Edgar Filing: Customers Bancorp, Inc.

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Accelerated filer

Non-accelerated filer

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Smaller Reporting Company

CUBI-2015.6.30-10Q

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 June 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):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x

On July 31, 2015, 26,871,745 shares of Voting Common Stock were issued and outstanding.

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CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

Table of Contents



Part I

Item 1.	Customers Bancorp, Inc. Consolidated Financial Statements as of June 30, 2015 and for the three and six month periods ended June 30, 2015 and 2014 (unaudited)	3

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	68

Item 4.	Controls and Procedures	68

PART II

Item 1.	Legal Proceedings	69

Item 1A.	Risk Factors	69

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	69

Item 3.	Defaults Upon Senior Securities	69

Item 4.	Mine Safety Disclosures	69

Item 5.	Other Information	69

Item 6.	Exhibits	70

SIGNATURES		71

Ex-31.1

Ex-31.2

Ex-32.1

Ex-32.2

Ex-101

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CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET — UNAUDITED

(amounts in thousands, except share and per share data)



	June 30, 2015			December 31, 2014
ASSETS
Cash and due from banks	$	44,064		$	62,746
Interest-earning deposits	347,525			308,277
Cash and cash equivalents	391,589			371,023
Investment securities available for sale, at fair value	373,953			416,685
Loans held for sale (includes $1,949,572 and $1,335,668, respectively, at fair value)	2,030,348			1,435,459
Loans receivable	4,524,825			4,312,173
Allowance for loan losses	(37,491		)	(30,932		)
Total loans receivable, net of allowance for loan losses	4,487,334			4,281,241
FHLB, Federal Reserve Bank, and other restricted stock	78,148			82,002
Accrued interest receivable	15,958			15,205
FDIC loss sharing receivable	—			2,320
Bank premises and equipment, net	11,453			10,810
Bank-owned life insurance	155,940			138,676
Other real estate owned	13,319			15,371
Goodwill and other intangibles	3,658			3,664
Other assets	55,943			52,914
Total assets	$	7,617,643		$	6,825,370
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits:
Demand, non-interest bearing	$	584,380		$	546,436
Interest-bearing	4,892,777			3,986,102
Total deposits	5,477,157			4,532,538
FHLB advances	1,388,000			1,618,000
Other borrowings	88,250			88,250
Subordinated debt	110,000			110,000
Accrued interest payable and other liabilities	30,735			33,437
Total liabilities	7,094,142			6,382,225
Shareholders’ equity:
Preferred stock, $1.00 par value per share; liquidation preference $25.00 per share; 100,000,000 shares authorized, 2,300,000 and 0 shares issued and outstanding as of June 30, 2015 and December 31, 2014	55,569			—
Common stock, par value $1.00 per share; 200,000,000 shares authorized; 27,402,005 and 27,277,789 shares issued as of June 30, 2015 and December 31, 2014; 26,871,745 and 26,745,529 shares outstanding as of June 30, 2015 and December 31, 2014	27,402			27,278
Additional paid in capital	359,455			355,822
Retained earnings	93,422			68,421
Accumulated other comprehensive loss, net	(4,114		)	(122		)
Treasury stock, at cost (530,260 shares as of June 30, 2015 and 532,260 shares as of December 31, 2014)	(8,233		)	(8,254		)
Total shareholders’ equity	523,501			443,145
Total liabilities and shareholders’ equity	$	7,617,643		$	6,825,370

See accompanying notes to the unaudited consolidated financial statements.

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CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME — UNAUDITED

(amounts in thousands, except per share data)



