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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
Form 10-Q
 
 
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2016

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

(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 July 29, 2016, 27,292,265 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)
 
June 30,
2016
 
December 31,
2015
ASSETS
 
 
 
Cash and due from banks
$
46,767

 
$
53,550

Interest-earning deposits
256,029

 
211,043

Cash and cash equivalents
302,796

 
264,593

Investment securities available for sale, at fair value
547,935

 
560,253

Loans held for sale (includes $2,274,294 and $1,757,807, respectively, at fair value)
2,301,821

 
1,797,064

Loans receivable
6,114,576

 
5,453,479

Allowance for loan losses
(38,097
)
 
(35,647
)
Total loans receivable, net of allowance for loan losses
6,076,479

 
5,417,832

FHLB, Federal Reserve Bank, and other restricted stock
111,418

 
90,841

Accrued interest receivable
22,402

 
19,939

Bank premises and equipment, net
12,457

 
11,531

Bank-owned life insurance
159,486

 
157,211

Other real estate owned
5,066

 
5,057

Goodwill and other intangibles
17,197

 
3,651

Other assets
127,568

 
70,233

Total assets
$
9,684,625

 
$
8,398,205

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Demand, non-interest bearing
$
749,564

 
$
653,679

Interest-bearing
6,001,695

 
5,255,822

Total deposits
6,751,259

 
5,909,501

Federal funds purchased
61,000

 
70,000

FHLB advances
1,906,900

 
1,625,300

Other borrowings
86,790

 
86,457

Subordinated debt
108,734

 
108,685

Accrued interest payable and other liabilities
89,380

 
44,360

Total liabilities
9,004,063

 
7,844,303

Shareholders’ equity:
 
 
 
Preferred stock, par value $1.00 per share; liquidation preference $25.00 per share; 100,000,000 shares authorized, 5,600,000 and 2,300,000 shares issued and outstanding as of June 30, 2016 and December 31, 2015
135,270

 
55,569

Common stock, par value $1.00 per share; 200,000,000 shares authorized; 27,817,093 and 27,432,061 shares issued as of June 30, 2016 and December 31, 2015; 27,286,833 and 26,901,801 shares outstanding as of June 30, 2016 and December 31, 2015
27,817

 
27,432

Additional paid in capital
367,843

 
362,607

Retained earnings
158,292

 
124,511

Accumulated other comprehensive loss, net
(427
)
 
(7,984
)
Treasury stock, at cost (530,260 shares as of June 30, 2016 and December 31, 2015)
(8,233
)
 
(8,233
)
Total shareholders’ equity
680,562

 
553,902

Total liabilities and shareholders’ equity
$
9,684,625

 
$
8,398,205

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
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Interest income:
 
 
 
 
 
 
 
Loans receivable
$
59,013

 
$
42,801

 
$
113,485

 
$
85,894

Loans held for sale
17,429

 
13,522

 
31,535

 
24,422

Investment securities
3,638

 
2,253

 
7,347

 
4,616

Other
1,241

 
1,107

 
2,352

 
3,469

Total interest income
81,321

 
59,683

 
154,719

 
118,401

Interest expense:
 
 
 
 
 
 
 
Deposits
11,142

 
8,145

 
21,356

 
15,671

Other borrowings
1,620

 
1,496

 
3,225

 
2,984

FHLB advances
3,716

 
1,799

 
5,984

 
3,488

Subordinated debt
1,685

 
1,685

 
3,370

 
3,370

Total interest expense
18,163

 
13,125

 
33,935

 
25,513

Net interest income
63,158

 
46,558

 
120,784

 
92,888

Provision for loan losses
786

 
9,335

 
2,766

 
12,299

Net interest income after provision for loan losses
62,372

 
37,223

 
118,018

 
80,589

Non-interest income:
 
 
 
 
 
 
 
Mortgage warehouse transactional fees
3,074

 
2,799

 
5,622

 
5,072

Interchange and card revenue
1,890

 
132

 
2,259

 
262

Bank-owned life insurance
1,120

 
1,169

 
2,243

 
2,230

Deposit fees
787

 
247

 
1,042

 
426

Gain on sale of loans
285

 
827

 
929

 
2,058

Mortgage loans and banking income
285

 
287

 
450

 
438

Gain (loss) on sale of investment securities
—

 
(69
)
 
26

 
(69
)
Other
816

 
1,001

 
1,180

 
1,709

Total non-interest income
8,257

 
6,393

 
13,751

 
12,126

Non-interest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
18,107

 
14,448

 
35,370

 
28,400

FDIC assessments, taxes, and regulatory fees
4,435

 
995

 
8,465

 
4,273

Technology, communication and bank operations
3,854

 
2,838

 
6,496

 
5,369

Professional services
3,636

 
2,792

 
6,207

 
4,705

Occupancy
2,473

 
2,199

 
4,798

 
4,300

Acquisition related expenses
874

 
—

 
1,050

 
—

Loan workout expense (income)
487

 
(13
)
 
905

 
256

Advertising and promotion
334

 
429

 
587

 
776

Other real estate owned expense (income)
183

 
(580
)
 
470

 
304

Other
3,800

 
2,552

 
7,739

 
4,742

Total non-interest expense
38,183

 
25,660

 
72,087

 
53,125

Income before income tax expense
32,446

 
17,956

 
59,682

 
39,590

Income tax expense
13,016

 
6,400

 
22,553

 
14,082

  Net income
19,430

 
11,556

 
37,129

 
25,508

               Preferred stock dividends
2,062

 
507

 
3,348

 
507

               Net income available to common shareholders
$
17,368

 
$
11,049

 
$
33,781

 
$
25,001

Basic earnings per common share
$
0.64

 
$
0.41

 
$
1.25

 
$
0.93

Diluted earnings per common share
$
0.60

 
$
0.39

 
$
1.17

 
$
0.88

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
June 30,
 
Six Months Ended
June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
19,430

