 
401

 

 

 

 
%
 
%
Non-Covered
44,100

 
35,929

 
255

 
7,916

 

 

 

 
%
 
%
Total Acquired PCI Loans
44,726

 
36,154

 
255

 
8,317

 

 

 

 
%
 
%
Deferred (fees) costs and unamortized premiums/(discounts), net
523

 
523

 

 

 

 

 

 


 


Total Loans Receivable
4,769,102

 
4,734,686

 
5,281

 
11,353

 
17,782

 
8,433

 
26,215

 
0.37
%
 
0.55
%
Total Loans Held for Sale
1,730,002

 
1,730,002

 

 

 

 

 

 


 


Total Portfolio
$
6,499,104

 
$
6,464,688

 
$
5,281

 
$
11,353

 
$
17,782

 
$
8,433

 
$
26,215

 
0.27
%
 
0.40
%
(1) Commercial & industrial loans, including owner occupied commercial real estate.

63

Table of Contents

Asset Quality at September 30, 2015 (continued)
Loan Type
Total Loans
 
NPL
 
ALL
 
Cash
Reserve
 
Total
Credit
Reserves
 
Reserves
to Loans
(%)
 
Reserves
to NPLs
(%)
(amounts in thousands)
 
New Century Orig. Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
Legacy
$
43,218

 
$
1,742

 
$
1,223

 
$

 
$
1,223

 
2.83
%
 
70.21
%
TDRs
1,960

 
797

 
55

 

 
55

 
2.81
%
 
6.90
%
Total Legacy Loans
45,178

 
2,539

 
1,278

 

 
1,278

 
2.83
%
 
50.33
%
 
 
 
 
 
 
 
 
 
 
 


 


Multi-Family
2,399,387

 

 
9,206

 

 
9,206

 
0.38
%
 
%
Commercial & Industrial
844,814

 
6,283

 
10,187

 

 
10,187

 
1.21
%
 
162.14
%
Commercial Real Estate Non-Owner Occupied
860,225

 
3,947

 
3,521

 

 
3,521

 
0.41
%
 
89.21
%
Residential
109,730

 
8

 
1,876

 

 
1,876

 
1.71
%
 
23,450.00
%
Construction
89,382

 

 
1,106

 

 
1,106

 
1.24
%
 
%
Other consumer
152

 

 
8

 

 
8

 
5.26
%
 
%
TDRs
540

 

 
5

 

 
5

 
0.93
%
 
%
Total Originated Loans
4,304,230

 
10,238

 
25,909

 

 
25,909

 
0.60
%
 
253.07
%
Acquired Loans
 
 
 
 
 
 
 
 
 
 


 


Covered
12,701

 
1,187

 
112

 

 
112

 
0.88
%
 
9.44
%
Non-covered
353,749

 
1,222

 
482

 
1,209

 
1,691

 
0.48
%
 
138.38
%
TDRs Covered
522

 

 

 

 

 
%
 
%
TDRs Non-Covered
7,473

 
2,596

 

 

 

 
%
 
%
Total Acquired Loans
374,445

 
5,005

 
594

 
1,209

 
1,803

 
0.48
%
 
36.02
%
Acquired PCI Loans
 
 
 
 
 
 
 
 
 
 


 


Covered
626

 

 
284

 

 
284

 
45.37
%
 
%
Non-Covered
44,100

 

 
5,758

 

 
5,758

 
13.06
%
 
%
Total Acquired PCI Loans
44,726

 

 
6,042

 

 
6,042

 
13.51
%
 
%
Deferred (fees) costs and unamortized premiums/(discounts), net
523

 
 
 
 
 
 
 
 
 


 


Total Loans Held for Investment
4,769,102

 
17,782

 
33,823

 
1,209

 
35,032

 
0.73
%
 
197.01
%
Total Loans Held for Sale
1,730,002

 

 

 

 

 


 