	Three Months Ended June 30,					Six Months Ended June 30,
	2015			2014		2015			2014
Interest income:
Loans receivable	$	42,801		$	35,220	$	85,894		$	63,576
Loans held for sale	13,522			6,715		24,422			11,798
Investment securities	2,253			2,543		4,616			5,583
Other	1,107			614		3,469			1,011
Total interest income	59,683			45,092		118,401			81,968
Interest expense:
Deposits	8,145			5,727		15,671			11,142
Other borrowings	1,496			1,184		2,984			2,340
FHLB advances	1,799			1,141		3,488			1,637
Subordinated debt	1,685			110		3,370			126
Total interest expense	13,125			8,162		25,513			15,245
Net interest income	46,558			36,930		92,888			66,723
Provision for loan losses	9,335			2,886		12,299			7,253
Net interest income after provision for loan losses	37,223			34,044		80,589			59,470
Non-interest income:
Mortgage warehouse transactional fees	2,799			2,215		5,072			3,974
Bank-owned life insurance	1,169			836		2,230			1,670
Gain on sale of loans	827			572		2,058			571
Mortgage loans and banking income	287			1,554		438			1,963
Deposit fees	247			212		426			426
Gain (loss) on sale of investment securities	(69		)	359		(69		)	3,191
Other	1,133			1,163		1,971			2,425
Total non-interest income	6,393			6,911		12,126			14,220
Non-interest expense:
Salaries and employee benefits	14,448			11,591		28,400			20,942
Technology, communication and bank operations	2,838			2,305		5,369			4,470
Professional services	2,792			1,881		4,705			4,163
Occupancy	2,199			1,911		4,300			3,942
FDIC assessments, taxes, and regulatory fees	995			3,078		4,273			5,209
Advertising and promotion	429			428		776			843
Loan workout expense (income)	(13		)	477		256			918
Other real estate owned expense (income)	(580		)	890		304			1,242
Other	2,552			2,644		4,742			4,642
Total non-interest expense	25,660			25,205		53,125			46,371
Income before income tax expense	17,956			15,750		39,590			27,319
Income tax expense	6,400			5,517		14,082			8,945
Net income	11,556			10,233		25,508			18,374
Preferred stock dividend	507			—		507			—
Net income available to common shareholders	$	11,049		$	10,233	$	25,001		$	18,374
Basic earnings per common share	$	0.41		$	0.38	$	0.93		$	0.69
Diluted earnings per common share	0.39			0.37		0.88			0.66

See accompanying notes to the unaudited consolidated financial statements.

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CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — UNAUDITED

(amounts in thousands)



	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
Net income	$	11,556		$	10,233		$	25,508		$	18,374
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) on securities arising during the period (1)	(5,423		)	4,101			(4,964		)	13,222
Income tax effect (1)	2,034			(1,435		)	1,818			(4,628		)
Less: reclassification adjustment for (gains) losses on securities included in net income	69			(359		)	69			(3,191		)
Income tax effect	(26		)	125			(26		)	1,117
Net unrealized gains (losses)	(3,346		)	2,432			(3,103		)	6,520
Unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses) on cash flow hedges arising during the period	446			(1,621		)	(1,500		)	(957		)
Income tax effect	(167		)	567			611			335
Net unrealized gains (losses)	279			(1,054		)	(889		)	(622		)
Other comprehensive income (loss), net of tax	(3,067		)	1,378			(3,992		)	5,898
Comprehensive income	$	8,489		$	11,611		$	21,516		$	24,272


(1)	Includes immaterial gains or losses on foreign currency items.

See accompanying notes to the unaudited consolidated financial statements.

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CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY — UNAUDITED

(amounts in thousands, except shares outstanding data)



	Six Months Ended June 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	—	—		—	—		—		25,508			—			—			25,508
Other comprehensive loss	—	—		—	—		—		—			(3,992		)	—			(3,992		)
Issuance of preferred stock, net of offering costs	2,300,000	55,569		—	—		—		—			—			—			55,569
Preferred stock dividend	—	—		—	—		—		(507		)	—			—			(507		)
Share-based compensation expense	—	—		—	—		2,359		—			—			—			2,359
Issuance of common stock under share-based compensation arrangements	—	—		126,216	124		1,274		—			—			21			1,419
Balance, June 30, 2015	2,300,000	$	55,569	26,871,745	$	27,402	$	359,455	$	93,422		$	(4,114	)	$	(8,233	)	$	523,501

	Six Months Ended June 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	—	—		—	—		—		18,374			—			—			18,374
Other comprehensive income	—	—		—	—		—		—			5,898			—			5,898
Stock dividend	—	—		2,429,375	2,429		43,364		(45,801		)	—						(8		)
Share-based compensation expense	—	—		—	—		2,034		—			—			—			2,034
Issuance of common stock under share-based compensation arrangements	—	—		75,834	77		742		—			—			—			819
Balance, June 30, 2014	—	$	—	26,729,360	$	27,262	$	353,371	$	43,581		$	(2,220	)	$	(8,254	)	$	413,740

See accompanying notes to the unaudited consolidated financial statements.