 
$
11,556

 
$
37,129

 
$
25,508

Unrealized gains (losses) on securities:
 
 
 
 
 
 
 
Unrealized holding gains (losses) on securities arising during the period
8,059

 
(5,423
)
 
14,926

 
(4,964
)
Income tax effect
(3,022
)
 
2,034

 
(5,597
)
 
1,818

Less: reclassification adjustment for (gains) losses on securities included in net income
—

 
69

 
(26
)
 
69

Income tax effect
—

 
(26
)
 
10

 
(26
)
Net unrealized gains (losses)
5,037

 
(3,346
)
 
9,313

 
(3,103
)
Unrealized gains (losses) on cash flow hedges:
 
 
 
 
 
 
 
Unrealized gains (losses) on cash flow hedges arising during the period
(813
)
 
446

 
(3,413
)
 
(1,500
)
Income tax effect
305

 
(167
)
 
1,280

 
611

Less: reclassification adjustment for (gains) losses included in net income
603

 
—

 
603

 
—

Income tax effect
(226
)
 
—

 
(226
)
 
—

Net unrealized gains (losses)
(131
)
 
279

 
(1,756
)
 
(889
)
Other comprehensive income (loss), net of tax
4,906

 
(3,067
)
 
7,557

 
(3,992
)
Comprehensive income
$
24,336

 
$
8,489

 
$
44,686

 
$
21,516

 See accompanying notes to the unaudited consolidated financial statements.

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Table of Contents

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, 2016
 
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, December 31, 2015
2,300,000

 
$
55,569

 
26,901,801

 
$
27,432

 
$
362,607

 
$
124,511

 
$
(7,984
)
 
$
(8,233
)
 
$
553,902

Net income
—

 
—

 
—

 
—

 
—

 
37,129

 
—

 
—

 
37,129

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
—

 
7,557

 
—

 
7,557

Issuance of common stock, net of offering costs of $15
—

 
—

 
7,291

 
7

 
152

 
—

 
—

 
—

 
159

Issuance of preferred stock, net of offering costs of $2,799
3,300,000

 
79,701

 
—

 
—

 
—

 
—

 
—

 
—

 
79,701

Preferred stock dividends
—

 
—

 
—

 
—

 
—

 
(3,348
)
 
—

 
—

 
(3,348
)
Share-based compensation expense
—

 
—

 
—

 
—

 
2,941

 
—

 
—

 
—

 
2,941

Exercise of warrants
—

 
—

 
239,478

 
240

 
831

 
—

 
—

 
—

 
1,071

Issuance of common stock under share-based compensation arrangements
—

 
—

 
138,263

 
138

 
1,312

 
—

 
—

 
—

 
1,450

Balance, June 30, 2016
5,600,000

 
$
135,270

 
27,286,833

 
$
27,817

 
$
367,843

 
$
158,292

 
$
(427
)
 
$
(8,233
)
 
$
680,562

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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, December 31, 2014
—

 
$
—

 
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 of $1,931
2,300,000

 
55,569

 
—

 
—

 
—

 
—

 
—

 
—

 
55,569

Preferred stock dividends
—

 
—

 
—

 
—

 
—

 
(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


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) 
 
Six Months Ended
June 30,
 
2016
 
2015
Cash Flows from Operating Activities
 
 
 
Net income
$
37,129

 
$
25,508

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
2,766

 
12,299

Provision for depreciation and amortization
2,143

 
2,068

Share-based compensation
3,394

 
2,755

Deferred taxes
(2,025
)
 
(3,476
)
Net amortization of investment securities premiums and discounts
424

 
404

(Gain) loss on sale of investment securities
(26
)
 
69

Gain on sale of mortgages and other loans
(1,189
)
 
(2,094
)
Origination of loans held for sale
(17,142,862
)
 
(15,090,554
)
Proceeds from the sale of loans held for sale
16,626,639

 
14,476,771

Decrease (increase) in FDIC loss sharing receivable net of clawback liability
255

 
(1,924
)
Amortization of fair value discounts and premiums
235

 
632

Net loss on sales of other real estate owned
80

 
334

Valuation and other adjustments to other real estate owned, net of FDIC receivable
193

 
(308
)
Earnings on investment in bank-owned life insurance
(2,243
)
 
(2,230
)
(Increase) decrease in accrued interest receivable and other assets
(31,201
)
 
1,158

Increase (decrease) in accrued interest payable and other liabilities
14,793

 
(4,314
)
Net Cash Used In Operating Activities
(491,495
)
 
(582,902
)
Cash Flows from Investing Activities
 
 
 
Proceeds from maturities, calls and principal repayments of securities available for sale
28,973

 
43,872

Proceeds from sales of investment securities available for sale
2,848

 
492

Purchases of investment securities available for sale
(5,000
)
 
(7,000
)
Net increase in loans
(667,403
)
 
(345,630
)
Proceeds from sales of loans
17,527

 
148,916

Purchases of bank-owned life insurance
—

 
(15,000
)
Net proceeds from (purchases of) FHLB, Federal Reserve Bank, and other restricted stock
(20,577
)
 
3,854

(Payments to) reimbursements from the FDIC on loss sharing agreements
(668
)
 
503

Purchases of bank premises and equipment
(2,185
)
 