Total Portfolio
$
6,499,104

 
$
17,782

 
$
33,823

 
$
1,209

 
$
35,032

 
0.54
%
 
197.01
%
The Bank manages its credit risk through the diversification of the loan portfolio and the application of policies and procedures designed to foster sound credit standards and monitoring practices. While various degrees of credit risk are associated with substantially all investing activities, the lending function carries the greatest degree of potential loss. At September 30, 2015 and December 31, 2014, non-performing loans to total loans were 0.27% and 0.20%, respectively. Total reserves to non-performing loans were 197.0% and 289.6%, respectively, at September 30, 2015 and December 31, 2014. The increase in non-performing loans results from a loan determined to have been made based upon fraudulent documents and a few additional borrowers that defaulted on their loan payments. The coverage ratio declined between periods due to a higher level of non-performing loans.
Originated Loans
Originated loans (excluding held-for-sale loans) totaled $4.3 billion, or 66.2%, of total loans at September 30, 2015, compared to $3.8 billion, or 66.7%, at December 31, 2014. The new management team adopted new underwriting standards that management believes better limits risks of loss than the pre-2009, or legacy underwriting standards. Only $10.2 million, or 0.24%, of the post 2009 loans were non-performing at September 30, 2015. Only $2.9 million, or 0.08%, of the post 2009 loans were non-performing at December 31, 2014. The post 2009 originated loans were supported by an allowance for loan losses of $25.9 million (0.60% of post 2009 originated loans) and $21.1 million (0.55% of post 2009 originated loans), respectively, at September 30, 2015 and December 31, 2014. The increase in the non-performing post 2009 originated loans primarily resulted from the $3.7 million net remaining balance of the fraudulent loan reported in second quarter 2015 ($9.0 million original balance less $5.3 million charged off in third quarter 2015).


64

Table of Contents

Legacy Loans
Legacy loans declined $10.0 million to $45.2 million at September 30, 2015, compared to $55.1 million at December 31, 2014. Non-performing Legacy loans decreased slightly from $2.7 million at December 31, 2014 to $2.5 million at September 30, 2015 as Customers continued to workout the losses in this portfolio. The Legacy originated loans were supported by an allowance for loan losses of $1.3 million (2.83% of Legacy loans) and $1.6 million (2.86% of Legacy loans), respectively, at September 30, 2015 and December 31, 2014.
Acquired Loans
At September 30, 2015, the Bank reported $419.2 million of acquired loans, which was 6.4% of total loans, compared to $422.3 million, or 7.4%, of total loans at December 31, 2014. Non-performing acquired loans totaled $5.0 million and $6.0 million at September 30, 2015 and December 31, 2014, respectively. When loans are acquired, they are recorded on the balance sheet at fair value. Acquired loans include purchased portfolios, FDIC failed-bank acquisitions, and unassisted acquisitions. Of the manufactured housing loans purchased from Tammac prior to 2012, $65.2 million were supported by a $1.2 million cash reserve at September 30, 2015, compared to $70.6 million supported by a cash reserve of $3.0 million at December 31, 2014. The cash reserve was created as part of the purchase transaction to absorb losses and is maintained in a demand deposit account at the Bank. All current losses and delinquent interest are absorbed by this reserve. For the manufactured housing loans purchased in 2012, Tammac has an obligation to pay the Bank the full payoff amount of the defaulted loan, including any principal, unpaid interest, or advances on the loans, once the borrower vacates the property. At September 30, 2015, $43.2 million of these loans were outstanding, compared to $47.5 million at December 31, 2014.
Many of the acquired loans were purchased at a discount. The price paid considered management’s judgment as to the credit and interest rate risk inherent in the portfolio at the time of purchase. Every quarter, management reassesses the risk and adjusts the cash flow forecast to incorporate changes in the credit outlook. Generally, a decrease in forecasted cash flows for a purchased loan will result in a provision for loan losses, and absent charge-offs, an increase in the allowance for loan losses. Acquired loans have a significantly higher percentage of non-performing loans than loans originated after September 2009. Management acquired these loans with the expectation that non-performing loan levels would be elevated, and therefore incorporated that expectation into the price paid. There is a Special Assets Group that focuses on workouts for these acquired non-performing assets. Total acquired loans were supported by reserves (allowance for loan losses and cash reserves) of $7.8 million (1.87% of total acquired loans) and $11.3 million (2.67% of total acquired loans), respectively, at September 30, 2015 and December 31, 2014.
Held-for-Sale Loans
At September 30, 2015, loans held for sale were $1.7 billion, or 26.6%, of the total loan portfolio, compared to $1.4 billion, or 25.0% of the total loan portfolio at December 31, 2014. The loans held-for-sale portfolio at September 30, 2015 included $1.7 billion of loans to mortgage banking businesses, $50.0 million of multi-family loans and $2.0 million of residential mortgage loans, compared to $1.3 billion of loans to mortgage banking businesses, $99.8 million of multi-family loans and $3.6 million of residential mortgages loans at December 31, 2014. Held-for-sale loans are carried on the balance sheet at either fair value (due to the election of the fair value option) or the lower of cost of fair value. An allowance for loan losses is not recorded on loans that are held for sale.
Effective September 30, 2015, Customers Bank transferred $30.4 million of multi-family loans from held for sale to loans receivable (held for investment) because the Bank no longer has the intent to sell these loans. Customers Bank transferred these loans at their carrying value, which was lower than the estimated fair value at the time of transfer.