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CUSTOMERS BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

(amounts in thousands)



	Six Months Ended June 30,
	2015			2014
Cash Flows from Operating Activities
Net income	$	25,508		$	18,374
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan losses, net of change to FDIC receivable and clawback liability	12,299			7,253
Provision for depreciation and amortization	2,068			1,807
Share-based compensation	2,755			2,853
Deferred taxes	(3,476		)	2,216
Net amortization of investment securities premiums and discounts	404			370
Loss (gain) on sale of investment securities	69			(3,191		)
Gain on sale of mortgages and other loans	(2,094		)	(2,424		)
Origination of loans held for sale	(15,090,554		)	(6,893,530		)
Proceeds from the sale of loans held for sale	14,476,771			6,581,581
Increase in FDIC loss sharing receivable net of clawback liability	(1,924		)	(1,972		)
Amortization (accretion) of fair value discounts	632			(203		)
Net loss on sales of other real estate owned	334			555
Valuation and other adjustments to other real estate owned	(308		)	442
Earnings on investment in bank-owned life insurance	(2,230		)	(1,670		)
Decrease (increase) in accrued interest receivable and other assets	1,158			(5,064		)
Decrease (increase) in accrued interest payable and other liabilities	(4,314		)	6,500
Net Cash Used In Operating Activities	(582,902		)	(286,103		)
Cash Flows from Investing Activities
Proceeds from maturities, calls and principal repayments of securities available for sale	43,872			22,055
Proceeds from sales of investment securities available for sale	492			213,249
Purchases of investment securities available for sale	(7,000		)	(149,940		)
Net increase in loans	(345,630		)	(897,928		)
Purchase of loan portfolios	—			(294,615		)
Proceeds from sales of loans	148,916			5,967
Purchases of bank-owned life insurance	(15,000		)	(465		)
Net proceeds from (purchases of) FHLB, Federal Reserve Bank, and other restricted stock	3,854			(32,044		)
Reimbursements from the FDIC on loss sharing agreements	503			1,477
Purchases of bank premises and equipment	(1,799		)	(644		)
Proceeds from sales of other real estate owned	4,431			5,281
Net Cash Used In Investing Activities	(167,361		)	(1,127,607		)
Cash Flows from Financing Activities
Net increase in deposits	944,632			730,954
Net (decrease) increase in short-term borrowed funds from the FHLB	(255,000		)	382,000
Proceeds from long-term FHLB borrowings	25,000			200,000
Net proceeds from issuance of long-term debt	—			133,222
Net proceeds from issuance of preferred stock	55,569			—
Proceeds from issuance of common stock	628			—
Net Cash Provided by Financing Activities	770,829			1,446,176
Net Increase in Cash and Cash Equivalents	20,566			32,466
Cash and Cash Equivalents – Beginning	371,023			233,068
Cash and Cash Equivalents – Ending	$	391,589		$	265,534

	(continued)
Supplementary Cash Flows Information
Interest paid	$	25,302		$	15,084
Income taxes paid	17,387			11,038
Non-cash items:
Transfer of loans to other real estate owned	$	2,405		$	6,898

See accompanying notes to the unaudited consolidated financial statements.

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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 April 2015, the FASB issued Accounting Standard Update (“ASU”) 2015-03, Simplifying the Presentation of Debt Issuance Costs. The guidance in this ASU is intended to simplify presentation of debt issuance costs, and require 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 this ASU is effective for interim and annual 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 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.

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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 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 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

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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. The guidance in this ASU is effective for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2017. 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 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.

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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 six months ended June 30, 2015 and 2014.



	Three Months Ended June 30, 2015
(amounts in thousands)	Unrealized Gains (Losses) on Available-for-sale Securities (2)			Unrealized Gain (Loss) on Cash Flow Hedge			Total
Beginning balance - April 1, 2015	$	1,385		$	(2,432	)	$	(1,047	)
Other comprehensive income (loss) before reclassifications	(3,389		)	279			(3,110		)
Amounts reclassified from accumulated other comprehensive loss to net income (3)	43			—			43
Net current-period other comprehensive income (loss)	(3,346		)	279			(3,067		)
Ending balance - June 30, 2015	$	(1,961	)	$	(2,153	)	$	(4,114	)



	Six Months Ended June 30, 2015
(amounts in thousands)	Unrealized Gains (Losses) on Available-for-sale Securities (2)			Unrealized Loss on Cash Flow Hedge			Total
Beginning balance - January 1, 2015	$	1,142		$	(1,264	)	$	(122	)
Other comprehensive (loss) before reclassifications	(3,146		)	(889		)	(4,035		)
Amounts reclassified from accumulated other comprehensive loss to net income (3)	43			—			43
Net current-period other comprehensive (loss)	(3,103		)	(889		)	(3,992		)
Ending balance - June 30, 2015	$	(1,961	)	$	(2,153	)	$	(4,114	)



	Three Months Ended June 30, 2014
(amounts in thousands)	Unrealized Gains (Losses) on Available-for-sale Securities (2)			Unrealized Gain (Loss) on Cash Flow Hedge			Total
Beginning balance - April 1, 2014	$	(4,030	)	$	432		$	(3,598	)
Other comprehensive income (loss) before reclassifications	2,666			(1,054		)	1,612
Amounts reclassified from accumulated other comprehensive loss to net income (3)	(234		)	—			(234		)
Net current-period other comprehensive income (loss)	2,432			(1,054		)	1,378
Ending balance - June 30, 2014	$	(1,598	)	$	(622	)	$	(2,220	)



	Six Months Ended June 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	8,594			(622		)	7,972
Amounts reclassified from accumulated other comprehensive loss to net income (3)	(2,074		)	—			(2,074		)
Net current-period other comprehensive income (loss)	6,520			(622		)	5,898
Ending balance - June 30, 2014	$	(1,598	)	$	(622	)	$	(2,220	)


(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.