(1,799
)
Proceeds from sales of other real estate owned
310

 
4,431

Acquisition of Disbursement business, net
(17,000
)
 
—

Net Cash Used In Investing Activities
(663,175
)
 
(167,361
)
Cash Flows from Financing Activities
 
 
 
Net increase in deposits
841,760

 
944,632

Net increase (decrease) in short-term borrowed funds from the FHLB
206,600

 
(255,000
)
Net decrease in federal funds purchased
(9,000
)
 
—

Proceeds from long-term FHLB borrowings
75,000

 
25,000

Net proceeds from issuance of preferred stock
79,701

 
55,569

        Preferred stock dividends paid
(3,110
)
 
—

        Exercise and redemption of warrants
1,071

 
—

        Proceeds from issuance of common stock
851

 
628

Net Cash Provided by Financing Activities
1,192,873

 
770,829

Net Increase in Cash and Cash Equivalents
38,203

 
20,566

Cash and Cash Equivalents – Beginning
264,593

 
371,023

Cash and Cash Equivalents – Ending
$
302,796

 
$
391,589

 
 
 
 
 
(continued)

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplementary Cash Flows Information
 
 
 
Interest paid
$
33,137

 
$
25,302

Income taxes paid
23,539

 
17,387

Non-cash items:
 
 
 
Transfer of loans to other real estate owned
$
592

 
$
2,405

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.  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 (Rockingham County); Manhattan, New York; and nationally for certain loan and deposit products.  The Bank has 14 full-service branches and provides commercial banking products, primarily loans and deposits. Customers Bank administratively supports loan and other financial products to customers through its limited purpose 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. Through BankMobile, a division of Customers Bank, Customers offers state of the art high tech digital banking services to consumers, students, and the "under banked" nationwide. The combination of the BankMobile technology software platform with the OneAccount Student Checking and Refund Management Disbursement Services business (the "Disbursement business") acquired from Higher One Holdings, Inc. and Higher One, Inc. (together, "Higher One") propelled BankMobile to one of the largest mobile banking services in the United States by number of customers. 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. Customers Bancorp has made certain equity investments through its wholly owned subsidiaries CB Green Ventures Pte Ltd. and CUBI India Ventures Pte Ltd.

NOTE 2 - ACQUISITION ACTIVITY
On June 15, 2016, Customers completed the acquisition of substantially all the assets and the assumption of certain liabilities of the Disbursement business from Higher One. The acquisition was completed pursuant to the terms of an Asset Purchase Agreement (the "Purchase Agreement") dated as of December 15, 2015 between Customers and Higher One. Under the terms of the Purchase Agreement, Customers also acquired all existing relationships with vendors and educational institutions, and all intellectual property and assumed normal business related liabilities. In conjunction with the acquisition, Customers hired approximately 225 Higher One employees primarily located in New Haven, Connecticut that manage the Disbursement business and serve the Disbursement business customers.

The transaction contemplates aggregate guaranteed payments to Higher One of $42 million. The aggregate purchase price payable by Customers is $37 million in cash, with the payments to be made as follows: (i) $17 million in cash upon the closing of the acquisition, (ii) $10 million upon the first anniversary of the closing and (iii) $10 million upon the second anniversary of the closing. In addition, concurrently with the closing, the parties entered into a Transition Services Agreement pursuant to which Higher One will provide certain transition services to Customers through June 30, 2017. As consideration for these services, Customers will pay Higher One an additional $5 million in cash. Customers also will be required to make additional payments to Higher One if, during the three years following the closing, revenues from the Disbursement business exceed $75 million in a year. The possible payment will be equal to 35% of the amount the Disbursement business related revenue exceeds $75 million in each year. As of June 30, 2016, Customers has not recorded a liability for any additional contingent consideration payable under the Purchase Agreement.

As specified in the Purchase Agreement, the payments of $10 million payable to Higher One upon each of the first and second anniversary of the transaction closing were placed into an escrow account with a third party. The $20 million in aggregate in such escrow account is presented in "Cash and due from banks" and "Accrued interest payable and other liabilities" on the June 30, 2016 balance sheet and is considered restricted cash.




8
Table of Contents


The following table presents the fair values of the assets acquired and liabilities assumed as of June 15, 2016:

 
 
(amounts in thousands)
June 15, 2016
Fair value of assets acquired:
 
Developed software
$
27,400

Other intangible assets
9,300

Accounts receivable
2,784

Prepaid expenses
1,180

Fixed assets, net
229

Total assets acquired
40,893

 
 
Fair value of liabilities assumed:
 
Other liabilities
5,531

Deferred revenue
2,655

Total liabilities assumed
8,186

 
 
Net assets acquired
$
32,707

 
 
Transaction cash consideration (1)
$
37,000

 
 
Goodwill recognized
$
4,293


(1) Includes $10 million payable to Higher One upon each of the first and second anniversary of the transaction closing placed into an escrow account with a third party (aggregate amount of $20 million).

Based on a preliminary purchase price allocation, Customers recorded $4.3 million in goodwill as a result of the acquisition. The amount of goodwill recorded reflects the excess purchase price over the estimated fair value of the net assets acquired. The goodwill recorded is deductible for tax purposes.

The assets acquired and liabilities assumed are presented at their estimated fair values. In many cases, the determination of these fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective and subject to change. The fair value estimates are considered preliminary and subject to change for up to one year after the closing date of the acquisition as additional information becomes available.