Deposits
The Bank offers a variety of deposit accounts, including checking, savings, money market deposit accounts (“MMDA”) and time deposits. Deposits are generally obtained primarily from our geographic service area. Customers also acquires deposits nationwide through deposit brokers, listing services and other relationships. Total deposits grew to $5.8 billion at September 30, 2015, an increase of $1.3 billion, or 27.6%, from $4.5 billion at December 31, 2014. Demand deposits were $924.2 million at September 30, 2015, compared to $617.6 million at December 31, 2014, an increase of $306.6 million, or 49.6%. These amounts consist primarily of non-interest bearing demand deposits. Savings, including MMDA, totaled $2.6 billion at September 30, 2015, an increase of $369.6 million or 16.8%, primarily attributed to an increase in money market accounts, including accounts held by municipalities. Time deposits were $2.3 billion at September 30, 2015, an increase of $576.5 million, or 33.7%. At September 30, 2015, the Bank had $1.2 billion in state and municipal deposits to which Customers has pledged available borrowing capacity through the FHLB to the depositor through a letter of credit arrangement. State and municipal deposits under this program increased $580.9 million, or 100.3% from December 31, 2014.

65

Table of Contents

The components of deposits were as follows at the dates indicated:
 
September 30,
2015
 
December 31,
2014
(amounts in thousands)
 
 
 
Demand
$
924,215

 
$
617,638

Savings, including MMDA
2,572,809

 
2,203,237

Time, $100,000 and over
1,559,456

 
1,043,265

Time, other
728,714

 
668,398

Total deposits
$
5,785,194

 
$
4,532,538



Borrowings
During the nine months ended September 30, 2015, the Bank borrowed $25.0 million of long-term FHLB advances and repaid $657.1 million of short-term FHLB advances.
Capital Adequacy and Shareholders’ Equity
Shareholders’ equity increased $94.8 million to $538.0 million at September 30, 2015 when compared to shareholders' equity of $443.1 million at December 31, 2014. The primary components of the increase were as follows:

the issuance of 2,300,000 shares of preferred stock on May 18, 2015 with net proceeds of $55.6 million;
net income of $40.8 million for the nine months ended September 30, 2015;
share-based compensation expense of $3.5 million for the nine months ended September 30, 2015; and
the issuance of common stock under share-based compensation arrangements of $1.7 million for the nine months ended September 30, 2015.
These increases were offset in part by:
net other comprehensive loss of $5.3 million for the nine months ended September 30, 2015, and
the accrual of a 7.00% preferred stock dividend of $1.5 million through September 30, 2015 (of which $1.3 million was paid on September 15, 2015).

Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C

On May 18, 2015, Customers Bancorp issued 2,300,000 shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C, par value $1.00 per share, with a liquidation preference of $25.00 per share.

Customers Bancorp will pay dividends on the Series C Preferred Stock only when, as, and if declared by the board of directors or a duly authorized committee of the board and to the extent that it has lawfully available funds to pay dividends. Dividends on the Series C Preferred Stock accrue and are payable quarterly in arrears, on the 15th day of March, June, September, and December of each year, having commenced on September 15, 2015, at a fixed rate per annum equal to 7.00% from the original issue date to, but excluding, June 15, 2020, and thereafter at a floating rate per annum equal to three-month LIBOR on the related dividend determination date plus a spread of 5.30% per annum.

Dividends on the Series C Preferred Stock are not cumulative. If Customers Bancorp's board of directors or a duly authorized committee of the board does not declare a dividend on the Series C Preferred Stock in respect of a dividend period, then no dividend shall be deemed to have accrued for such dividend period, be payable on the applicable dividend payment date, or be cumulative, and Customers Bancorp will have no obligation to pay any dividend for that dividend period, whether or not the board of directors or a duly authorized committee of the board declares a dividend on the Series C Preferred Stock for any future dividend period.