(3)	Reclassification amounts are reported as gain or loss on sale of investment securities on the Consolidated Statements of Income.

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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 June 30,				Six Months Ended June 30,
	2015		2014		2015		2014
(amounts in thousands, except share and per share data)
Net income available to common shareholders	$	11,049	$	10,233	$	25,001	$	18,374
Weighted-average number of common shares outstanding - basic	26,839,799		26,724,499		26,808,766		26,705,620
Share-based compensation plans	1,509,521		997,012		1,405,578		924,398
Warrants	331,344		260,893		307,840		251,796
Weighted-average number of common shares - diluted	28,680,664		27,982,404		28,522,184		27,881,814
Basic earnings per common share	$	0.41	$	0.38	$	0.93	$	0.69
Diluted earnings per common share	0.39		0.37		$	0.88	$	0.66

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.



	Three Months Ended June 30,		Six Months Ended June 30,
	2015	2014	2015	2014
Anti-dilutive securities:
Share-based compensation awards	12,383	118,386	12,383	86,786
Warrants	52,242	118,745	52,242	118,745
Total anti-dilutive securities	64,625	237,131	64,625	205,531

NOTE 5 — INVESTMENT SECURITIES

The amortized cost and approximate fair value of investment securities as of June 30, 2015 and December 31, 2014 are summarized in the tables below:



	June 30, 2015
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
(amounts in thousands)
Available for Sale:
Mortgage-backed securities (1)	$	332,577	$	2,127	$	(3,349	)	$	331,355
Corporate notes	22,000		324		—			22,324
Equity securities (2)	22,514		—		(2,240		)	20,274
	$	377,091	$	2,451	$	(5,589	)	$	373,953


(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.

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	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 six months ended June 30, 2015 and 2014:



	Three Months Ended June 30,					Six Months Ended June 30,
	2015			2014		2015			2014
(amounts in thousands)
Proceeds from sale of available-for-sale securities	$	492		$	25,359	$	492		$	213,249
Gross gains	$	—		$	359	$	—		$	3,191
Gross losses	(69		)	—		(69		)	—
Net gains (losses)	$	(69	)	$	359	$	(69	)	$	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.

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:



	June 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	20,000		20,324
Due after ten years	2,000		2,000
Mortgage-backed securities	332,577		331,355
Total debt securities	$	354,577	$	353,679

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 June 30, 2015 and December 31, 2014 were as

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follows:



	June 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)	$	75,517	$	(421	)	$	75,478	$	(2,928	)	$	150,995	$	(3,349	)
Equity securities (2)	20,268		(2,239		)	6		(1		)	20,274		(2,240		)
Total	$	95,785	$	(2,660	)	$	75,484	$	(2,929	)	$	171,269	$	(5,589	)



	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 (1)	$	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 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.

At June 30, 2015, there were eight available-for-sale investment securities in the less-than-twelve-month category and twenty 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. 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. The Company 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 June 30, 2015.

At June 30, 2015 and December 31, 2014, Customers Bank had pledged investment securities aggregating $336.0 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 June 30, 2015 and December 31, 2014 was as follows:



	June 30,		December 31,
	2015		2014
(amounts in thousands)
Commercial loans:
Mortgage warehouse loans at fair value	$	1,944,803	$	1,332,019
Multi-family loans at lower of cost or fair value	80,776		99,791
Commercial loans held for sale	2,025,579		1,431,810
Consumer loans:
Residential mortgage loans at fair value	4,769		3,649
Loans held for sale	$	2,030,348	$	1,435,459

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NOTE 7 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

The following table presents loans receivable as of June 30, 2015 and December 31, 2014:



	June 30,			December 31,
	2015			2014
(amounts in thousands)
Commercial:
Multi-family	$	2,236,757		$	2,206,403
Commercial and industrial (including owner occupied commercial real estate)	913,898			770,220
Commercial real estate non-owner occupied	886,982			827,940
Construction	68,073			44,642
Total commercial loans	4,105,710			3,856,205
Consumer:
Residential real estate	265,469			285,003
Manufactured housing	119,786			126,731
Other	1,241			1,541
Total consumer loans	386,496			413,275
Total loans receivable not covered under FDIC loss sharing agreements	4,492,206			4,269,480