The fair value for developed software is based on expected revenue attributable to the software utilizing a discounted cash flow methodology giving consideration to potential obsolescence. Developed software is being amortized over ten years based on the estimated economic benefits received. The fair value for other intangible assets represents the value of existing student and university relationships and a non-compete agreement with Higher One based on estimated retention rates and discounted cash flows. Other intangible assets are being amortized over an estimated life ranging from four to twenty years.

In connection with the Disbursement business acquisition, Customers incurred acquisition related expenses of $0.9 and $1.1 million for the three and six months ended June 30, 2016, related predominantly to professional services.
NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
Basis of Presentation
The interim unaudited consolidated financial statements of Customers Bancorp 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

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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, 2015 consolidated balance sheet presented in this report has been derived from Customers Bancorp’s audited 2015 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 2015 consolidated financial statements of Customers Bancorp and subsidiaries included in the Customers' Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on February 26, 2016. That Form 10-K describes Customers Bancorp’s significant accounting policies, which include its policies on Principles of Consolidation; Cash and Cash Equivalents and Statements of Cash Flows; Investment Securities; Loan Accounting Framework; Allowance for Loan Losses; Investments in FHLB, Federal Reserve Bank, and other restricted stock; Other Real Estate Owned; FDIC Loss Sharing Receivable and Clawback Liability; Bank-Owned Life Insurance; Bank Premises and Equipment; Treasury Stock; Income Taxes; Share-Based Compensation; Derivative Instruments and Hedging; Comprehensive Income; and Earnings per Share. 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. Presented below are Customers Bancorp's significant accounting policies that were updated during the three months ended June 30, 2016 to address new or evolving activities and recently issued accounting standards and updates that were issued or effective during 2016.
Restrictions on Cash and Amounts due from Banks
Customers Bank is required to maintain average balances on hand or with the Federal Reserve Bank.  As of June 30, 2016 and December 31, 2015, these reserve balances were $82.6 million and $73.2 million, respectively.

In connection with the acquisition of the Disbursement business from Higher One, Customers placed $20 million in an escrow account with a third party to be paid to Higher One over the next two years. This cash is restricted in use and is reported in "Cash and due from banks" on the consolidated balance sheet as of June 30, 2016.
Business Combinations
Business combinations are accounted for by applying the acquisition method in accordance with Accounting Standards Codification (ASC) 805, Business Combinations. Under the acquisition method, identifiable assets acquired and liabilities assumed are measured at their fair values as of that date, and are recognized separately from goodwill. Results of operations of the acquired entity are included in the consolidated statement of income from the date of acquisition.
Goodwill and Other Intangible Assets
Goodwill represents the excess of cost over the identifiable net assets of businesses acquired. Other intangible assets represent purchased assets that lack physical substance but can be distinguished from goodwill because of contractual or other legal rights. Intangible assets that have finite lives, such as customer relationship intangibles, core deposit intangibles, and non-compete agreements, are amortized over their estimated useful lives and subject to periodic impairment testing. Goodwill and other intangible assets recognized as part of the Disbursement business acquisition are based on a preliminary allocation of the purchase price and subject to change for up to one year following the date of the acquisition closing.
Goodwill and other intangible assets are reviewed for impairment annually as of October 31 and between annual tests when events and circumstances indicate that impairment may have occurred. Impairment is a condition that exists when the carrying amount of goodwill or other intangible asset exceeds its implied fair value. A qualitative factor test can be performed to determine whether it is necessary to perform the two-step quantitative impairment test. If the results of the qualitative review indicate that it is unlikely (less than 50% probability) that the carrying value of the reporting unit exceeds its fair value, no further evaluation needs to be performed. As of June 30, 2016 and December 31, 2015, goodwill and other intangibles totaled $17.2 million and $3.7 million, respectively.

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Recently Issued Accounting Standards
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13—Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate lifetime expected credit loss and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. The ASU also requires new disclosures for financial assets measured at amortized cost, loans, and available for sale debt securities. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Customers is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09—Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting. The FASB issued this ASU as part of its initiative to reduce complexity in accounting standards. The areas for simplification in this ASU involve several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. For public business entities, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. In addition, the amendments in this ASU eliminate the guidance in Topic 718 that was indefinitely deferred shortly after the issuance of FASB Statement No. 123 (revised 2004), Share-Based Payment. Customers is currently evaluating the impact of this ASU on its financial condition and results of operations.
In March 2016, the FASB issued ASU No. 2016-07—Investments—Equity Method and Joint Ventures. To simplify the accounting for equity method investments, the amendments in the ASU eliminate the requirement in Topic 323 that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The ASU is effective for all entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Customers does not expect the adoption of this ASU to have a significant impact on its financial condition or results of operations.
In March 2016, the FASB issued ASU No. 2016-06—Derivatives and Hedging: Contingent Put and Call Options in Debt Instruments. Topic 815 requires that embedded derivatives be separated from the host contract and accounted for separately as derivatives if certain criteria are met, including the “clearly and closely related” criterion. The amendments in this ASU clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. Namely, this decision sequence requires that an entity consider whether:
1.
the payoff is adjusted based on changes in an index;
2.
the payoff is indexed to an underlying other than interest rates or credit risk;
3.
the debt involves a substantial premium or discount; and
4.
the call (put) option is contingently exercisable.
The amendments apply to all entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. For public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Customers does not expect the adoption of this ASU to have a significant impact on its financial condition or results of operations.
In March 2016, the FASB issued ASU No. 2016-05—Derivatives and Hedging: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The term novation refers to replacing one counterparty to a derivative instrument with a new counterparty. That change occurs for a variety of reasons, including financial institution mergers, intercompany transactions, an entity exiting a particular derivatives business or relationship, an entity managing against internal credit limits, or in response to laws or regulatory requirements. The amendments in this ASU clarify that a change in the counterparty to a