66

Table of Contents

The Series C Preferred Stock has no stated maturity, is not subject to any mandatory redemption, sinking fund or other similar provisions and will remain outstanding unless redeemed at Customers Bancorp's option. Customers Bancorp may redeem the Series C Preferred Stock at its option, at a redemption price equal to $25.00 per share, plus any declared and unpaid dividends (without regard to any undeclared dividends), (i) in whole or in part, from time to time, on any dividend payment date on or after June 15, 2020 or (ii) in whole but not in part, within 90 days following the occurrence of a regulatory capital treatment event. Any redemption of the Series C Preferred Stock is subject to prior approval of the Board of Governors of the Federal Reserve System. The Series C Preferred Stock qualifies as Tier 1 capital under regulatory capital guidelines.

Except in limited circumstances, the Series C Preferred Stock does not have any voting rights.

On August 24, 2015, Customers Bancorp's board of directors declared a cash dividend on its Series C Preferred Stock of $0.56875 per share. The dividend was paid on September 15, 2015 to shareholders of record on August 31, 2015.
We are subject to various regulatory capital requirements that are monitored by federal banking agencies. Failure to meet minimum capital requirements can lead to supervisory actions by regulators; any supervisory action could have a direct material effect on our financial statements. At September 30, 2015, the Bank and Customers Bancorp met all capital adequacy requirements to which they were subject and were well capitalized.
The capital ratios for the Bank and the Bancorp at September 30, 2015 and December 31, 2014 were as follows:
 
Actual
 
For Capital Adequacy
Purposes
 
To Be Well Capitalized
Under
Prompt Corrective Action
Provisions
(amounts in thousands)
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
As of September 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
Common equity Tier 1 capital (to risk weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Customers Bancorp, Inc.
$
481,277

 
8.24
%
 
$
262,811

 
4.5
%
 
N/A

 
N/A

Customers Bank
$
549,276

 
9.45
%
 
$
261,566

 
4.5
%
 
$
377,818

 
6.5
%
Total capital (to risk weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Customers Bancorp, Inc.
$
667,532

 
11.43
%
 
$
467,219

 
8.0
%
 
N/A

 
N/A

Customers Bank
$
693,099

 
11.92
%
 
$
465,007

 
8.0
%
 
$
581,259

 
10.0
%
Tier 1 capital (to risk weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Customers Bancorp, Inc.
$
536,846

 
9.19
%
 
$
350,414

 
6.0
%
 
N/A

 
N/A

Customers Bank
$
549,276

 
9.45
%
 
$
348,755

 
6.0
%
 
$
465,007

 
8.0
%
Tier 1 capital (to average assets)
 
 
 
 
 
 
 
 
 
 
 
Customers Bancorp, Inc.
$
536,846

 
7.27
%
 
$
295,328

 
4.0
%
 
N/A

 
N/A

Customers Bank
$
549,276

 
7.46
%
 
$
294,713

 
4.0
%
 
$
368,392

 
5.0
%
As of December 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
Total capital (to risk weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Customers Bancorp, Inc.
$
578,644

 
11.09
%
 
$
417,473

 
8.0
%
 
N/A

 
N/A

Customers Bank
$
621,894

 
11.98
%
 
$
415,141

 
8.0
%
 
$
518,926

 
10.0
%
Tier 1 capital (to risk weighted assets)
 
 
 
 
 
 
 
 
 
 
 
Customers Bancorp, Inc.
$
437,712

 
8.39
%
 
$
208,737

 
4.0
%
 
N/A

 
N/A

Customers Bank
$
480,963

 
9.27
%
 
$
207,570

 
4.0
%
 
$
311,356

 
6.0
%
Tier 1 capital (to average assets)
 
 
 
 
 
 
 
 
 
 
 
Customers Bancorp, Inc.
$
437,712

 
6.69
%
 
$
261,622

 
4.0
%
 
N/A

 
N/A

Customers Bank
$
480,963

 
7.39
%
 
$
260,462

 
4.0
%
 
$
325,577

 
5.0
%


67

Table of Contents

The capital ratios above reflect the new capital requirements under "Basel III" effective during the first quarter 2015. As of September 30, 2015, the Bank and Bancorp were in compliance with the new requirements. See "NOTE 10 - REGULATORY MATTERS" for additional discussion regarding regulatory capital requirements.