Commercial:
Multi-family	1,730			2,002
Commercial and industrial (including owner occupied commercial real estate)	6,585			2,543
Commercial real estate non-owner occupied	8,798			11,370
Construction	669			5,076
Total commercial loans	17,782			26,897
Consumer:
Residential real estate	11,186			12,392
Other	2,721			2,892
Total consumer loans	13,907			15,284
Total loans receivable covered under FDIC loss sharing agreements (1)	31,689			42,181
Total loans receivable	4,523,895			4,311,661
Deferred (fees) costs and unamortized premiums/(discounts), net	930			512
Allowance for loan losses	(37,491		)	(30,932		)
Loans receivable, net	$	4,487,334		$	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.

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Non-Covered Loans

The following tables summarize non-covered loans by loan type and performance status as of June 30, 2015 and December 31, 2014:



	June 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	$	—	$	—	$	—	$	—	$	2,234,308	$	2,449	$	2,236,757
Commercial and industrial	—		—		—		1,919		648,548		1,747		652,214
Commercial real estate - owner occupied	—		—		—		1,597		244,941		15,146		261,684
Commercial real estate - non-owner occupied	—		—		—		663		876,512		9,807		886,982
Construction	—		—		—		—		68,073		—		68,073
Residential real estate	298		—		298		1,003		255,297		8,871		265,469
Manufactured housing (5)	3,080		2,637		5,717		2,664		107,579		3,826		119,786
Other consumer	1		—		1		—		1,055		185		1,241
Total	$	3,379	$	2,637	$	6,016	$	7,846	$	4,436,313	$	42,031	$	4,492,206
	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.

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Covered Loans

The following tables summarize covered loans by loan type and performance status as of June 30, 2015 and December 31, 2014:



	June 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)
Commercial and industrial	$	149	$	—	$	149	$	—	$	908	$	146	$	1,203
Commercial real estate owner occupied	—		—		—		55		5,327		—		5,382
Commercial real estate non-owner occupied	—		—		—		547		4,583		3,668		8,798
Construction	—		—		—		669		—		—		669
Multi-family	—		—		—		—		350		1,380		1,730
Residential real estate	—		—		—		1,297		9,287		602		11,186
Other consumer	65		—		65		142		2,476		38		2,721
Total	$	214	$	—	$	214	$	2,710	$	22,931	$	5,834	$	31,689
	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)


(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

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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 and a 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. 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 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 expires 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 ("Clawback 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. Due to continued cash payments on the covered loans in excess of expectations, the Bank now anticipates that it will be required to pay the FDIC at the end of its loss sharing arrangements. Accordingly, a clawback liability of $2.4 million was recorded as of June 30, 2015, with a corresponding increase to the provision for loan losses recorded during second quarter 2015. To the extent actual losses on the covered loans are less than estimated losses, the clawback liability will increase. To the extent actual losses on the covered loans are more than the estimated losses, the clawback liability will decrease.

As of June 30, 2015, the Bank expected to collect $1.0 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 at $2.4 million. The net amount of $1.5 million is included in "Accrued interest payable and other liabilities" 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 six months ended June 30, 2015 and 2014.



	Allowance for Loan Losses Three Months Ended June 30,
(amounts in thousands)	2015			2014
Beginning balance	$	33,566		$	26,704
Provision for loan losses (1)	4,924			2,730
Charge-offs	(1,804		)	(1,405		)
Recoveries	805			157
Ending balance	$	37,491		$	28,186

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	FDIC Loss Sharing Receivable/ Clawback Liability Three Months Ended June 30,
(amounts in thousands)	2015			2014
Beginning balance	$	3,427		$	8,272
Decreased estimated cash flows (2)	(4,411		)	(156		)
Other activity, net (a)	334			983
Cash receipts from FDIC	(805		)	(180		)
Ending balance	$	(1,455	)	$	8,919

(1) Provision for loan losses	$	4,924		$	2,730
(2) Effect attributable to FDIC loss share arrangements	4,411			156
Net amount reported as provision for loan losses	$	9,335		$	2,886


(a)	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 Six Months Ended June 30,
(amounts in thousands)	2015			2014
Beginning balance	$	30,932		$	23,998
Provision for loan losses (1)	8,559			5,631
Charge-offs	(2,948		)	(1,941		)
Recoveries	948			498
Ending balance	$	37,491		$	28,186