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derivative instrument that has been designated as the hedging instrument under Topic 815, does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. For public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Customers does not expect the adoption of this ASU to have a significant impact on its financial condition or results of operations.
In March 2016, the FASB issued ASU No. 2016-04—Liabilities—Extinguishments of Liabilities: Recognition of Breakage for Certain Prepaid Stored-Value Products. When an entity sells a prepaid stored-value product (such as gift cards, telecommunication cards, and traveler’s checks), it recognizes a financial liability for its obligation to provide the product holder with the ability to purchase goods or services at a third-party merchant. When a prepaid stored-value product goes unused wholly or partially for an indefinite time period, the amount that remains on the product is referred to as breakage. There currently is diversity in the methodology used to recognize breakage. Subtopic 405-20 includes derecognition guidance for both financial liabilities and nonfinancial liabilities, and Topic 606, Revenue from Contracts with Customers, includes authoritative breakage guidance but excludes financial liabilities. The amendments in this ASU provide a narrow scope exception to the guidance in Subtopic 405-20 to require that breakage be accounted for consistent with the breakage guidance in Topic 606. For public business entities, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Customers does not expect the adoption of this ASU to have a significant impact on its financial condition or results of operations.
In February 2016, the FASB issued ASU No. 2016-02, Leases. From the lessee's perspective, the new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement for a lessees. From the lessor's perspective, the new standard requires a lessor to classify leases as either sales-type, finance or operating. A lease will be treated as a sale if it transfers all of the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as a financing. If the lessor doesn’t convey risks and rewards or control, an operating lease results. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. A modified retrospective transition approach is required for lessors for sales-type, direct financing, and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. Customers is currently evaluating the impact of the pending adoption of the new standard on its consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall. The guidance in this ASU among other things, (1) requires equity investments with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (3) eliminates the requirement for public entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (4) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (5) requires an entity to present separately in other comprehensive income the portion of the change in fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (6) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (7) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities. The guidance in this ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Customers does not expect the adoption of this ASU to have a significant impact on its financial condition or results of operations.
In November 2015, the FASB issued ASU 2015-17, Income Taxes. The amendments in this ASU, which will align the presentation of deferred income tax assets and liabilities with International Financial Reporting Standards (IFRS), require that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. The amendments in this ASU apply to all entities that present a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by the amendments in this ASU. For public business entities, the amendments in this ASU are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Customers does not expect the adoption of this ASU to have a significant impact on its financial condition or results of operations.

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In September 2015, the FASB issued 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 was 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. The adoption of this ASU did not have an impact on Customers' 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- Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting, respectively. The guidance in these ASUs is intended to simplify the 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 and is applicable on a retrospective basis. The guidance in these ASUs was effective for interim and annual periods beginning after December 15, 2015. The adoption of these ASUs on January 1, 2016 resulted in a reclassification adjustment, which reduced "Other borrowings" by $1.8 million and "Subordinated debt" by $1.3 million with a corresponding decrease in "Other assets" of $3.1 million as of December 31, 2015.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis. The guidance in this ASU affects reporting entities that must determine whether they should consolidate certain legal entities. this update modifies the evaluation of whether limited partnerships or similar legal entities are variable interest entities (VIEs) or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. The guidance in this ASU was effective for annual and interim periods beginning after December 15, 2015. The adoption of this ASU did not have an impact on Customers' financial condition or results of operations.
In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items - 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 ASU was effective in the first quarter 2016. The adoption of this ASU did not have an impact on Customers' financial condition or results of operations.
In November 2014, the FASB issued ASU 2014-16, Derivatives and Hedging: 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 was effective in first quarter 2016. The adoption of this ASU did not have an impact on Customers' financial condition or results of operations.

In August 2014, the FASB issued ASU 2014-13, Consolidation: 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 was effective in first quarter 2016. The adoption of this ASU did not have an impact on Customers' 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

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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 was effective in first quarter 2016. The adoption of this ASU did not have an 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 following 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, and (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: 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 March 2016, the FASB issued ASU No. 2016-08—Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net). While the ASU does not change the core provisions of Topic 606, it clarifies the implementation guidance on principal versus agent considerations. Namely, the ASU clarifies and offers guidance to help determine when the reporting entity is providing goods or services to a customer itself (i.e. the entity is a principal), or merely arranging for that good or service to be provided by the other party (i.e. the reporting entity is an agent). If the entity is a principal, it recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred to the customer. When the reporting entity is an agent, it recognizes revenue in the amount of any fee or commission to which it expects to be entitled in exchange for arranging for the specified good or service to be provided by the other party. An entity is a principal if it controls the specified good or service before that good or service is transferred to a customer. The guidance includes indicators to assist in determining whether the Control criteria are met. If a contract with a customer includes more than one specified good or service, an entity could be a principal for some specified goods or services and an agent for others. Customers does not expect the adoption of this ASU to have a significant impact on its financial condition or results of operations.
In April 2016, the FASB issued ASU No. 2016-10—Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing. This ASU clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. The ASU includes targeted improvements based on input the FASB received from the Transition Resource Group for Revenue Recognition and other stakeholders. The ASU seeks to proactively address areas in which diversity in practice potentially could arise, as well as to reduce the cost and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis. The amendments in this ASU affect the guidance in ASU 2014-09, Revenue from Contracts with Customers, which will be effective for fiscal years beginning after December 31, 2016 for public entities. The effective date and transition requirements for the amendments in this ASU are the same as those in ASU 2014-09. Customers does not expect the adoption of this ASU to have a significant impact on its financial condition or results of operations.
In May 2016, the FASB issued ASU No. 2016-12—Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients. This ASU clarifies certain aspects of Topic 606 guidance as follows:
•
The objective of the collectibility assessment is to determine whether the contract is valid and represents a substantive transaction on the basis of whether a customer has the ability and intention to pay the promised consideration in exchange for the goods or services transferred.