Off-Balance Sheet Arrangements
The Bank is involved with financial instruments and other commitments with off-balance sheet risks. Financial instruments with off-balance sheet risks are incurred in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit, including unused portions of lines of credit, and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized on the balance sheets.
With commitments to extend credit, exposures to credit loss in the event of non-performance by the other party to the financial instrument is represented by the contractual amount of those instruments. The same credit policies are used in making commitments and conditional obligations as for on-balance sheet instruments. Because they involve credit risk similar to extending a loan, they are subject to the Bank’s credit policy and other underwriting standards.
As of September 30, 2015 and December 31, 2014, the following off-balance sheet commitments, financial instruments and other arrangements were outstanding:
 
September 30, 2015
 
December 31, 2014
(amounts in thousands)
 
Commitments to fund loans
$
512,853

 
$
231,294

Unfunded commitments to fund mortgage warehouse loans
1,160,501

 
713,619

Unfunded commitments under lines of credit
386,351

 
430,995

Letters of credit
42,506

 
36,206

Other unused commitments
7,537

 
7,685

Commitments to fund loans, unfunded commitments to fund mortgage warehouse loans, unfunded commitments under lines of credit and letters of credit are agreements to extend credit to or for the benefit of a customer in the ordinary course of our business.
Commitments to fund loans and unfunded commitments under lines of credit may be obligations of Customers 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. Customers evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if Customers deems it necessary upon extension of credit, is based on management’s credit evaluation. The types of collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.
Mortgage warehouse loan commitments are agreements to purchase mortgage loans from mortgage bankers that agree to purchase the loans back in a short period of time or to sell to third party mortgage originators. These commitments generally fluctuate monthly as existing loans are repurchased by the mortgage bankers and new loans are purchased by the Bank.
Outstanding letters of credit written are conditional commitments issued by Customers to guarantee the performance of a customer to a third party. Letters of credit may obligate Customers to fund draws under those letters of credit whether or not a customer continues to meet the conditions of the extension of credit. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
Liquidity and Capital Resources
Liquidity for a financial institution is a measure of that institution’s ability to meet depositors’ needs for funds, to satisfy or fund loan commitments, and for other operating purposes. Ensuring adequate liquidity is an objective of the asset/liability management process. Customers coordinates its management of liquidity with its interest rate sensitivity and capital position, and strives to maintain a strong liquidity position.

68

Table of Contents

Customers' investment portfolio provides periodic cash flows through regular maturities and amortization and can be used as collateral to secure additional liquidity funding. Our principal sources of funds are proceeds from stock issuance, deposits, debt issuance, principal and interest payments on loans, and other funds from operations. Borrowing arrangements are maintained with the Federal Home Loan Bank and the Federal Reserve Bank of Philadelphia to meet short-term liquidity needs. As of September 30, 2015, our borrowing capacity with the Federal Home Loan Bank was $3.3 billion, of which $715.9 million was utilized in short-term borrowings and $1.2 billion of available capacity was utilized to collateralize state and municipal deposits. As of September 30, 2015, our borrowing capacity with the Federal Reserve Bank of Philadelphia was $61.1 million.
Net cash flows used in operating activities were $300.3 million during the nine months ended September 30, 2015, compared to net cash flows used in operating activities of $445.6 million during the nine months ended September 30, 2014. During the nine months ended September 30, 2015, originations of loans held for sale exceeded proceeds from sales of loans held for sale by $344.5 million. During the nine months ended September 30, 2014, originations of loans held for sale exceeded proceeds from sales of loans held for sale by $481.3 million.
Investing activities used net cash flows of $412.9 million during the nine months ended September 30, 2015, compared to $1.8 billion during the nine months ended September 30, 2014. Net cash used to originate loans totaled $606.2 million during the nine months ended September 30, 2015, compared to $1.6 billion during the nine months ended September 30, 2014. No loan portfolios were purchased during the nine months ended September 30, 2015, compared to $308.2 million purchased during the nine months ended September 30, 2014. Proceeds from the sale of loans totaled $192.3 million during the nine months ended September 30, 2015, compared to $109.9 million during the nine months ended September 30, 2014.
Financing activities provided a net aggregate of $725.6 million during the nine months ended September 30, 2015, compared to $2.3 billion during the nine months ended September 30, 2014. During the nine months ended September 30, 2015, increases in deposits provided $1.3 billion, net repayments of short-term borrowed funds used $657.1 million, net proceeds from federal funds purchased provided $50 million, net proceeds from long-term FHLB advances provided $25.0 million, net proceeds from the issuance of preferred stock provided $55.6 million, proceeds from the issuance of common stock provided $0.7 million, and payment of preferred stock dividends used $1.3 million. During the nine months ended September 30, 2014, increases in deposits provided $1.3 billion, net proceeds from short-term borrowed funds provided $610.0 million, net proceeds from long-term FHLB advances provided $265.0 million, and net proceeds from the issuance of long-term debt provided $133.1 million. These financing activities provided sufficient cash flows to support Customers' investing and operating activities.
Overall, based on our core deposit base and available sources of borrowed funds, management believes that Customers has adequate resources to meet its short-term and long-term cash requirements for the foreseeable future.
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, investments, and deposits, and their use may also affect rates charged on loans or paid for deposits.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At September 30, 2015, there have been no material changes in the information disclosed under “Quantitative and Qualitative Disclosures About Market Risk” included within Customers Bancorp’s 2014 Form 10-K.
Item 4. 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 at September 30, 2015.