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•
An entity can recognize revenue in the amount of consideration received when it has transferred control of the goods or services, has no additional obligation to transfer goods or services, and the consideration received is nonrefundable.
•
A reporting entity is permitted to make the accounting policy election to exclude amounts collected from customers for all sales taxes from the transaction price.
•
The measurement date is specified as being the contract inception, and variable consideration guidance applies only to variability resulting from reasons other than the form of the consideration.
•
As a practical expedient, a reporting entity is permitted to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented in accordance with Topic 606 when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations.
•
The ASU clarifies that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy generally accepted accounting principles (GAAP) before the date of initial application. Accounting for elements of a contract that do not affect revenue under legacy GAAP are irrelevant to the assessment of whether a contract is complete. In addition, the amendments in this ASU permit an entity to apply the modified retrospective transition method either to all contracts or only to contracts that are not completed contracts.
The amendments in this ASU clarify that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. However, an entity is still required to disclose the effect of the changes on any prior periods retrospectively adjusted. The effective date and transition requirements in this Update are the same as the effective date and transition requirements for ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). Customers does not expect the adoption of this ASU to have a significant impact on its financial condition or results of operations.
NOTE 4 — 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, 2016 and 2015.
 
Three Months Ended June 30, 2016
 
Available-for-sale-securities
 
 
 
 
(amounts in thousands)
Unrealized Gains (Losses)
Foreign Currency Items
Total Unrealized Gains (Losses)
 
Unrealized Loss on Cash Flow Hedge
 
Total
Balance - March 31, 2016
$
(363
)
$
(547
)
$
(910
)
 
$
(4,423
)
 
$
(5,333
)
Other comprehensive income (loss) before reclassifications
5,258

(221
)
5,037

 
(508
)
 
4,529

Amounts reclassified from accumulated other comprehensive loss to net income (2)
—

—

—

 
377

 
377

Net current-period other comprehensive income (loss)
5,258

(221
)
5,037

 
(131
)
 
4,906

Balance - June 30, 2016
$
4,895

$
(768
)
$
4,127

 
$
(4,554
)
 
$
(427
)


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Six Months Ended June 30, 2016
 
 
 
Available-for-sale-securities
 
 
 
 
(amounts in thousands)
Unrealized Gains (Losses)
Foreign Currency Items
Total Unrealized Gains (Losses)
 
Unrealized  
Loss on
Cash Flow  Hedge
 
Total
Balance - December 31, 2015
$
(4,602
)
$
(584
)
$
(5,186
)
 
$
(2,798
)
 
$
(7,984
)
Other comprehensive income (loss) before reclassifications
9,513

(184
)
9,329

 
(2,133
)
 
7,196

Amounts reclassified from accumulated other comprehensive loss to net income (2)
(16
)
—

(16
)
 
377

 
361

Net current-period other comprehensive income (loss)
9,497

(184
)
9,313

 
(1,756
)
 
7,557

Balance - June 30, 2016
$
4,895

$
(768
)
$
4,127

 
$
(4,554
)
 
$
(427
)
 
 
 
 
 
 
 
 
(1)
All amounts are presented net of tax. Amounts in parentheses indicate reductions to accumulated other comprehensive income.
(2)
Reclassification amounts for available-for-sale securities are reported as gain (loss) on sale of investment securities on the consolidated statements of income. Reclassification amounts for cash flow hedges are reported as interest expense on FHLB advances on the consolidated statements of income.

 
Three Months Ended June 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
Balance - March 31, 2015
$
1,277

$
108

$
1,385

 
$
(2,432
)
 
$
(1,047
)
Other comprehensive income (loss) before reclassifications
(3,147
)
(242
)
(3,389
)
 
279

 
(3,110
)
Amounts reclassified from accumulated other comprehensive income (loss) to net income (2)
43

—

43

 
—

 
43

Net current-period other comprehensive income (loss)
(3,104
)
(242
)
(3,346
)
 
279

 
(3,067
)
Balance - June 30, 2015
$
(1,827
)
$
(134
)
$
(1,961
)
 
$
(2,153
)
 
$
(4,114
)

 
Six Months Ended June 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
Balance - December 31, 2014
$
1,156

$
(14
)
$
1,142

 
$
(1,264
)
 
$
(122
)
Other comprehensive (loss) before reclassifications
(3,026
)
(120
)
(3,146
)
 
(889
)
 
(4,035
)
Amounts reclassified from accumulated other comprehensive loss to net income (2)
43

—

43

 
—

 
43

Net current-period other comprehensive income (loss)
(2,983
)
(120
)
(3,103
)
 
(889
)
 
(3,992
)
Balance - June 30, 2015
$
(1,827
)
$
(134
)
$
(1,961
)
 
$
(2,153
)
 
$
(4,114
)
 
 
 
 
 
 
 
 
(1)
All amounts are presented net of tax. Amounts in parentheses indicate reductions to accumulated other comprehensive income.

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(2)
Reclassification amounts are reported as gain (loss) on sale of investment securities on the consolidated statements of income.