69

Table of Contents

During the quarter ended September 30, 2015, there have been no changes in the Bancorp’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Bancorp’s internal control over financial reporting.

70

Table of Contents

Part II. OTHER INFORMATION
Item 1. Legal Proceedings
There have been no material changes to the legal proceedings disclosed within our 2014 Form 10-K.
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 2014 Form 10-K and in our subsequently filed quarterly reports on Form 10-Q for the periods ended March 31, 2015 and June 30, 2015  The risks described therein 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.”

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On November 26, 2013, Customers announced that the Board of Directors had authorized a stock repurchase plan in which the Bancorp could acquire up to 5% of its current outstanding shares at prices not to exceed a 20% premium over the then current book value. The repurchase program has no expiration date but may be suspended, modified or discontinued at any time, and the Bancorp has no obligation to repurchase any amount of its common stock under the program.
During the three and nine months ended September 30, 2015, the Bancorp did not repurchase any of its shares. The maximum number of shares available to be purchased under the plan is 750,551 shares.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.

71

Table of Contents

Item 6. Exhibits
 
Exhibit
No.
  
Description
 
 
 
3.1
  
Amended and Restated Articles of Incorporation of Customers Bancorp, incorporated by reference to Exhibit 3.1 to the Customers Bancorp’s Form 8-K filed with the SEC on April 30, 2012
 
 
 
3.2
  
Amended and Restated Bylaws of Customers Bancorp, incorporated by reference to Exhibit 3.2 to the Customers Bancorp’s Form 8-K filed with the SEC on April 30, 2012
 
 
 
3.3
  
Articles of Amendment to the Amended and Restated Articles of Incorporation of Customers Bancorp, incorporated by reference to Exhibit 3.1 to the Customers Bancorp Form 8-K filed with the SEC on July 2, 2012
 
 
 
3.4
 
Statements with Respect to Shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C, incorporated by reference to Exhibit 3.1 to the Customers Bancorp Form 8-K filed with the SEC on May 18, 2015
 
 
 
4.1
  
Indenture, dated as of July 30, 2013, by and between Customers Bancorp, Inc., as Issuer, and Wilmington Trust, National Association, as Trustee, incorporated by reference to Exhibit 4.1 to the Customers Bancorp 8-K filed with the SEC on July 31, 2013
 
 
 
4.2
  
First Supplemental Indenture, dated as of July 30, 2013, by and between Customers Bancorp, Inc., as Issuer, and Wilmington Trust, National Association, as Trustee, incorporated by reference to Exhibit 4.2 to the Customers Bancorp 8-K filed with the SEC on July 31, 2013
 
 
 
4.3
  
6.375% Global Note in aggregate principal amount of $55,000,000, incorporated by reference to Exhibit 4.3 to the Customers Bancorp 8-K filed with the SEC on July 31, 2013
 
 
 
4.4
  
Amendment to First Supplemental Indenture, dated August 27, 2013, by and between Customers Bancorp, Inc. and Wilmington Trust Company, National Association, as trustee, incorporated by reference to Exhibit 4.1 to the Customers Bancorp 8-K filed with the SEC on August 29, 2013.
 