NOTE 5 — 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,
 
2016
 
2015
 
2016
 
2015
(amounts in thousands, except share and per share data)
 
 
 
 
 
 
 
Net income available to common shareholders
$
17,368

 
$
11,049

 
$
33,781

 
$
25,001

Weighted-average number of common shares outstanding - basic
27,080,676

 
26,839,799

 
27,012,869

 
26,808,766

Share-based compensation plans
1,590,456

 
1,509,521

 
1,563,242

 
1,405,578

Warrants
299,908

 
331,344

 
303,769

 
307,840

Weighted-average number of common shares - diluted
28,971,040

 
28,680,664

 
28,879,880

 
28,522,184

Basic earnings per common share
$
0.64

 
$
0.41

 
$
1.25

 
$
0.93

Diluted earnings per common share
$
0.60

 
$
0.39

 
$
1.17

 
$
0.88

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,
 
2016
 
2015
 
2016
 
2015
Anti-dilutive securities:
 
 
 
 
 
 
 
Share-based compensation awards
616,995

 
12,383

 
616,995

 
12,383

Warrants
52,242

 
52,242

 
52,242

 
52,242

Total anti-dilutive securities
669,237

 
64,625

 
669,237

 
64,625

NOTE 6 — INVESTMENT SECURITIES
The amortized cost and approximate fair value of investment securities as of June 30, 2016 and December 31, 2015 are summarized in the tables below:
 
June 30, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
(amounts in thousands)
 
 
 
 
 
 
 
Available for Sale:
 
 
 
 
 
 
 
Agency-guaranteed residential mortgage-backed securities
$
269,044

 
$
3,484

 
$
(552
)
 
$
271,976

Agency-guaranteed commercial real estate mortgage-backed securities
204,845

 
8,709

 
—

 
213,554

Corporate notes (1)
44,929

 
861

 
(78
)
 
45,712

Equity securities (2)
22,514

 
—

 
(5,821
)
 
16,693

 
$
541,332

 
$
13,054

 
$
(6,451
)
 
$
547,935

(1)
Includes subordinated debt issued by other bank holding companies.
(2) Consists primarily of equity securities issued by a foreign entity.


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Table of Contents

 
December 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
(amounts in thousands)
 
 
 
 
 
 
 
Available for Sale:
 
 
 
 
 
 
 
Agency-guaranteed residential mortgage-backed securities
$
299,392

 
$
1,453

 
$
(2,741
)
 
$
298,104

Agency-guaranteed commercial real estate mortgage-backed securities
206,719

 
—

 
(3,849
)
 
202,870

Corporate notes (1)
39,925

 
320

 
(178
)
 
40,067

Equity securities (2)
22,514

 
—

 
(3,302
)
 
19,212

 
$
568,550

 
$
1,773

 
$
(10,070
)
 
$
560,253

(1)
Includes subordinated debt issued by other bank holding companies.
(2) Consists primarily of equity securities issued by 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, 2016 and 2015:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
(amounts in thousands)
 
 
 
 
 
 
 
Proceeds from sale of available-for-sale securities
$
—

 
$
492

 
$
2,848

 
$
492

Gross gains
$
—

 
—

 
$
26

 
$
—

Gross losses
—

 
(69
)
 
—

 
(69
)
Net gains
$
—

 
$
(69
)
 
$
26

 
$
(69
)
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, 2016
 
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
37,929

 
38,427

Due after ten years
7,000

 
7,285

Agency-guaranteed residential mortgage-backed securities
269,044

 
271,976

Agency-guaranteed commercial real estate mortgage-backed securities
204,845

 
213,554

Total debt securities
$
518,818

 
$
531,242


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Table of Contents

Gross unrealized losses and fair value of Customers' investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2016 and December 31, 2015 were as follows:
 
June 30, 2016
 
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:
 
 
 
 
 
 
 
 
 
 
 
Agency-guaranteed residential mortgage-backed securities
$
—

 
$
—

 
$
53,069

 
$
(552
)
 
$
53,069

 
$
(552
)
Corporate notes (1)
13,923

 
(78
)
 
—

 
—

 
13,923

 
(78
)
Equity securities (2)
—

 
—

 
16,693

 
(5,821
)
 
16,693

 
(5,821
)
Total
$
13,923

 
$
(78
)
 
$
69,762

 
$
(6,373
)
 
$
83,685

 
$
(6,451
)
 
December 31, 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:
 
 
 
 
 
 
 
 
 
 
 
Agency-guaranteed residential mortgage-backed securities
$
102,832

 
$
(535
)
 
$
57,357

 
$
(2,206
)
 
160,189

 
$
(2,741
)
Agency-guaranteed commercial real estate mortgage-backed securities
202,870

 
(3,849
)
 
—

 
—

 
202,870

 
(3,849
)
Corporate notes (1)
9,748

 
(178
)
 
—

 
—

 
9,748

 
(178
)
Equity securities (2)
19,206

 
(3,301
)
 
6

 
(1
)
 
19,212

 
(3,302
)
Total
$
334,656

 
$
(7,863
)
 
$
57,363

 
$
(2,207
)
 
$
392,019

 
$
(10,070
)
(1)
Includes subordinated debt issued by other bank holding companies.    
(2)     Consists primarily of equity securities in a foreign entity.
At June 30, 2016, there were two available-for-sale investment securities in the less-than-twelve-month category and fourteen available-for-sale investment securities in the twelve-month-or-more category. The unrealized losses on the residential 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 estimated the value could reasonably 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 concluded that the securities are not other-than-temporarily impaired as of June 30, 2016.
At June 30, 2016 and December 31, 2015, Customers Bank had pledged investment securities aggregating $272.0 million and $299.8 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.

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Table of Contents

NOTE 7 – LOANS HELD FOR SALE
The composition of loans held for sale as of June 30, 2016 and December 31, 2015 was as follows:
 
June 30, 2016
 
December 31, 2015
(amounts in thousands)
 
 
 
Commercial loans:
 
 
 
Mortgage warehouse loans at fair value
$
2,271,893

 
$
1,754,950

Multi-family loans at lower of cost or fair value
27,527

 
39,257

Commercial loans held for sale
2,299,420

 
1,794,207

Consumer loans:
 
 
 
Residential mortgage loans at fair value
2,401

 
2,857

Loans held for sale
$
2,301,821

 
$
1,797,064


Commercial loans held for sale consists primarily of mortgage warehouse loans. These mortgage warehouse lending transactions are subject to master repurchase agreements and are designated as held for sale and reported at fair value based on an election made to account for the loans at fair value. Pursuant to the agreements, Customers funds the pipelines for these mortgage lenders by sending payments directly to the closing agents for funded loans (i.e., the purchase event) and receives proceeds directly from third party investors when the loans are sold into the secondary market (i.e., the sale event). The fair value of the mortgage warehouse loans is estimated as the amount of cash initially advanced to fund the mortgage, plus accrued interest and fees, as specified in the respective agreements. The interest rate on these loans are variable and the lending transactions are short-term, with an average life of 19 days from purchase to sale. The primary goal of these lending transactions is to provide liquidity to mortgage companies.

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. No loans were transfered during 2016.


20
Table of Contents

NOTE 8 — LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
The following table presents loans receivable as of June 30, 2016 and December 31, 2015:
 
June 30, 2016
 
December 31, 2015
(amounts in thousands)
 
 Commercial:
 
 
 
 Multi-family
$
3,308,556

 
$
2,909,439

 Commercial and industrial (including owner occupied commercial real estate)
1,192,674

 
1,111,400

 Commercial real estate non-owner occupied
1,139,711

 
956,255

 Construction
99,615

 
87,240

 Total commercial loans
5,740,556

 
5,064,334

 Consumer:
 
 
 
 Residential real estate
262,567

 
271,613

 Manufactured housing
107,874

 
113,490

 Other
3,277

 
3,708

 Total consumer loans
373,718

 
388,811

Total loans receivable
6,114,274

 
5,453,145

Deferred costs and unamortized premiums, net
302

 
334

 Allowance for loan losses
(38,097
)
 
(35,647
)
 Loans receivable, net of allowance for loan losses
$
6,076,479

 
$
5,417,832



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Table of Contents

The following tables summarize loans receivable by loan type and performance status as of June 30, 2016 and December 31, 2015:
 
June 30, 2016
 
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
$
—

 
$
—

 
$
—

 
$
—

 
$
3,304,995

 
$
3,561

 
$
3,308,556

Commercial and industrial
—

 
—

 
—

 
5,294

 
837,642

 
932

 
843,868

Commercial real estate - owner occupied
—

 
—

 
—

 
2,677

 
333,609

 
12,520

 
348,806

Commercial real estate - non-owner occupied
52

 
—

 
52

 
2,299

 
1,126,583

 
10,777

 
1,139,711

Construction
—

 
—

 
—

 
—

 
99,381

 
234

 
99,615

Residential real estate
570

 
—

 
570

 
2,494

 
251,672

 
7,831

 
262,567

Manufactured housing (5)
3,461

 
2,297

 
5,758

 
1,818

 
97,062

 
3,236

 
107,874

Other consumer
—

 
—

 
—

 
45

 
3,006

 
226

 
3,277

Total
$
4,083

 
$
2,297

 
$
6,380

 
$
14,627

 
$
6,053,950

 
$
39,317

 
$
6,114,274




December 31, 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
$
—

 
$
—

 
$
—

 
$
—

 
$
2,905,789

 
$
3,650

 
$
2,909,439

Commercial and industrial
39

 
—

 
39

 
1,973

 
799,595

 
1,552

 
803,159

Commercial real estate - owner occupied
268

 
—

 
268

 
2,700

 
292,312

 
12,961

 
308,241

Commercial real estate - non-owner occupied
1,997

 
—

 
1,997

 
1,307

 
940,895

 
12,056

 
956,255

Construction
—

 
—

 
—

 
—

 
87,006

 
234

 
87,240

Residential real estate
2,986

 
—

 
2,986

 
2,202

 
257,984

 
8,441

 
271,613

Manufactured housing (5)
3,752

 
2,805

 
6,557

 
2,449

 
101,132

 
3,352

 
113,490

Other consumer
107

 
—

 
107

 
140

 
3,227

 
234

 
3,708

Total
$
9,149

 
$
2,805

 
$
11,954

 
$
10,771

 
$
5,387,940

 
$
42,480

 
$
5,453,145

 
(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.

As of June 30, 2016 and December 31, 2015, the Bank had $1.0 million and $1.2 million, respectively, of residential real estate held in other real estate owned. As of June 30, 2016 and December 31, 2015, the Bank had initiated foreclosure proceedings on $1.0 million and $0.6 million, respectively, on loans secured by residential real estate.

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Table of Contents

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 six months ended June 30, 2016 and 2015 and the loans and allowance for loan losses by loan class based on impairment evaluation method as of June 30, 2016 and December 31, 2015 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.
Three Months Ended June 30, 2016
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)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Ending Balance, March 31, 2016
$
12,135

 
$
9,959

 
$
1,410

 
$
8,548

 
$
1,264

 
$
3,676

 
$
468

 
$
145

 
$
37,605

Charge-offs
—

 
(537
)
 
—

 
—