 
 
4.5
  
6.375% Global Note in aggregate principal amount of $8,250,000, incorporated by reference to Exhibit 4.2 to the Customers Bancorp 8-K filed with the SEC on August 29, 2013
 
 
 
4.6
  
Form of Note Subscription Agreement (including form of Subordinated Note Certificate and Senior Note Certificate), incorporated by reference to Exhibit 10.1 to the Customers Bancorp 8-K filed with the SEC on June 26, 2014
 
 
 
31.1
  
Certification of the Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or Rule15d-14(a)
 
 
 
31.2
  
Certification of the Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or Rule15d-14(a)
 
 
 
32.1
  
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
 
 
 
32.2
  
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
 
 
 
101
  
The Exhibits filed as part of this report are as follows:
 
 
 
101.INS
  
XBRL Instance Document.
 
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document.
 
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
 
101.DEF
  
XBRL Taxonomy Extension Definitions Linkbase Document.


72

Table of Contents

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.
 
 
 
November 3, 2015
By:
 
/s/ Jay S. Sidhu
 
Name:
 
Jay S. Sidhu
 
Title:
 
Chairman and Chief Executive Officer
(Principal Executive Officer)
 
 
 
 
 
Customers Bancorp, Inc.
 
 
 
November 3, 2015
By:
 
/s/ Robert E. Wahlman
 
Name:
 
Robert E. Wahlman
 
Title:
 
Chief Financial Officer
(Principal Financial Officer)

73

Table of Contents

Exhibit Index
 
Exhibit
No.
  
Description
 
 
 
3.1
  
Amended and Restated Articles of Incorporation of Customers Bancorp, incorporated by reference to Exhibit 3.1 to the Customers Bancorp’s Form 8-K filed with the SEC on April 30, 2012
 
 
 
3.2
  
Amended and Restated Bylaws of Customers Bancorp, incorporated by reference to Exhibit 3.2 to the Customers Bancorp’s Form 8-K filed with the SEC on April 30, 2012
 
 
 
3.3
  
Articles of Amendment to the Amended and Restated Articles of Incorporation of Customers Bancorp, incorporated by reference to Exhibit 3.1 to the Customers Bancorp Form 8-K filed with the SEC on July 2, 2012
 
 
 
3.4
 
Statement with Respect to Shares of Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series C, incorporated by reference to Exhibit 3.1 to the Customers Bancorp Form 8-K filed with the SEC on May 18, 2015
 
 
 
4.1
  
Indenture, dated as of July 30, 2013, by and between Customers Bancorp, Inc., as Issuer, and Wilmington Trust, National Association, as Trustee, incorporated by reference to Exhibit 4.1 to the Customers Bancorp 8-K filed with the SEC on July 31, 2013
 
 
 
4.2
  
First Supplemental Indenture, dated as of July 30, 2013, by and between Customers Bancorp, Inc., as Issuer, and Wilmington Trust, National Association, as Trustee, incorporated by reference to Exhibit 4.2 to the Customers Bancorp 8-K filed with the SEC on July 31, 2013
 
 
 
4.3
  
6.375% Global Note in aggregate principal amount of $55,000,000, incorporated by reference to Exhibit 4.3 to the Customers Bancorp 8-K filed with the SEC on July 31, 2013
 
 
 
4.4
  
Amendment to First Supplemental Indenture, dated August 27, 2013, by and between Customers Bancorp, Inc. and Wilmington Trust Company, National Association, as trustee, incorporated by reference to Exhibit 4.1 to the Customers Bancorp 8-K filed with the SEC on August 29, 2013.
 
 
 
4.5
  
6.375% Global Note in aggregate principal amount of $8,250,000, incorporated by reference to Exhibit 4.2 to the Customers Bancorp 8-K filed with the SEC on August 29, 2013
 
 
 
4.6
  
Form of Note Subscription Agreement (including form of Subordinated Note Certificate and Senior Note Certificate), incorporated by reference to Exhibit 10.1 to the Customers Bancorp 8-K filed with the SEC on June 26, 2014
 
 
 
31.1
  
Certification of the Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a) or Rule15d-14(a)
 
 
 
31.2
  
Certification of the Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a) or Rule15d-14(a)
 
 
 
32.1
  
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
 
 
 
32.2
  
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002
 
 
 
101
  
The Exhibits filed as part of this report are as follows:
 
 
 
101.INS
  
XBRL Instance Document.
 
 
 
101.SCH
  
XBRL Taxonomy Extension Schema Document.
 
 
 
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document.
 
 
 
101.DEF
  
XBRL Taxonomy Extension Definitions Linkbase Document.

74